It's no secret that the manufacturing industry is facing some tough times at the moment. Low-profit margins, supply chain issues and Brexit are just a few of the challenges manufacturers are currently dealing with. But one of the biggest threats to manufacturers right now is poor cash flow.
In this blog post, we'll explain why cash flow is so important for manufacturers and give you tips on how you can improve your cash flow. By staying on top of your cash flow you'll be in a much better position to face whatever challenges come your way!
Traditionally, the manufacturing industry operates on tight profit margins. When times are good, manufacturers can make a decent profit, but when the economy goes through a downturn, these margins quickly disappear.
In fact, the average manufacturing company operates on an average profit margin of just 7.9%.
These tight margins are exacerbated by uncertain future revenue streams, caused by things like Brexit and COVID-19. In a recent survey, 40% of manufacturers stated that they were unsure of where future profits would come from.
Another reason for cash flow issues in manufacturing is the imbalance of business cycles. The UK manufacturing sector tends to grow at a slower rate than the service sector, meaning that there are more manufacturing companies competing for a smaller slice of the pie.
Added to this are the supply chain issues and late payment problems that have been exacerbated by Brexit and COVID-19 and you have a recipe for cash flow disaster.
There are also some common issues associated with how manufacturing businesses do business that can negatively impact their cash flow. These include:
Long payment terms - UK manufacturers are often forced to offer longer payment terms to their customers in order to win and retain business, putting them at risk of late payments
Significant stock holding - manufacturing businesses tend to have high stock levels as they need to be able to fulfil orders quickly. This can tie up cash and increase the cost of goods sold
Offering too much credit - giving too much credit to customers can lead to bad debt and cash flow problems. However, because of the more competitive manufacturing market, it can be tempting for businesses to offer more credit in order to win new business
Cash flow issues are one of the most common problems for manufacturing businesses, with 57% of businesses having experienced problems with cash flow.
The most common consequences of poor cash flow for manufacturing businesses are:
Difficulty in meeting day-to-day expenses such as rent, staff salaries and raw materials
Poor cash flow can make it hard for manufacturing businesses to meet their day to day expenses. This can lead to businesses being forced to close down, reduce staff numbers or even go into bankruptcy.
In fact, cash flow issues are the primary reason 82% of small businesses fail.
Delays in paying suppliers which can lead to them withholding goods or services
Late payment by customers can cause cash flow problems as manufacturing businesses may have to wait a long time for payment in Turn this can cause them to have to pay suppliers later than agreed, which can lead to the supplier withholding goods or services.
Difficulty in obtaining finance from banks
Manufacturing businesses may find it difficult to obtain finance from banks if they have a poor cash flow history. This is because the bank will see that the business is not managing its finances well and so see them as a higher risk.
Increased borrowing costs as a result of being seen as high risk by lenders
Where businesses are able to secure finance pay, the interest rates they are likely to will be much higher than if their cash flow was more healthy. This is because the lender is taking on a greater risk by lending money to a business that may not be able to repay it.
Difficulty in expanding the business or making new investments
Cash flow issues stifle a companies ability to grow and expand. This is because cash flow is often needed to finance new investments, such as expanding a manufacturing facility or buying new equipment.
If a business is unable to make these investments due to its poor cash flow history, it will likely fall behind its competitors.
Thankfully, there are a few ways that manufacturers can improve their cash flow and hopefully get back on track.
1. Sell excess stock
Selling excess stock is a great way to improve cash flow, as it will free up some of the money that is currently tied up in inventory.
This can be done through online marketplaces, such as Amazon or eBay, or by selling to distributors or retailers.
Stock also costs money just to store, so freeing up this space will also save on storage costs.
While it can be tempting to store stock to potentially sell at a higher price in the future, it is important to weigh up the costs and benefits of doing so.
It is almost always more profitable to adopt a lean supply chain methodology than storing stock for a theoretical future gap in the market. While maintaining stock levels does allow for a quick reaction to incoming orders, if it's strangling your cash flow it's not worth it.
By getting rid of excess stock, manufacturers are able to improve their cash flow while also freeing up space in their warehouses cutting down on their storage and maintenance costs.
Review your expenses and reevaluate production costs
A whopping 78% of small businesses lack a well-developed business plan, which can have a major impact on their cash flow.
One way to combat this is by reviewing your expenses and reevaluating your production costs.
Are there any areas where you could save money without compromising the quality of your product? Can you negotiate better rates with your suppliers or service providers?
If you are able to reduce your manufacturing costs, you will free up more cash flow to invest in other areas of your business.
The first step in doing this is to examine all of your expenses and see where you can make cuts.
You may also want to consider bringing in an outside consultant who can help you streamline your manufacturing process and reduce your overall production costs.
2. Increase the price of your products
Although it can be difficult to raise prices in an industry that is already known for being competitive, it may be necessary in order to boost your manufacturing business's cash flow.
Trading at an ultra-low price point can actually have a negative effect on your cash flow. As we've already mentioned, low-profit margins can limit your cash flow and make it difficult to invest in your business.
One way to combat this is to increase the price of your products. This will not only help you generate more revenue, but it will also give you more breathing room when it comes to cash flow.
Obviously, in order to implement this strategy, you'll need to do your research first and make sure that your products are priced competitively in the market.
Arbitrarily increasing or decreasing the price of your products can have disastrous consequences, so it's important to be strategic about it.
Market research can help you understand how your products compare to others on the market, and it can also help you identify opportunities to increase your prices without hurting your sales.
If you're able to charge more for your products, it will free up more cash flow for manufacturing investments, creating a positive feedback loop that can help your business grow.
3. Liquidate old inventory
Liquidation refers to the process of selling off assets or inventory that is no longer needed.
It can be a great way to free up cash flow for manufacturing investments, as it allows you to get rid of excess stock and raise money quickly.
There are a few different ways to liquidate old inventory, so it's important to choose the option that will work best for your business. Some common liquidation options include:
Selling products at a discount - one of the most common ways to liquidate inventory is to sell it at a discount. This can be done through online marketplaces, auctions, or direct sales to customers.
Donating products - another option is to donate unsold products to charity. Not only will this help you get rid of excess stock, but it can also potentially generate tax deductions for your business.
Offering inventory for auction - you can also auction off your excess inventory to interested buyers. This can be a good option if you have products that are unique or hard to find.
Partnering with another business - if you're struggling to sell your products, you could consider partnering with another business. This could involve selling their products in your store or manufacturing products for them.
4. Renegotiate with suppliers
If you are having cash flow problems, it's worth renegotiating the terms of your supplier agreements. This could involve asking for longer payment terms or discounts on future orders.
The trick to this is to start early - don't wait until you're in a desperate situation to try and renegotiate. As soon as it looks like you might have some issues paying your suppliers on time, start talking to them about a new agreement.
Renegotiating with suppliers can be especially effective if you have multiple lines of credit with different suppliers. This gives you some leverage when negotiating terms.
5. Optimise your credit control process and be proactive with late-paying customers
The credit-control process and your accounts receivables are the foundation of your cash flow. Make sure you have a process in place that is proactive, and not just reactive.
This means contacting customers as soon as they become late with their payments, rather than waiting until the invoice is already overdue.
Just makes sure you're offering a full range of payment options, so customers can choose the one that's most convenient for them.
You should also be proactively chasing payments from long-standing customers who have historically been good payers. Sometimes even long-standing customers can fall behind for a short period of time.
This is why repeated credit checking is so important – it can help you identify any potential problems before they become an issue.
If you have to, be prepared to take a tough line on repeated late payers. This may mean refusing to sell them any more products or services until they pay their outstanding invoices in full.
Whatever measures you take, the key is to be proactive rather than reactive when it comes to cash flow. The earlier you act, the less likely it is that your cash flow will become a problem.
The only downside to being proactive with your cash flow is that it can be time-intensive, which is where automation comes in.
6. Ensure consistent cash flow automatically with Chaser
With an automated platform like Chaser, you can manage your cash flow in a fraction of the time, freeing up more of your day to focus on other important tasks.
By using an automated system, you can be proactive about your cash flow and keep your business running smoothly.
Chaser is an automated system that can help you manage your cash flow more efficiently, freeing up more of your day to focus on other important tasks. With Chaser, you can get a real-time view of your outstanding invoices so you always know where you stand.
can also set up automatic reminders to make sure you never miss a payment. Chaser is the perfect tool for businesses that want to boost their cash flow and keep their business running smoothly.
Sign up for a free trial today!