Cash flow bottlenecks can occur at any stage, even to businesses making steady progress. This issue is significantly pronounced in manufacturing businesses. It is typically because the cash conversion cycle is considerably extended.
You invest in raw materials that undergo production, followed by sales. Lastly, cash is generated via either an upfront customer payment or one at a later date. Meanwhile, you may also need to make further investments for another round of production. A manufacturing business thus involves one of the most cash-intensive operations.
Here are thus a few tips to streamline cash flow in your manufacturing business efficiently.
1. Prepare A Blueprint
Start with taking stock of your cash flow. It may help you to understand where your cash flow currently stands to improve its position in the future. Next, undertake a forecast of the following 12 months, ensuring that you iron out everything to the last detail. Lastly, track your cash flow routinely to ensure its execution does not stray from the plan.
2. Eliminate Inefficiencies
You might benefit from reviewing the cash flow process you have in place from time to time. Try and identify areas in the process, causing any waste of resources or tying up working capital unnecessarily.
Check if there are fluffs in your production process that you could do without. Also, analyse the entire range of expenses you require from start to finish. Eliminate the costs that are not directly contributing to revenue generation or better production.
3. Review Payment Terms
You may also benefit from examining your payment terms. Go through the list of your clients and note if it’s feasible to restructure the payment schedule. For instance, you could ask some customers to pay upfront or even implement a system of installment payments. Such measures can help release the funds earlier.
4. Seek Alternative Financing Options
Setting a payment schedule to your benefit may not be possible in all situations. As an alternative measure, you could thus also bolster your manufacturing business’s working capital with other financing options. One of the simplest and readily available funding options, in that regard, is invoice financing. It allows you to leverage the unpaid bills to avail immediate funding from a financial institution. This way, you could access tied up funds with ease, thus, improving the cash flow.
5. Strike Better Terms With Suppliers
With a cordial supplier relationship, you can try and negotiate for better terms. It can go a long way into improving your business’s cash flow. You could thus ensure a longer credit period, allowing you some leeway in the business cycle. Other than that, you could also benefit from discounts offered on early payments, or lower minimum order volumes.
6. Provide Discounts
An efficient way to speed up payments from customers is to offer discounts on early payments. This incentivising encourages your debtors to forward payments faster. However, reckon the cost-profit aspect of this measure before implementation. Optimise discounts such that it makes up for any small loss of income.
7. Be On Top Of Invoicing
You need to take active charge of repayments to ensure efficient cash flow management. Be proactive with invoicing. Set up reminders for your debtors when the repayment dates approach. Also, be quick to follow up with late payments.
8. Perform Credit Checks
You may want to perform credit checks for all customers that do not pay upfront. For customers with a poor credit history, there’s always a chance for late payments. It can hurt your working capital estimates significantly.
9. Opt For Leasing
In some cases, leasing equipment, warehouses, etc. can be more beneficial to your business’s cash flow compared to making purchases. It can save significantly on investment, thus, bolstering liquidity.
10. Set Up Cooperative Purchasing
If feasible, form a buying cooperative. Look for organisations with similar raw material requirements, and then make a bulk purchase from suppliers offering discounts.
A robust cash flow position allows you to leverage opportunities and maximises your organisation’s growth potential. While these are some direct ways to improve cash flow, you may also take into consideration other ways that may have an influence.