Proactive Measures to Managing and Improving Cash Flow

Cash flow management is critical to your business’s success, whether you’re growing, holding steady or even faced with a downturn. Having the right amount of cash on hand enables you to take advantage of investment opportunities, plan for the future and weather economic uncertainty.

Mike Sibley, leader of the James Moore manufacturing team, and Kevin Golden, a team partner and member, offer practical strategies for taking control of and improving your business’ cash flow.

Cash flow management is not a one-size-fits-all function. Consider which approaches will help reduce the stress on your business that can stem from delayed payments, hazy projections or surplus inventory. In a world where cash is king, these tools can help you avoid being asset rich but cash poor.

Tip 1: Be proactive.

Proactively managing your cash flow ensures you have enough working capital for production. It also primes your business to react quickly if circumstances change.

For manufacturers, the production cycle starts with a purchase order from a customer. You buy raw materials, start production, ship your product, send an invoice and receive payment within 30 to 60 days (depending on your terms).

In total, however, this process can last much longer. When you order materials, you could be three to six months out from getting paid for the product you’re making. Meanwhile, you’re responsible for paying your vendors and employees and keeping the lights on in your building. How can you stay afloat in the meantime?

Many manufacturers rely on credit to fund those in-between payments. If a customer is late with their payment, however, or your invoicing process is delayed, that further strains your business.

“Cash flow can be really difficult to manage, particularly in a growth environment,” Mike said. “The shorter you can make that cycle, the better.”

Tip 2: Budget and forecast.

The first step to proactively managing your cash is making sure you have a budget and are forecasting business outcomes. Budgeting tells you where you are at the moment and where you’re likely to be in the future. Mike and Kevin offer pointers on how to make a budget and use it to forecast your cash flow.

Cash flow forecasting helps you see how much cash you will have in the future based on your current production, billing and collection cycles. It can also reveal which parts of your business aren’t functioning efficiently, how much cash you’ll need to tide you over when times are tight and how readily accessible your cash is.

“If you look at your balance sheet and you’ve got a lot of great assets, but they’re all sitting in inventory, that’s going to create a problem,” Kevin said. “Cash flow forecasting is going to point out times when you are cash poor and where those needs are.”

Staying alert to forthcoming challenges can prepare you to approach your bank about extending or increasing a line of credit or taking out a loan.

“Cash flow forecasting helps you start having those conversations, both internally as a management team, and with people like your accountant, your banker, your lawyer – whoever can help you through those times when it’s a little rougher,” Kevin said.

It also empowers you make a precise ask. When your banker asks how much you need, forecasting can prep you to respond with a number and provide the documents that enable your banker to understand your business cycle and current shortages.

Forecasting doesn’t just assist when times are lean. It can also help you take advantage when business is booming and you have extra cash that could be applied strategically. Buying more in bulk, for example, could help you take advantage of available discounts. You could also negotiate better terms with your vendors and pay down debt.

Remember that it is also possible to grow too fast. Cash is crucial to successful growth that gets you to the next level.

Tip 3: Improve your payment and collection process.

Making your business cycle more efficient isn’t always about cutting costs. It’s often about being more efficient with the tools you already have.

One such tool is managing customer credit. When a customer doesn’t pay on time, you are essentially serving as their creditor, financing them in the meantime. This slows down the conversion of raw materials to cash.

Sometimes rectifying late payments is as simple as making a phone call. If a customer consistently fails to pay according to the terms you’ve agreed upon, however, think about that relationship and whether you are both helping one another thrive. If not, it may be time to revisit and revise your terms.

“You’ve delivered your end. So now it’s time to make sure that they hold up theirs,” Kevin said.

Tighten up your invoicing process by making sure you are invoicing promptly after shipping orders. Double-check that you have the right point of contact for collecting payments and that invoices and prices are correct.

To speed up the collection process, look into ways your customers can pay digitally with a credit card. Consider using an app or automated text or email reminder to make payments easier. And gently prod customers for whom payment may not be top of mind.

“The more open communication you have, the better relationship you’re going to have with your customer—and the better your collection process will be,” Mike said.

See if you can align the payment terms of vendors to match those of your customers. If customers pay you on a 45-day cycle, ask if vendors will accept payment on the same timeline.

Another option for securing cash quickly is factoring, which is selling your receivables at a discount. The issue of collecting in full then falls to the intermediary who purchases the receivables.

“I wouldn’t say factoring is necessarily a good practice to make a habit of doing, but it’s an option,” Kevin said. “If you’re in a tough spot, and you’ve got to come up with some cash in a hurry, it’s a great way to help convert your receivables into some quick cash that can get you through some of those difficult times.”

Each one of these options—extending credit, getting and offering discounts, factoring—comes with a cost. Consider the pros and cons and which works best for your business and situation.

Tip 4: Manage your inventory.

Inventory is one of the most critical parts of a manufacturing business, particularly in light of the supply chain disruptions of the past two years. Those difficulties spurred some manufacturers to stockpile available materials to avoid a shortage later. As a result, businesses may now find themselves with an unwieldy surplus of raw materials.

“That’s literally cash that’s sitting on your inventory shelves,” Mike said.

Determine how many months’ worth of materials you currently have. Then compare that with how long it takes you to get those same materials from your vendors. If there’s a disparity, think about how you can draw down your inventory until it reaches its normal level. This helps you rebuild your cash.

“This is something that all manufacturers should be looking at right now,” Mike said.

Also, communicate proactively with your suppliers about your needs and address any quality issues to reduce the amount of damaged or subpar materials you receive.

Ultimately, the benefit of managing your cash flow is that it gives you peace of mind.

“Whenever you’re able to plan for these things, you’re going to sleep a little better at night,” Kevin said. “That’s why cash flow is important. It affects your day-to-day and how you’re able to continue to work and thrive in your business.”