It doesn’t matter what industry you’re in. As a manufacturer, you need to have a stabilized cash flow. The dynamics of the modern market dictates that you do. Cash flow basically refers to the coming in and going out of money in your business.
With increasing competition, globalization, and raw materials that keep getting costlier, you already have a lot on your hand. While you’re still battling these challenges, here comes customers that want higher product quality—for lesser price of course!
By now, you don’t have to be told that you need to connect your business with regular cash flow. A positive cash flow means you can continue running and growing your manufacturing company. A negative one means — well, you can guess.
Yes, don’t we all love positive cash flow? No doubt that is the dream of every manufacturer. How does the dream get actualized in reality then? How do you keep the positive cash flow coming in? What should you do to put a stop on that negative cash flow and turn the table around? This article answers it all, with more.
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A wide number of factors can make your bank account very lean. For the manufacturing industry, here are a couple of common challenges that require cash flow management:
The phases involved from setting up shop to buying raw materials, to selling, then to actually getting your profit may be a very long and difficult one. You’ve invested a lot of capital in the production process, yet it’s going to take a long while for you to start getting paid. This is so whether or not you run a cash on delivery (COD), 30 day end-of-month (EOM), 60 day EOM, or other suitable plans.
While you’re in this, you have to keep the manufacturing wheel going. You still have to finance the cost of further production. You may also be dealing with numerous suppliers that you have to pay immediately. The implication of all these is that things may get really tight in between manufacturing goods and getting the returns.
Excess production cost will always affect your cash flow. The cost of production isn’t just about raw materials. Energy bills, payment of wages, running logistics, etc., also form part of your production cost.
When the cost of production is high, your profit will be lessened. If the poor profit is not easily addressed, it will lead to negative cash flow. The immediate effect of this is that you’ll start juggling payment of bills, you’ll start deferring paying your suppliers or employees.
If you’re going through this, you should really learn how to cut the cost of production.
Terms of credit are getting more constricted. This could happen to anyone. One of the economic effects of the pandemic is that credit lines are feeling the heat. The first concern is that your suppliers may now demand a faster payment plan. On the other end, your clients or consumers may further worsen matters. They may delay payments or even propose a revised payment plan that will further extend payment dates.
Whichever view you look at it from, your business cycle is already affected. On both scales, the result is less cash flow and more financial stress.
The evolving business climate has necessitated a lot of ‘expected’ shifts in the manufacturing industry. It doesn’t come as a surprise because business patterns evolve every time. In some cases, some products may suddenly gain popularity and increase in market demand. In other instances, some goods that were once essential and in hot demand may lose their sensation.
Also, overseas (and even domestic) supply chains are not as easy as they used to be to navigate. With the pandemic, the cost of transporting or importing raw materials from overseas is getting more difficult and volatile.
The well-known uncertainty of current economic and social conditions has caused a lot of problems for the manufacturing industry.
With the never-ending challenges that pressure businesses every day, it has now become more important to look into ways of boosting that cash flow and making sure your business stays afloat. Here are 7 ways to go about this.
The money will not just flow in miraculously. As the owner of a manufacturing business, you have to put in place several methods and inventory levels to ensure your books get stabilized. You must first note that the key to doing this is not just in sourcing for cash inflow. Limiting cash outflow is equally as important to your business.
We have identified 7 ways you can boost the cash flow in your manufacturing company. Here they are:
When you make sales, you have to issue invoices. If you don’t send invoices, chances are that you won’t get paid. It is simple business logic that the quicker you send out invoices, the quicker the payment comes in.
Make sure you stay on top of invoicing your customers. The quicker you send invoices out, the faster the cash comes in.
You can’t ever be too busy to issue the invoices. This is also an important part of running a manufacturing business.
What’s the point of sending out invoices if the customers are not redeeming them? If the invoices are not paid as and when due, it’s no doubt going to put a strain on your cash flow. Of course, it’s not an easy thing trying to get customers to pay their invoice. This hinges on a lot of factors that are usually beyond your own control. With the right strategy however, you may be able to induce your customers to pay the invoice quite faster.
Some of the tricks you may put to good use include:
You can do this by sending an SMS or mail a couple of days before the invoice is due. Then you have to send reminders the day the invoice is due, and keep sending it days after it is due. If the invoice still remains unpaid, you may have to resort to calling them.
In some instances, the invoice may be due 30 days after it is sent. You may however offer your customers a juicy deal if they can redeem the invoice the first week after it is sent. Surely, earlier payments equals more cash flow.
Engaging this tactic will not only increase your chances of getting paid, it’ll also help lessen your chances of having customers who don’t pay on time.
This is undoubtedly one of the major ways you can increase your cash flow. A sizable chunk of your cash outflow is channeled towards financing the cost of production. If the cost of manufacturing your products is higher than they should be, you’ll run into financial problems.
Business logic dictates that you have to get more money flowing in and less money going out. Thus, you have to look for more ways to spend less on production cost—without reducing the quality of your products of course. Here are some of the ways you can go about this:
You may be experiencing a cash flow crunch because the prices you set for your products are too low. Perhaps you had to lower your prices at a time because you wanted to bring customers to your business. During this time however, prices of raw materials and other cost of production have increased—and hence your negative cash flow.
This may be the right time to consider a markup or margin analysis of your products. To determine whether or not your prices are fair or competitive, you’ll have to find out:
It is important that you find a balance in your pricing strategy. Not only should your products not come off as too expensive or too cheap, you must also continue to give your customers the quality they expect.
If the price of the product is not the reason you’re cash-strapped, there’s no really no need to increase the prices. You will have to look for other alternatives.
The more products you’re able to sell, the higher your income. If the reason you’re cash-strapped is because you’re not selling enough products, then you have to find a solution to that. You may be selling less because the demand for your product suddenly dropped. Brainstorming for fresh ideas to get your manufactured products sold should put you on the green side of the book.
Here are a couple of tips to boost sales and increase your income:
When this is so, you might have to consider producing more products or adding more products or services to your business. You have to get creative about other ways to generate income without having to overstretch your cost of production.
Rather than adding new products to your production line, inducing your existing customers to buy more from you may help solve the cash flow problem.
Having too much inventory is one of the major problems that manufacturers face. Other than taking up storage space, excess inventory also chokes your cash inflow and keeps you from expanding your business. This identifies why you need to pay extra attention to your product sales and inventory.
Check your sales patterns to determine your busy and non-busy sales products or periods. How fast do some products move? Are some of your products seasonal? The answers you get from these will help you learn how to move out your old inventory.
You can liquidate your old inventory by:
One business tactic important to your manufacturing company is learning how and when to pay off vendors. The first rule is to always take advantage of early payments that come with a discount. If there’s incentive to pay early, well… pay when it’s most convenient for you.
For instance, assuming January is a slow month for your business and you have a bill due for January 31st, you can consider pushing off paying off your vendors to February (a month you experience a boom in sales).
Without it being said, it is clear that the number one trick to increasing your cash flow is by boosting your sales.
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