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How to Improve Cash Flow in a Manufacturing Business
It has been a challenging year for all businesses, with trade dropping off for many whilst still having to deal with overheads. Businesses need to maintain a healthy cash flow, even in times such as these, so that they can continue to operate until trade is back to regular levels.
For manufacturing businesses, even during periods of normal trade, the time between paying for components and receiving payment for the finished product can be lengthy, while in the meantime wages, utility bills, and loan or lease repayments still need to be paid.
With that in mind, we’ve put together some tips on how to improve cash flow in a manufacturing business so that OEMs can continue doing what they do best, even in these trying times.
Sell excess stock
The first thing you should be looking at to improve the cash flow in your manufacturing business is the stock you are holding. Holding more stock than you need increases your warehouse and storage costs and indicates that you’re purchasing more than you need.
When you are expecting more business, you may want to hold more stock, but this is better achieved by producing sales forecasts with your suppliers. For the rest of the time, it is better to sell on this excess stock and improve your cash flow.
Assess your supply chain for pricing
There is a good chance your cash flow is being inhibited by the prices you are paying your suppliers for your components. The cost of the components themselves might not be overpriced, but minimum orders across multiple suppliers can have you buying more stock than you actually need.
Renegotiate with your suppliers to see if you can get a better price for your components, reduce minimum orders or arrange longer credit terms.
Review expenses and reduce costs where possible
You may think that your business is running at optimal efficiency, but there are usually some areas where costs can be reduced. First, you need to thoroughly examine where your cash is currently going. Any expenses you have that don’t contribute directly to your production or sales should be reviewed and possibly shelved until cash flow is no longer a problem.
Change the way you get paid
One of the reasons cash flow can become an issue for manufacturers is because of late payments from clients. It may be that you have a contract in place that doesn’t require clients to pay for products until a certain date or that your clients are also struggling for cash flow and are trying to delay payment.
Consider offering an incentive or discount for early repayment to boost your cash flow or renegotiate the way you get paid with your clients, such as in regular instalments or taking a deposit upfront on each order.
Be flexible and open to alternatives
Our final tip on improving your cash flow management is to take a flexible approach to your supply chain. Keeping too rigidly to the same suppliers you have always used means that you might find yourself in a bind when conditions change, as the problems that face your business are likely to affect your suppliers too. That’s why it’s worthwhile to have reliable backup suppliers for all of your components.
Whilst these are challenging times, keeping a steady cash flow is essential for manufacturers, so if you would like help preventing problems in your supply chain, why not get in touch and see how we can help.