3 Ways Manufacturers Can Optimize Cash Flow

Manufacturers know that managing cash flow can often feel like navigating a relentless tide. Balancing between incoming revenues and outgoing expenses requires both skill and insight; and it’s not always clear where to begin making improvements.

To help, we’re offering three potential strategies to enhance your financial agility: effective inventory management, strategic supplier relationships, and revamping your accounts receivable processes. These strategies can not only alleviate cash flow pressures but drive sustainable growth.

1. Streamline Your Inventory Management

Many manufacturers suffer from inefficient or generally unorganized inventory management. 

1. Inefficiency is caused by time wasted looking for items, losing items completely, or fixing inventory errors.
2. When it comes to cash flow, the simple fact is money locked in unsold inventory restricts day-to-day operations and limits growth opportunities.

How to Streamline Your Inventory Management

Nailing down critical policies, procedures, and technologies that help improve your inventory management is best tackled early on before the situation becomes overwhelming.

1.  Implement an Inventory Management System: These systems can provide accurate data, streamline ordering processes, and predict demand more effectively.
2.  Embrace Lean Inventory: Implement Just-in-Time inventory management to keep stock levels aligned with customer demand. This requires working with reliable suppliers and being mindful of supply chain disruptions​.
3.  Improve Your Supplier Relationships: Focus on building strong relationships with suppliers to better negotiate lead times and pricing.
4.  Optimize Your Storage Space: If necessary, consider fully redesigning your storage areas to maximize efficient space utilization and provide quicker access to items.
5.  Commit to Continuous Improvement: Listen to your stock room and other employees. Encourage their feedback and instill a culture aimed at constantly optimizing inventory management.

2. Negotiate Favorable Payment Terms with Suppliers

Favorable payment terms with your suppliers are essential for maintaining healthy cash flow and overall financial stability.

Here are 4 steps you can follow to identify and improve unfavorable payment terms:

I. Conduct a Payment Terms Analysis

Start by reviewing all of your current payment terms with each supplier. Assess the impact of your net 30 and net 60 payments by evaluating the gap between when you receive payments from customers and when you make payments to suppliers.

Compare this information to industry norms to give yourself an idea of what is typical and what could be considered unfavorable. 

Note: If you’re unsure where to look, try reaching out to industry peers or associates for insights into common payment practices.

II. Evaluate Supplier Relationships

To fully determine if you’re receiving favorable or unfavorable terms, you’ll need to understand both your relationship with the supplier and the leverage your supplier has in negotiations.

Long-standing, trustworthy relationships might mean you can ask for better terms. However, a supplier with a unique or irreplaceable product may out-leverage you.

III. Communicate with Suppliers

If you believe you’re under unfavorable terms, you’ll need to open a dialogue with that supplier.

Be transparent about your needs and limitations. If they understand your situation and value your business, suppliers may be willing to adjust their terms and work with you.

IV. Explore Alternatives

If negotiations feel unproductive, you may need to find alternative options.

This could mean switching to a new supplier, consulting with a financial advisor or supply chain expert, or looking for new ways to manufacture your product.

3. Improve Accounts Receivable Management

Poorly managed accounts receivable (AR) operations can have a significant impact on a manufacturing business's cash flow and overall financial health. 

Factors like how long your business takes to collect payments, the amount of bad debt, inaccuracies and errors, and lack of real-time visibility are all clear signs that your accounts receivable operations need to be revamped.

Here’s how to do it:

I. Implement/Upgrade AR Software

Specialized accounts receivable software can help by automating invoicing, payment reminders, and collection processes. The right modern software can easily integrate with your existing RP system for improved visibility and control over receivables.

Automated systems have the added benefit of reducing manual errors and freeing up staff time for more strategic tasks.

II. Enhance Credit Management Procedures

Too much bad debt on the books can indicate your credit terms are too lenient or that creditworthiness is not being adequately assessed.

• Conduct thorough credit checks on new customers before extending credit
• Regularly review the credit status of existing customers, especially if their payment behavior changes
• Establish clear credit policies and ensure they are communicated effectively to customers

III. Improve Your Customer Relationships

Building strong relationships with your customers can greatly improve your AR management. A better understanding of their payment processes and cash flows can lead to more efficient payments and easier planning.

Make a concerted effort to reach out to customers, especially those with irregular payment cycles, and address any issues proactively. Focus on excellent customer service to ensure you leave no unresolved issues in the way of collecting payments.

Engaging in open and transparent communication regarding obligations sets clear boundaries and provides a simple framework for resolving any inquiries or disputes.

Bonus Tip: Consider Financing Options

If immediate access to capital is required and you have no other way to free up cash without incurring interest, financing may be a valuable option.

The Pros and Cons of Financing

Financing is an excellent tool for rapidly increasing liquidity without diluting your ownership stake. Many business loans are also tax-deductible. However, there are drawbacks to consider.

Loans will come with interest, so you’ll need to make good use of the influx of liquidity for financing to be worth it in the long term. Also, be wary of over-leveraging; excessive debt can put dire financial strain on your company. 

Finally, collateral may be required for certain types of loans, which means placing company assets at risk.

CMTC Helps SMMs Conquer Cash Flow and Optimize Growth

CMTC is committed to bolstering the productivity and competitiveness of California’s manufacturers.

We offer various services specifically designed to address the unique challenges faced by small and medium-sized manufacturers. CMTC stands ready to help with:

• Technology Implementation
• Supply Chain Optimization
• Lean Manufacturing Strategies

If you need help with cash flow or are looking for other assistance with your business growth, contact CMTC today.