Effective Cash Management for Manufacturing CompaniesSadaf Abbas
Effective Cash Management for Manufacturing Companies
Effective cash management for Manufacturing companies’ importance can only be understood after realizing that ‘Money is power. When this is said, it means the Cash, not hypothetical profits. A company can record profit based on a contractual ability to collect cash in the future. But, the company itself may be paying cash to suppliers before it receives from the customers. Here, lies the biggest issue for all businesses.
If companies don’t control this cycle of cash, they can run out of cash and stop functioning. Cash management can be done through a proper financial plan and modeling. For example, if a Coffee shop has a financial model ready they can manage their cash effectively.
Succeeding are some of the challenges that companies face:
Time-lag in the middle of receipts and payments
Companies have to pay the vendors and labor before they can produce a product that will be sold to get profit later. An increase in this time gap shows a cash flow management issue.
Some companies allow customers to make changes to the product at certain stages before completion and therefore, it can increase the time gap and again cause cash flow management issues.
Companies working on a milestone basis can sometimes only send bills to the customer for up to 90% of the work completed. This means that the company can bill the remaining 10% of work done and expensed, in the next cycle of billing. Companies should look for ways to reduce this while also making sure that the bills are sent promptly.
Inventory management is another major topic of concern for many companies. From, cash flow perspective ‘Just in Time’ inventory management technique reduces the purchase and retention of inventory to the minimum and therefore helpful for reducing the cash flow cycle.
Similarly, investments in equipment also mean payment of cash for purchases. So, make purchases only when they are needed and make sure that the purchased equipment is used to its maximum potential. Consider the leasing of fixed assets instead of purchase.
Effective Cash management throughout the lifecycle of a manufacturing process
Every product is different, and the company needs to know the net cash for its manufacturing cycle. Succeeding are some guidelines that cover the five chief phases of the manufacturing process:
Before taking an order of a product
- Appraise the credit grade of your possible customer
- Evaluate the payment schedules in the project contract
- Budget the contract precisely
- Know whatever financial records are essential to be retained
- Finalize the particulars of the development contract and negotiate favorable terms
- Decide when payments will be completed
- In what way payments will be made
- What will happen if payments fall due
- Decide the costs that are allowed in the production
- Know about the performance penalties, if any
- Negotiate the retention rate
- Know about the cut-off for invoices to be acknowledged
- Hold a meeting before the start of manufacturing to be on the same page
- Discuss the reporting and documentation requisites
- Prepare and confirm a performance and billing schedule, time-bound
- Adhere to the performance and billing schedule
- Strictly control expenditures according to the schedule of values
- Negotiate credit terms with vendors and subcontractors
- Send invoices promptly as per the contract terms
- Pay suppliers as per the contract terms
End of manufacturing
- To avoid any delays in the final payment, make sure you create the product as the customer asked
- Collect the last payment
If the above is focused on each manufacturing project, then here are some common cash-flow management advice:
At the business level
- Use cash flow statement model in excel or software to predict future cash-flows
- Train your project supervisors so they understand cash-flow management
- Make credit facilities available
Dealing with suppliers
- Keep looking for the best deals even if u have a fixed supplier
- Keep asking for discounts
- Ask for an extension of the credit limit
- Maintain cash reserves or financing facilities
- Link the incentives with cash-flow performance
- Outsource when practicable. Companies pay every week or fortnightly to employees on fixed wages, while payment to sub-contractors can be arranged every month
- Write flawless payment terms
- Check credit rating before making deals
- Develop a front-loaded schedule of values. Bill in phases for items such as mobilization, then site development, and finally walls, roof, landscaping, and finish.
- Don’t put all the cash into a single project. Take more than one projects at different timings to help manage the cash-flows during production
- Automate invoices and remember to remind customers a few days earlier
- Offer early payment benefits
- Avoid mistakes in billing. It leaves a wrong impression on the client and they may delay payments later
- Over-Billing is also not recommendable. It means you are treating clients as a credit facility.
- Accept electronic clearing; this is the fastest way to receipts
- Discuss with clients to reduce your payment terms
- Chase late payment instantly, and review terms with this client
Effective Cash Management is an ongoing task and needs to be controlled in every project. You should use a dynamic and automated Financial Model created by Oak business Consultant, or Financial Analysis services.