Managing cash flow is crucial for any business, especially in the manufacturing industries. John Spender, Director of Business Advisory at William Buck gives an outline for managing the coin
Poor cash flow management can exert significant pressure on manufacturing operations, making it difficult to meet expenses and potentially leading to insolvency and liability for company debts.
In light of rising inflation, supply chain issues, and the ATO intensifying efforts to recover outstanding debts, it becomes essential for manufacturers to have strong control over their cash flow. By gaining a comprehensive understanding of cash flow dynamics, manufacturers can proactively manage liquidity and address potential concerns early on.
If your manufacturing business is facing tougher trading conditions and tighter cash flow, it is recommended to consider implementing the following strategies and processes:
13-week cash flow forecast
A detailed 13-week cash flow forecast is a valuable tool for monitoring both cash inflows from debtors and cash outflows for the payment of creditors. This forecast should encompass various elements such as employment entitlements and historical debt repayments.
By continuously monitoring existing and upcoming expenses, manufacturers can ensure the availability of sufficient short-term assets to meet obligations promptly. Having a cash flow forecast enables business owners and operators to prioritise payments and plan, thereby avoiding penalties.
By accurately projecting cash inflows and outflows over 13 weeks, manufacturers can gain better visibility into their financial position and make informed decisions. This allows them to anticipate any potential shortfalls in cash and take proactive measures to address them.
The cash flow forecast should consider factors such as sales projections, accounts receivable collections, accounts payable obligations, and any upcoming expenses or investments. Regularly reviewing and updating the cash flow forecast helps manufacturers stay on top of their financial obligations and make necessary adjustments to ensure sufficient liquidity.
Debtor management processes
Once a cash flow forecast is in place, it is crucial to focus on debtor management and expedite the conversion of invoices into cash. Establishing robust cash collection processes is essential for timely payment collection.
This includes promptly sending out invoices, following up on overdue payments, and implementing clear policies for credit terms and collections. Manufacturers should also identify key performance indicators (KPIs) for debtor management, such as average collection period and debtor turnover ratio, to measure the efficiency of their collections process.
In cases where customers consistently delay payments, manufacturers may need to consider stricter measures, such as suspending supply until outstanding payments are made. Regularly reviewing and analysing debtor aging reports helps identify customers with overdue payments, allowing manufacturers to take appropriate actions to recover the cash. Efficient debtor management ensures a steady cash inflow, improves cash flow stability, and reduces the risk of bad debts.
Budgeting and overhead reduction
Implementing a comprehensive budgeting system for expenses is a vital practice that enables effective cash flow management and ensures desired profit margins are achieved. Creating a detailed plan of expected outgoings and regularly comparing them to actual expenses allows manufacturers to identify specific areas of concern promptly. By aligning expenses with revenue projections, manufacturers can control their costs and maintain a healthy cash flow.
Budgeting should involve a thorough examination of all expenses, including raw materials, labour costs, overheads, and other operating expenses. Manufacturers should analyse historical data and market trends to make accurate revenue and expense projections.
To reduce overhead costs, manufacturers can explore various strategies such as renegotiating supplier contracts, optimising inventory levels, improving operational efficiency, and exploring cost-saving technologies. By closely managing expenses and continuously seeking opportunities for cost reduction, manufacturers can improve their cash flow position and overall profitability.
Preparation and review of budgets/forecasts
Budgets and cash flow forecasts are dynamic documents that should be continuously reviewed and adjusted based on changing circumstances and business objectives. Depending on the current conditions, it may be necessary to review and update these forecasts and budgets regularly, such as monthly or quarterly. By regularly comparing budget forecasts with actual results, manufacturers can identify any cost overruns and take appropriate action. It is crucial to maintain accurate and up-to-date data within accounting systems to generate reports that facilitate effective decision-making processes.
Regular budget and forecast reviews enable manufacturers to identify trends, evaluate their financial performance, and make necessary adjustments. By analysing the reasons for any deviations from the planned budget, manufacturers can identify areas for improvement and implement corrective measures. This ensures that the budget and cash flow forecast remain relevant and aligned with the business’s objectives.
Consulting a specialist
In addition to implementing the above strategies, manufacturers need to seek guidance from experts in cash flow management specific to the manufacturing industry. Consulting with a William Buck Manufacturing Specialist can provide valuable insights and tailored advice to optimise cash flow management practices. These specialists have in-depth knowledge of the manufacturing industry and can help manufacturers navigate the complexities of cash flow management during periods of instability.
By adopting a proactive approach to cash flow management and implementing the recommended strategies, manufacturers can position themselves for success even in challenging economic conditions. Prioritising cash flow stability not only ensures the business’s financial health but also enables manufacturers to take advantage of opportunities for growth and innovation. It is an investment that pays off in the long run by safeguarding the business against potential risks and uncertainties.
John Spender is the Director of Business Advisory at William Buck.