Cash flow is the blood that keeps manufacturing businesses alive. Without secure cash flow businesses would cease to exist. While it is possible for a company to survive without cash, that can only be possible for a short period. Ultimately, operations will collapse if the money coming in is less than the amount going out to sustain activities. Statistics show that more than 50% of manufacturing startups fail within their first four years. This can be attributed to cash flow issues. It is therefore imperative that manufacturing companies manage their cash well to avoid trouble. Achieving this is not easy, but for survival, it is necessary. A steady cash flow is important to a manufacturing company for various reasons, both operational and investing.
Operating Needs for Cash Lead To Manufacturing Industry Debt Collection
Manufacturing companies churn out thousands of products each day. They need to produce in large quantities to meet consumer demand as well as take advantage of economies of scale. The more a manufacturer produces, the lower the cost of production per product. That means there are bigger margins when producing in bulk. To produce goods, a company needs to spend on several factors of production. From labor to raw materials, to utilities, a manufacturer must have the funds to finance its operations. Thus, positive cash flow is necessary to facilitate operating activities.
As a manufacturer, you cannot produce goods without raw materials. Raw materials are the key components of any product. Although suppliers may supply raw materials on credit, they will eventually have to be paid. Therefore, the business must be able to generate the cash to pay suppliers. Failure to pay suppliers can stall production to a halt as they would stop supplying material.
Another key component of the manufacturing process is labor. Having raw materials and the necessary facilities and equipment will not produce anything. Manufacturers need personnel to carry out different tasks that will facilitate production. They will need to pay their employees and cover the associated costs such as unemployment insurance and healthcare. Unlike suppliers, employees have to be paid every month or week, depending on the terms of engagement. You cannot pay them without a steady stream of cash. Failure to pay employees would mean production stalls as there would be no one to run, monitor or supervise the production process.
Although not attributable directly to a product, expenditure on utilities is also important for a manufacturer. Expenses on utilities such as electricity are necessary for the running of any manufacturing plant. They are an important part of the manufacturing process and require funds. Without liquidity, it is difficult to meet such expenses. It may affect the ability of the business to produce its products.
Investing Needs for Cash
Apart from the day-to-day running of functions, a manufacturer also needs cash to invest in equipment and machinery. There is also a need for cash for maintenance expenses. Manufacturers need your equipment and machinery functioning at all times so that you meet your production targets. Maintenance costs are therefore going to be a big part of your budget. From time to time, you will also need to upgrade your equipment and machinery by purchasing new models of equipment to keep up with market trends. You will need cash to get new equipment or maintain what you have. That further highlights the need to have a health cash flow in your business.
Improving Cash Flow for a Manufacturing Company
The key to improving liquidity is being able to free extra cash. That is achievable through various techniques. You can achieve this through managing your stock or managing your payments.
Manufacturers always offer payment terms to their customers. However, the terms could result in low liquidity if it takes too long to collect payment from distributors. Since manufacturers need to pay for supplies, utilities and labor in time, they also need to be able to collect your debts in time. Manufacturers can acquire the services of a third-party collection agency to help them manage their collections.
Engaging third-party collection agencies may be beneficial to a business in several ways. The agencies offer to follow up on your debtors for a fee. They ensure debtors pay their debts in time as per their contracts. Thus, they ensure the company maintains positive cash flow.
The effect of negative cash flow can be devastating to any business. Thus, it is necessary to adopt techniques that ensure healthy cash levels for any manufacturing company. Manufacturers can also review their credit terms to establish a favorable balance with customers that results in steady cash levels. Alternatively, companies can procure the services of a third-party collection agency to help you manage their collections from debtors. With proper management of cash flows, manufacturing companies will be in a better position to survive into the future.