Generally, the color red has positive undertones and is often associated with energy, passion or action; however, when it comes to the financial aspects of an organization, red is never an ideal color to be associated with.
If you are a small manufacturing organization, then- perhaps more likely than a large organization- you are aware of the importance of having a positive cash flow and staying out of the red.
In layman's terms, cash flow is a simple tool that gauges the sum of monies flowing in and out of an organization. Creating a financial forecast is imperative to optimizing your cash flow and ensuring that your organization doesn’t over spend or over project and stays out of the red.
3 Ways to Start Improving
If you don’t know what your organization’s financial standing is, then you can’t expect to improve it. As a supplemental preliminary step to improving the cash flow of your organization, you will need to assess where you are financially by following the money trail. This provides a snapshot of where the ebbs and flows of your organization’s money would be best allocated.
1. Financial Forecast
Post assessment of your organization's financial standing, you will need to perform a financial forecast. Using real numbers from last year’s revenue and expenses to gauge future expenses is a smart way to forecast your financial future. This will allow you to see where your monies would be best allocated for this year or the next.
Create a detailed twelve month forecast that clearly projects the years nooks and crannies, such as:
- Growth
- Employment opportunities
- Sales spikes
- Production increases
- Buying opportunities
Ideally a financial forecast is completed on an annual basis; however, there are many twists and turns in the economy, which can happen at any time, and changes in buyers habits that make conducting a financial forecast on a weekly, monthly or quarterly basis a good practice.
2. Speedy Payments & Receivables
As a financial rule of thumb, making sure your payments are on time is a critical aspect of conducting reputable and reliable business practices. Being prepared for when an invoice is filed wrong and encounters multiple delays or knowing how fluid your collections process is are two examples of how you can be proactive instead of reactive.
In order for an organization to retain its contract negotiation power and financial credibility, the accounts payable department needs to adhere to a structured pay schedule and ensure that payments are conducted as soon as possible.
3. Keep Afloat and Reduce the Bloat
Based on a financial snapshot or your organization, did you notice any bloat within your inventory? Don’t make the mistake of buying more supply than what’s demanded. Doing that will not only be a waste of product, but it will waste your financial resources that could have been plugged into a more needed department or area. Make an effort to maintain and regularly check your inventory by dividing the costs of goods sold by the average value of your inventory so you don’t unnecessarily bloat your inventory.
All Hands on Deck
Red is a passionate and energetic color. Within manufacturing, the color red does not hold the same connotations it does in other aspects of everyday life. To keep red out of your organization’s cash flow and increase growth opportunities, you should:
- Take a quick assessment of where the organization’s financial standing is
- Flesh out a financial forecast
- Allocate monies accordingly
- Adhere to an outlined pay schedule
- Reduce your inventory bloat
Improving an organization’s cash flow is not dependent on one person. Rather, the improvement relies on everyone in the company. Making sure that each department understands the importance of a positive cash flow and the steps to keeping it that way as a critical aspect to fulfilling the organization’s financial and growth objectives. Contact consulting experts to learn more about how you can stay out of the red and improve your cash flow.
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