Tips on Managing Your Business's Cash Flow
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Posted by Michael S. on October 23, 2017 in Manufacturer Focus

If you have been in business for a while, this fact won’t surprise you. Less than 50% of manufacturing startups make it past the four-year mark. This is not usually because of the owner or founder’s lack of knowledge in the industry. Instead, it most likely comes down to cash flow.

 

Simply put, cash flow is the total amount of money being transferred into and out of a business. If your available money grew during the period, you have positive cash flow. If you have less than you had at the beginning of the period, you have negative cash flow. Too many periods with negative cash flow can be a sign that your business might be in danger of running out of cash.

 

What impacts your outgoing cash flow (accounts payable)?

 

  • Payroll and benefits 

  • Equipment lease or loan payments 

  • Rent or mortgage payments 

  • Utility payments 

  • Tax payments 

  • Material and component purchases 

  • Software and equipment upgrades 

  • Inventory management, storage, and taxes 

  • Other fees, permit costs, etc.   

 

What impacts your incoming cash flow (accounts receivable)? 

 

  • Customers paying for goods and services 

  • Refunds 

  • Investment income if you have interest-bearing accounts  

  • Other income   

 

To give you a little insight into cash flow, here is an example:

 

A customer asks you to quote 50 widgets. You analyze the time it will take to manufacture those widgets. You add material and overhead costs, as well as transportation expenses and profit. You give the customer the quote. He agrees to the terms and has you build 50 widgets. You order the materials and tooling, start building the fixture, and purchase other things you need to complete the job on time. These items all cost you money, and most of your suppliers have 30-day net agreements. It takes another four weeks to make those 50 widgets. Once they are complete, you ship them to the customer with an invoice.

 

The total time is over two months. In the meantime, you must pay for materials, make payroll, pay the utility company, etc. That’s a lot of money going out the door, and nothing coming in. While you are waiting for your customer to pay, you take on other jobs and cover the related expenses. Now, you have no cash available to pay your other bills. You are in trouble even though you didn’t do anything wrong.

 

To protect yourself, you can put a few safeguards in place. 

 

  • Establish a budget       

  • Operating budget

  • Expense accounts 

  • Incoming/receiving accounts 

  • Set tax and fixed cost dollars aside 

  • Make sure you price your widgets correctly to include all operating and fixed costs, as well as a satisfactory profit margin 

  • Negotiate 45-day or longer payment terms with your suppliers 

  • Ask your customers to make a down payment of 25% or more 

  • Set up payment plans with your customers (e.g.,10% one week before the project starts, another 20% due at the beginning of the project, etc.) 

  • Set 10-day payment terms with your customers 

  • Offer a 5% or higher discount if the invoice is paid in full within 10 days   

 

In addition, you can do the following to keep you fixed costs down.

 

  • Don’t have excess capital investments       

  • Make sure you don't have unnecessary equipment that is not paid for 

  • Ensure your existing equipment is utilized to its full potential before buying more capacity 

  • When buying equipment, see if used machinery is available 

  • Investigate if current machinery can do the job before adding special equipment 

  • Use Lean manufacturing practices       

  • Cell manufacturing

  • Pull not push manufacturing

  • Single piece flow not batch manufacturing 

  • Use Takt time manufacturing principles 

  • Manage your inventory       

  • Don’t overstock raw material and components 

  • See if your customers will buy the components for you   

 

Even when you are a small or midsize company, or just starting out, it’s important to pay close attention to your cash flow. If you do not have a 100% grasp on your cash flow, you might want to consider some of the following ideas:

 

  • Take classes in business finance 

  • Hire an accountant 

  • Contract with a consulting firm  

  • Join a trade association (resources) 

  • Set money aside to ensure you can pay incoming bills   

 

You might have started your manufacturing company because of your passion for machining or assembling parts, but you still need to focus on the basics of business. You can’t have expenditures that are larger than your income. Some of the simple ideas above can make it easier for you to stay ahead of cash flow problems.    

Michael S. is our Manufacturing guru
I have over 30 years experience in a broad range of manufacturing areas. Starting with an apprenticeship in Germany I’ve worked my way through a verity of positions within the manufacturing field. I got my start as a Tool and Die maker. I next became a supervisor of a class A tool room, then manager of a machining department. I was exposed to lean manufacturing in the mid 90s and adapted the lean philosophy. Loving and teaching the lean approach, I moved on to become a Continuous Improvement manager which led to a job as a manufacturing manager. I joined Acuity in 2015 as their manufacturing expert. I hope to evolve how manufacturers deal with, and think about insurance companies, as well as be a resource to my fellow employees – enabling them to better understand the unique needs of manufacturers.


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