Any manufacturing company needs a strong cash flow to help operate smoothly, but many find this aspect of running a business difficult.
Manufacturers have certain unavoidable costs, and these costs can seriously affect their working capital.
These basic costs are:
- direct materials
- direct labour
- factory overheads
“While businesses will look for ways to improve their efficiencies, they shouldn’t ignore potential ways of improving cash flow, alongside any other potential cost reductions,” advises Paul Daine, Managing Director of Premium Collections.
The Challenge of Working Capital
“According to The Manufacturer, there’s a liquidity imbalance in the UK economy, with large amounts of cash concentrated in the hands of a few large corporations,” Paul points out. “At the same time, industry as a sector has experienced a deterioration in working capital.”
Where manufacturers may be looking for greater cost reductions to alleviate customer-driven pressures, this can be at the expense of working capital.
“This kind of pressure may make things worse, if you’ve already got cash flow issues,” warns Paul.
“If a manufacturing business is experiencing problems with cash flow, it may then risk becoming mired in troubles paying back its own creditors”
It is all a question of balance. It must keep its sales volume at a level that brings in money, but to do so may require more expenditure on inventory. More expenditure requires more cash.
“The risk is that you get pulled into a spiralling debt crisis,” Paul cautions.
Cash Flow and Debt Recovery
The key thing for manufacturers is to speed up receivables while trying to cut costs.
“Manufacturers cannot simply focus all their energies on growth and sales without looking at their expenses,” says Paul. “This means looking at how they are performing in the present, not just at projected performance.”
“An experienced investor will look at cash flow, not just profit, because it shows how much money is available for day to day operations, and is therefore a basic for a sound business”
There may be ways a manufacturing business can improve its cash flow by reducing its inventory or its overheads, for example; or improving its mixture of products to focus more on those items yielding higher margins.
However, as Paul explains, getting paid on time should always be a priority.
“Don’t disregard debt recovery,” concludes Paul. “If you’re making cash flow a priority, then you must consider your options for recovering money owed, as well as efficiencies in other areas.”
“Commercial debt recovery should not simply be a last resort but rather a strategic, cash flow option, you can employ in certain circumstances”
For additional reading, please visit Why is Cash Flow Always a Pressing Problem for SMEs?