Right now, many manufacturers are operating as usual. But as COVID-19 cases rise and more states and cities declare shelter in place orders, businesses across the board are becoming more and more affected. Manufacturers are right to be concerned about their cash flow.
In times of crisis, there are nine significant ways manufacturers can manage and increase cash flow:
1. Ensure your own financing remains viable
Many manufacturers have a lot of availability under their credit lines. If current levels of inventory and receivables remain strong, use this as collateral and consider drawing down on your lines of credit. This will give you the immediate cash you need to ensure you can satisfy your near-term cash commitments.
If you’re wondering, “Why borrow money now?”, consider the high possibility the financing options you currently have available to you will not continue to be available as customers begin extending their payments. As those receivables age, they will decrease in value as collateral, and you’ll be less likely to borrow money from the bank in the future. Drawing down on lines of credit now can set you up better in the long-term.
Also, begin to shift your focus from your profit and loss statement (P&L) to your balance sheet and your working capital (e.g., payables, receivables and inventory). Your balance sheet gives you a full view of your assets, which can help you turn receivables into cash and prevent cash outflow mismanagement. By aligning assets, it helps provide added direction for your team and makes sure cash is going where — and when — it should be.
Your P&L gives you a historical view of your operations but doesn’t tell you what cash commitments you have for the next 30, 60 or 90 days. Your balance sheet gives you that future-focused look and helps you understand how much cash you will likely need.
2. Offer customer discounts for early payment, but stretch out your own payments
As cash begins to tighten for everyone, it helps to offer discounts for faster payment. Customers that do have more cash will likely be enticed by a deeper discount from standard, which will allow you to turn receivables into cash more quickly. And that can be significant in increasing and maintaining cash flow during challenging times.
Also significant is coordinating the timing of when you are paying your vendors and suppliers. By strategically managing your cash outflow, you can weigh payment options to take advantage of vendor discounts or delaying when to pay in full.
3. Consider factoring your receivables
Instead of trying to collect your receivables under normal practices and waiting for the duration of the credit terms, consider selling them to a financial organization who specializes in factoring. While the financial organization will take a certain percentage as a fee, you will receive cash quickly.
Plus, you won’t have to worry about whether you can collect on the receivables and instead can focus your organization’s time and effort on production, streamlining processes and other methods of increasing cash flow.
4. Ask for a deposit up front for custom or long-term orders
Evaluate whether you can ask a customer up front for a deposit before working on custom orders. Or whether you can ask for milestone payments during long-term orders. These terms will depend on the customer, but these types of payments will significantly help maintain a steady cash flow while you incur the costs associated with fulfilling the custom order.
5. Lower your safety stock levels
Most manufacturers maintain inventory levels high enough to allow a quick reaction to incoming orders. Your renewed focus on inventory management will ensure you are maintaining the appropriate levels to conserve cash without impacting your ability to fulfill orders or react when the crisis is over.
6. Evaluate your customer and supplier bases
Are your customer or supplier bases too concentrated? If a large part of your orders come from only a couple customers, or you rely on a few key suppliers for raw materials, any disruption to these relationships can have devastating consequences. In uncertain times like these, it’s not unrealistic that one of your customers or suppliers’ businesses may fail. Evaluate the risk of a concentrated base on your company and consider how you can expand that base.
7. Evaluate customer credit risk
You should also assess your customers’ credit risks so you can better understand where your financial risks are in terms of collection.
While credit risk with your customers has always been evaluated, it is one area that can get overlooked when times are good. The consequences of COVID-19 are rippling through the business community and impacting everyone’s ability to meet current or long-term obligations. You want to understand what impact the current situation has on your customers and what that means for when you can expect payment. This will allow you to make any necessary changes so you can help stabilize and manage your own financial situation.
8. Streamline processes
During downturns in the economy, manufacturers will naturally focus on cutting costs. However, one area that is not always as obvious is the opportunity to streamline current manufacturing processes so as the economy rebounds, they are in a much stronger position to capitalize and meet demands. Time is money, so if you can re-direct your employees’ focus to evaluate how to effectively streamline a process and take 20% of the time out of it, and do that with more and more processes, you become a stronger organization during the slower periods and during the peak demands.
9. Manage costs
Streamlining and cutting costs is still important, of course, and there are certain ways you can do that right now. For example, if your company offers a 401(k) match, consider forgoing it for a certain time period, as it will help with immediate cash flow. Or you could cut temporary staff and redistribute their duties to permanent staff who may not be as busy as in normal times. You could also consider leasing equipment instead of buying it, as leasing gives you the flexibility to preserve cash while still fulfilling the capital needed to meet current production demands.
Now that you know how to improve cash flow in a manufacturing business, let’s get started
There are lots of cash flow options based on your business and its specific situation. Evaluating the above nine ways to increase cash flow, and taking action now, can help ensure your manufacturing business’s continued success into the future. If you need assistance with further ways and best practices to navigate the COVID-19 pandemic, contact Wipfli.
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