Establishing a balance between your cash flow and expenses is crucial for operating a successful business. You should always have enough cash on hand to cover upcoming invoices, rent, payroll, taxes, cost of goods sold, and other expenses.
The balance sheet of a business can show a profit, but that business could still struggle if the timing of the cash flow doesn’t match the expenses incurred. There are different factors that can slow down cash flow for manufacturers. It’s important to be aware of these factors and of the solutions that exist.
Demand Can Slow Down Unexpectedly
There is a wide range of external factors that can negatively impact demand. Some industries have seasonal cycles that you can track and predict, but an event like a widespread economic slowdown or new regulations that affect imports and exports could cause sales to drop.
On a smaller scale, a new competitor launching a product at a better price could cause your cash flow to slow down.
There are a few strategies you can use to increase resiliency in case of a slowdown:
- Invest in analytics to leverage historical data and forecast demand. You can use these insights to adjust inventory spending and production volumes.
- Don’t base spending on projected sales numbers.
- Save up enough money to have enough cash on hand to cover business expenses for three to six months.
The fluctuating price of raw materials is a concern for almost 80% of manufacturers. Prices have been unpredictable and can reduce profit margins considerably.
Developing a flexible procurement process to find the best price possible is a strategy you should focus on. You should also look into negotiating new agreements with your suppliers. Some suppliers offer contracts with prices that will remain fixed through a predetermined number of price movements.
Fluctuating raw material prices can mean that the resources you invested in a few months ago are now worth a lot more. You can take advantage of market movements through raw material buyback programs and get cash for waste and unused inventory.
If prices have become prohibitive, look into replacing raw materials with different products that are more affordable and easier to find.
Invoices and Collections
There are different scenarios where your invoicing process can slow down your cash flow:
- A client is late for paying a large invoice.
- A client goes bankrupt and can’t meet their financial obligations.
- A client cancels a large order after you have invested time and resources in the project.
- Billing mistakes can delay payments.
- Practices like sending a large invoice once an order is completed can slow down your invoicing collection process.
Creating a more effective invoicing and collection process can improve cash flow and deliver a better experience for your customers.
Best practices like asking for a deposit or partial payment upfront for large orders will bring in more cash before you have to invest time and resources to fulfill the order. You can also improve your invoice collection rate by offering a discount if a client pays early and charging late fees.
Think about investing in an invoicing software solution with automation features. These solutions can save you time by generating and sending invoices automatically. You can also use automated reminders to ensure that clients don’t miss payments.
Cash Flow Management
A mismatch between your cash flow and monthly expenses can make meeting your financial obligations difficult. You might expect a payment for a large order at an upcoming date and have some exciting prospects for future growth. However, a lack of immediate cash flow will be an issue if you have some bills due now.
A credit line can do in a pinch, but borrowing money to cover immediate financial obligations will increase your future expenses. You should save up enough cash to cover all your expenses for three to six months. Having enough cash on hand will create a comfortable margin, and you won’t fall behind on your different financial obligations if sales slow down.
You should review financing options to start saving up for your cash cushion. Invoice factoring is a viable option if you have some accounts payable. You can use an invoice factoring service to get cash for these invoices immediately.
Asset financing is another option to explore if you need to purchase new equipment, and a business loan or cash advance can help you cover immediate financial obligations or give you enough capital to invest in growth strategies.
Working toward adopting a lean manufacturing process will reduce waste and unnecessary costs. It’s a business model that emphasizes flexibility, effectiveness, and optimized processes. You should think about investing in analytics to better forecast demand and optimizing cash flow with financing solutions and effective accounting and invoicing processes.