Manufacturing – taking materials or components and turning them into something new (often on a large scale) – is essential in our modern lives. And it’s not just necessary for consumers, but also for the state of Australia’s economy.
The Australian manufacturing industry employs over 923,000 people, which is over 7% of the country’s total workforce. Collectively, the 47,530 businesses that make up the sector earn over $32b in profit. But no matter the size of an operation or how successful it may be, strong cash flow is always an essential part of maintaining that success.
Learning how to improve cash flow in a manufacturing business can be the difference between a struggling business and one that thrives. And cash flow has never been more vital than in 2020. After all, you need to buy the raw materials before you can manufacture anything for sale.
So let’s take a look at the four most common cash flow issues and our 10 tips to improve cash flow in your manufacturing business.
Common manufacturing industry cash flow challenges
While many situations can put your working capital under pressure, the following circumstances are four of the most common.
- Business cycle length. There’s no getting around it: the time from buying your raw materials to selling your goods and receiving the money can last weeks to months. And meanwhile, any working capital you’ve invested in those raw materials is completely tied up.
Yet you still need to purchase more raw materials or components to keep the manufacturing production line moving. It doesn’t matter whether your payment terms are cash on delivery (COD), 30 day end-of-month (EOM) or 60 day EOM. You’ll still need to pay for those goods well before you start receiving any money for your own sales. And to make it more complicated, you’re probably dealing with different suppliers that each have their own payment terms.
Finally, once you’ve sold your product, you may need to wait 30, 60 or even 90 days before you get the cash. The resulting lack of available working capital quickly impacts your cash flow if you don’t take action.
- Excess costs. Buying raw materials or components isn’t the only thing that can affect your cash flow. Other large costs like energy bills, wages or loan repayments eat into any available working capital.
This can lead to having to juggle your bill payments and outgoings, or holding off on paying suppliers or employees. In the long term, this can damage your reputation and your relationship with suppliers and other key stakeholders.
- Credit term squeeze. International payment terms were tightening even before the pandemic hit, with credit insurance limits constricting many suppliers’ terms of credit. This squeeze may lead to those suppliers demanding payment faster, putting greater strain on your cash flow.
At the same time, your client base may also be feeling the financial pressure. They might then push you to accept delayed payments or even payment plans, depending on their own financial status.
Both of these circumstances can result in less available cash in your business and more financial stress.
- Current business climate. The general uncertainty of current economic and social conditions has created severe cash flow strains for many businesses. They may be feeling the squeeze from either their supplier, their client, or both.
Depending on your client base, buying patterns may have changed significantly. For example, you might be seeing increased demand if you manufacture ‘essential’ items, or a decline in demand for non-essential products.
You may also experience difficulties with your suppliers, particularly if you import materials. Overseas supply chains can be difficult to navigate during times of crisis. Even domestic suppliers may feel the effects, which can in turn impact your production line.
10 tips to improve the cash flow in your manufacturing business
The good news is that no matter the reason/s for your tight cash flow circumstances, there are ways to take control.
1. Track your cash flow. The first step is tracking your current cash flow. You can’t improve something if you don’t know its current status. Where is your cash going? Take a typical product you sell – calculate the time from when you purchase the raw materials, to when you finish the product, to when a customer orders, to the point you receive their payment.
2. Review your expenses. Examine all of your expenses and cut (or minimise) anything that doesn’t directly affect production or sales – for example, branded vehicles or large showrooms. Focus instead on the expenses that directly contribute to your revenue.
3. Reduce waste. Both material waste and inefficient processes can drain your cash. Examine your processes to see if you can eliminate any inefficiencies. Can you tweak the process to save excess material waste or time?
4. Renegotiate with suppliers. This can be particularly effective if you have a strong relationship with them. You may be able to negotiate longer credit terms, lower minimum quantities, or price breaks to give yourself some breathing room.
5. Require a payment schedule. You may be able to ask for either an upfront deposit or progress payments on your goods for some clients and contracts. This reduces your risk and keeps you from footing the bill for the full manufacturing cost upfront.
6. Offer discounts for early payments. You may also have the option to offer your clients discounts for early payments. Having quicker access to your money may be worth the small loss in income.
7. Accept multiple forms of payment. The more ways people can pay you, the easier it will be to get your money quickly. That’s why Octet has recently partnered with AccountsPay for our clients – it means their customers get a range of convenient payment options for their bills.
8. Be proactive with late payers. Just invoicing your clients isn’t enough. You need to keep on top of your invoicing, and quickly follow up with late payers. Remember: the sooner you follow up, the quicker you can get your money. Depending on your clients’ circumstances, you may also need to renegotiate terms with them or implement penalties for late payment.
9. Consider a Debtor Finance solution. Our Debtor Finance solution lets you leverage your unpaid invoices to get the revenue from your sales faster. You can use it to access up to 85% of your accounts receivable value within 24 hours. And as your business grows, so too does your available cash flow.
10. Research Trade Finance solutions. Our Trade Finance solution gives you a convenient line of credit for your business. It introduces a third-party financier into your transaction so you can both pay your suppliers immediately, and get quicker payment from your buyers. Put simply, it lets you trade on your terms.
Power to trade
Strong cash flow puts you in a better position to negotiate favourable deals with suppliers, jump on any opportunities that arise, and weather financial storms.
Talk to us to discover more about improving the cash flow of your manufacturing business.