Manufacturing is the backbone of the economy. All of the goods that you use on a daily basis have to be manufactured somewhere. In 2019, manufacturing accounted for $6.79 trillion of the global GDP.
But for manufacturers to stay in business, they must learn to manage their cash flow. Understanding how to perform cash flow forecasting in manufacturing is crucial.
Understanding Cash Flow in Manufacturing
Cash flow is the amount of cash or cash equivalents transferring in and out of a company. Inflows are the cash or income that enters your business. Outflows are your expenses.
If your inflows exceed your outflows, your cash flow will be positive. However, if you’re spending more money than you’re bringing into the business, your cash flow will be negative.
Negative cash flow may be a sign that the business is in trouble and cannot cover its operating expenses.
For manufacturers, it is crucial to maintain positive cash flow. Forecasting can help businesses predict what their cash flow will be in the weeks and months to come. If forecasts predict negative cash flow, you can take steps now to address or even prevent that outcome.
Benefits of Cash Flow Forecasting for Manufacturers
There are many advantages to forecasting in manufacturing. These benefits include:
Anticipate Cash Shortages and Address Issues Now
With cash flow forecasting, you can anticipate cash shortages and take steps now to address the issue. Acting early can help your business avoid making late payments to suppliers or employees.
Most businesses will need to seek out financing at some point. Lenders will often require businesses to provide cash flow forecasts as part of their loan application process. Creating forecasts regularly can help you demonstrate your business’s growth and improved cash flow management over time.
Put Your Cash to Work
Just as forecasting can predict cash flow shortages, it can also predict surpluses. If your forecast shows a cash surplus in the future, then you can make smarter decisions about how to put it to work for you, whether it’s through:
- Paying off debt.
- Returning the money to shareholders.
Forecasting gives you time to make your decision and use the data available to you to make the best choice for your business.
Key Components of Cash Flow Forecasting
Cash flow forecasting is best performed using tools or software that has access to your current and past financials. The software can reduce forecasting errors and rapidly forecast what your sales may be based on:
- Current trends.
- Past trends.
- Growth projections.
The key components in every forecast are projected:
- Payment time.
Growth rates may vary, but historical data can be used to better understand your historical growth rate for greater forecast accuracy.
Strategies for Improving Cash Flow in Manufacturing
Manufacturing cash flow can be improved using many strategies:
- Implement rapid invoice systems that automatically send invoices when order milestones are completed. Invoicing systems should include reminders that encourage buyers to pay faster.
- Reevaluate your supply chain. Is it possible to buy more inventory in bulk and save money? Are there other suppliers that you can contract with for a lower price than what you’re currently paying?
- Streamline the manufacturing process. If you have bottlenecks in the manufacturing process, they can lead to slower fulfillment times and slow product delivery. Review new technologies or practices that your workforce can utilize to speed up manufacturing, allowing you to take more orders and reduce the time between order start and fulfillment times.
- Review prices. Production costs often rise and manufacturers fail to adjust their pricing to match these changes. You must review and update pricing periodically to ensure that your company maintains healthy profit margins.
- Liquidate old inventory. Storage costs and loss of warehouse space will not help you maintain healthy cash flow levels. If you have older inventory, liquidate it to rid yourself of the inventory and free up cash. You can even put these items on sale for a steep discount to deplete inventory even faster.
Reducing costs is another opportunity to improve your cash flow. For example, you may need to cut back on employees because of new efficiencies. Additionally, you may produce differing products at higher or lower profit margins.
You should review your offers and:
- Consider dropping products with low-profit margins if they don’t sell often.
- Debate increasing product prices for items with low-profit margins.
- Bundling items together that consumers want to sell more items that don’t sell well individually.
Maintaining a LEAN manufacturing business will allow you to make the most out of your cash flow and free up money that will be better spent on growing your company.
Manufacturing cash flow inconsistencies can cause you to lose revenue and business. You need healthy cash flow to secure inventory, sign contracts and confidently meet deadlines without needing to go into debt.
Forecasting your company’s cash flow and following the best practices above will improve your business’s financial health.