If you’re looking at maximizing cash flow from a basic standpoint, then you need to increase the speed of receivables — monetary and other obligations owed to a company by customers or debtors — while cutting costs. You can’t just look at top-line growth, or increasing sales. While top-line growth is important because it indicates there’s demand for the products or services being sold, it doesn’t take into account selling expenses. This is why so many experienced investors pay close attention to cash flow, which indicates how much capital is available for day-to-day operations. (For more, see: The Essentials of Corporate Cash Flow.)
Every manufacturing company needs strong cash flow to operate smoothly. However, not all have it. Even if a manufacturing company is generating strong cash flow, there is almost always room for improvement. Read on for some ways to increase maneuverability of your cash.
1. Sell Excess Inventory
Inventory depreciates faster than any other asset. If you have inventory that doesn’t move or some that moves slowly, it’s time to cut ties and sell it, even if you have to do it at a discount. This might be difficult at first, but it will free up cash, which can then be applied toward stronger growth areas of the business. (For related reading, see: Why Are Fixed Manufacturing Costs Included in Inventories Through the Absorption Costing Method?)
2. Project Future Cash Flows
This would be a time-consuming task if you were to try and analyze and predict by yourself. Fortunately, there is cash flow management software to project future income and expenses, which will help reduce the element of surprise and allow you to prepare accordingly.
3. Increase Profitability
The best way to do increase profitability is to increase prices. Manufacturers should consider increases prices for the following:
- Custom machinery
- Product attachments
Be sure to look at the comps throughout the industry to get an idea of whether you’re underpriced or not. Remember that a slight decrease in volume can be made up for with increased pricing, which will lead to higher sales.
4. Improve Product Mix
In order to improve product mix, you need to put more focus on higher-margin products. One simple approach to accomplishing this goal is to update and improve old products. In order to help fuel sales, offer extended warranties and sales incentives to your sales force. (For related reading, see: How Does Free Cash Flow to the Firm Measure Money, Time and Risk?)
5. Reduce Overhead
Excluding core operations, consider outsourcing, but only if pricing is favorable. Also, instead of adding floor space, reduce it. The future is going to be about efficiency, and you will find many manufacturers operating in much smaller spaces. It’s better to be ahead of the curve. Additionally, review your management team and its effectiveness. If there’s one area that can be cut in almost any business, it’s management. (For more, see: Why Should Management Teams Focus More on Horizontal Integration?)
6. Pay Suppliers on Time
Do not pay your dues early or late. If you pay them early, you’re reducing cash flow. If you pay them late, you could be hit with fees, which also hurts cash flow. There is one exception: If you’re offered a steep discount by paying upfront, consider it. This will hit current cash flow, but it will benefit future cash flow.
7. Pull Receivables in Before Accounts Payable
If receivables are coming in faster than payables are going out, you’re in a good spot. If this isn’t a possibility, at least reduce the average accounts receivable by several days. If it’s currently 50, attempt to lower it to 45. This will improve cash flow.
8. Improve Gross Margin
Below are several ways to help improve gross margin, or the proportion of each dollar of revenue that you retain as profit:
- Reduce purchasing costs
- Comprehensively train employees (increases productivity)
- Conduct wage and performance reviews
- Offer productivity incentives (For more, see: Gross Margin vs. Operating Margin.)
9. Get Everyone on Board
From management to sales, get everyone together to announce that cash flow is now the top priority. Make sure you're armed with answers to likely questions so the meeting moves fast and little time is lost. When everyone has the same goal, it becomes more attainable.
10. Maintain Open Communication with Suppliers
Talking with and maintaining an open line of communication will greatly increase your odds of being able to negotiate payment times and prices, which can have a positive impact on cash flow.
The Bottom Line
Making operations and finances run more efficiently will help improve cash flow for any manufacturer. Even implementing one of the changes noted above should have a powerful and positive impact. (For more, see: 10 Ways to Improve Cash Flow from Receivables.)