Cash flow challenges happen to every business. You'll be flush with initial capital, but a single hefty invoice not being paid promptly or a large order can leave you struggling to pay debts and maintain growth.
We will share some of the challenges manufacturers face and explain how to create a 13-week cash flow model for your business.
Cash Flow Challenges in the Manufacturing Industry
Manufacturers have many moving parts that allow them to stay in operation. A single wasted expenditure can lead to low cash flow. The most common challenges these organizations face include:
- Stock forecasting is one of the areas where manufacturers can cause liquidity issues for their business. You may overstock components; if sales slow, you’ll have inventory that sits and can’t use the cash for growth initiatives.
- Customer credit may attract your initial customers but also cause a cash flow crunch. There’s always a risk that credit extensions can lead to non-payment.
- Slow invoice payments go along with customer credit perfectly. If your invoices aren’t paid promptly or late, you’ll have potential cash flow problems because you’re owed money for completed work.
Of course, other cash flow problems can arise. Many manufacturers invest too much money into growth and end up low on cash flow because they invest too much of their capital into development.
You must have a comprehensive forecast that alerts you to potential:
- Cash flow issues
- Cash flow surpluses
If you predict a surplus or have more than enough liquidity, you can invest in your business correctly.
Building a Comprehensive 13-Week Cash Flow Model for Manufacturers
Cash flow efficiency can significantly increase when you learn how to create and use a 13 week cash flow forecast. A 13-week forecast covers an entire business quarter and will allow you to identify the following:
- Growth opportunities
You can use a tool to create these forecasts because they’re highly accurate, but you can also make your model manually. You'll need to look through past data to determine to your best ability:
- Receivable collections
- Other receipts
- Operational payments
- Capital expenditures
- Professional fees
- Interest payments
- Financing fees
You'll need to list all your expected orders and expenditures. For example, you can look through the prior month's expenses to determine how much cash outflows you can expect each week.
Software and cash flow SaaS solutions will connect to your accounting software to run these numbers for you. Predicting growth or contraction will help you better understand your business’s financial position throughout the 13 weeks.
If you have an accountant, they can work on creating a forecast for you that’s based on your data. The larger your company is, the more complex it is to make a cash flow forecast without professional help accurately.
Lean Manufacturing and Cash Flow Efficiency
Lean manufacturing is all about minimizing waste within manufacturing operations while maximizing productivity.
Reducing waste will immediately free up cash flow to improve efficiency.
The five values of lean manufacturing are:
- Identify value from the consumer’s perspective
- Analyze and map the value stream
- Create flow to reduce waste
- Implement a pull system
- Continually search for ways to improve processes and efficiency
Following these principles will help improve cash flow over the long term.
Supplier Relations and Cash Flow Stability
Manufacturing enterprises can face cash flow challenges like any other business. However, these challenges can eventually affect supplier relations and cash flow stability.
Having a reliable and accurate cash flow forecast is critical.
When manufacturing enterprises can look weeks or months ahead, they can identify potential cash flow shortages and take action now to avoid them.
Maintaining healthy cash flow will allow enterprises to maintain excellent relationships with suppliers while ensuring they have a reliable and steady cash flow.
Forecast-Driven Investment and Expansion Decisions
Manufacturing enterprises must invest and expand to grow their operations like any other business. However, making investment and expansion decisions can be challenging without data and figures to guide you.
Cash flow forecasts provide insight and a look at the future, allowing stakeholders to make more informed decisions. A clear picture of the enterprise’s financial health and future cash flow will make it easier to determine when to pull the trigger on investment or expansion plans.
Making important decisions based on forecasts will lead to better results than making decisions based on hunches or historical data alone.
Cash flow forecasting is vital in running any business, including manufacturing enterprises. Manufacturers need to find ways to improve cash flow efficiency and learn how to build accurate 13-week cash flow models. Accurate forecasts will help stakeholders make more intelligent decisions regarding investments and expansion.