Managing Cash Flow to Weather Economic Uncertainty

Economists are predicting choppy waters for the 2023 market. Budgeting and strategically managing your cash flow can help your manufacturing company prepare for uncertainties and make more informed decisions in response to market changes. It can also give you the flexibility you need to take advantage of investment opportunities.

Mike Sibley, leader of the James Moore manufacturing team, and Kevin Golden, a team partner and member, discuss how budgeting and managing cash flow can make for smoother sailing amidst economic downturns.

Predictions for 2023

2022 ushered in the first phase of a bear market, with the market declining 28% between January and October. Despite a brief rally, conditions have continued to fluctuate. Mike and Kevin pinpoint several trends for the new year.

  • Consumer spending is dropping. Some of this spending decline is driven by inflation, which has stayed hotter than expected. Persistent inflation also means the Fed is not likely to curb rate increases anytime soon. At the same time, consumers are beginning to push back on rising prices, especially as pandemic savings dry up. These factors will affect a variety of industries, including manufacturing.
  • Job openings remain. Some manufacturers have been able to stabilize their workforce. Others are still looking for extra help to work through their backlog. “We have about 4.5 million more job openings than unemployed workers right now,” Kevin said. “It’s still a struggle to get that workforce into the office.”
  • A recession may be on the horizon. The market may show some strain as the government reduces how much money it is investing in the market, inflation continues to remain sticky and consumers decrease their spending. Manufacturing companies may experience a drop in demand for goods. CEOs have raised concerns about capital expenditure spending, which they may slow in anticipation of a recession. Margins may also decrease as labor costs increase.

“Trying to preserve pre-2020 margins and increase in growth from there has been a battle, not only during COVID, but now that we’re on the other end,” Kevin said.

Focus on smart growth

How can manufacturing companies stay nimble and prepared to pivot in an unpredictable year? Using a budget to inform and guide your decision-making is always important. But it’s even more vital when facing possible rough economic winds and reduced cash flow. It can also help you avoid the pitfall of growing at an unsustainable rate.

A common refrain among CEOs of tech companies that recently rolled out significant layoffs is that, “’We just grew too much staff. We let it get out of control.’” Mike recalls hearing similar statements during the 2007-2008 economic recession.

“When revenues are increasing and everything is looking up, it’s easy to keep adding people, especially if you lack capacity,” Mike said. “And you’re so busy, you’re not taking the time to look at how you can scale up more efficiently.”

If your company is experiencing rapid growth, consider ways to accommodate this scale-up sustainably rather than starting a hiring spree. Look for ways to eliminate waste and generate more throughput. This helps you weather declines in business down the road without having to let people go. It’s an especially strategic approach in a tight labor market in which finding the right job candidate is not easy.

“It’s about taking a hard look at what you have and how you can use it better,” Kevin said. “It’s not necessarily about cutting costs. Look at your resources, tools and people to increase those margins and get more out of the resources you already have.”

Budgeting empowers you to make proactive decisions

A budget keeps your business heading in the right direction and provides clear understanding of what’s happening under the hood. It reveals what you’re doing right and where you could improve and connects operations and funds.

Budgets also help you make proactive decisions when you see challenges heading your way. Regularly reviewing your financials keeps your options open. Conversely, waiting until something goes wrong to check your budget and cash flow constricts your ability to respond.

“You can gain a lot from experience and knowledge,” Kevin said. “You’re only going to get that if you’re looking at your budget on a regular basis, rather than waiting for a particular event, such as tax season, the end of the year or a board meeting.”

Even if the year has already started, it’s never too late to set up a budget. Mike and Kevin offer advice for getting started.

  • Involve your management team in the budget creation process. Making each manager responsible for their area’s budget is one of the best budgeting practices. Not only do managers know what they need, this gives them ownership over the process as well. It also incentivizes them to practice the behaviors that will help your company to grow in the desired way, bolstering accountability. Small businesses can practice a similar level of participation even if they have fewer people. “The more input you can get, the better ideas you will have on how to do things,” Mike said.
  • Be realistic. Use historical and current data as guidelines. Model your company’s trends in labor costs, overtime and so forth. If there are surprises along the way, examine the underlying causes. Use this information to shape your projections for the rest of your year. “This gives you the big picture and enables you to make decisions. That’s what this is all about,” Mike said.
  • File timely reports. Make sure you collect and review key financial data accurately and in a timely way. Compare your estimated expenses to your actual ones. This can alert you when costs are getting out of hand or margins or pricing need to change. Waiting until a crisis to review your finances costs you extra money. “It does me no good if I set a budget up but never actually measure against that budget in a timely way,” Kevin said.

Use your budget to boost your cash flow

Cash is king. Having liquidity enables you to move quickly to take advantage of the investment opportunities that can arise in a volatile market. Understanding your cash flow also helps insulate you from future slowdowns and prepare to pivot if the need arises.

You can use your budget to make cash flow projections. Forecasting helps you plan and track expenses, manage risk and allocate your available resources.

“With a budget, what we can do is take your estimated profitability and turn it into a cash flow using estimated inventory turns, accounts receivable days, accounts payable days and so forth,” Mike said.

You can also use these approaches to improve your manufacturing company’s cash flow.

  • Review customer and receivable lists. Is someone consistently paying late? Consider shortening the payment cycle for certain customers to reduce the time during which you’re waiting for those cash inflows.
  • Reduce inventory. Many manufacturing companies are still recovering from the supply chain disruptions of the COVID-10 pandemic. As raw materials became harder to find, some companies built up their inventory to buffer themselves from shortages. “This is literally taking cash and putting it in inventory,” Mike said. These manufacturers may now find themselves overstocked. Reexamine your supply chain management to determine whether you can reduce your inventory to free up cash.
  • Slash waste. Look at your purchasing patterns and your production cycle for opportunities to work more efficiently.
  • Adopt a “just in time” mindset. “From the moment you buy raw materials to the time you collect from your customers could be anywhere from three to six months or more,” Mike said. “Is there anything you can do to shorten those cycles? That’s another area in which a budget can be really useful.”

Your budget can reveal if you need cash or a line of credit. It also empowers you to take this information to your bank to demonstrate your needs and the kind of growth you anticipate. The more information you can share, the greater your chances of receiving a loan.

“Greater transparency, greater budgeting and greater cash flow planning help banks better understand your situation,” Kevin said. “When they understand, they feel a lot better about loaning.”


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