6 ways manufacturing businesses can improve cash flow
In Australia, the manufacturing industry contributes $100 million to the national GDP and employs around 900,000 people, according to ABS (Australian Bureau of Statistics) data. With those figures to hand, it sounds like a profitable industry to be in. However, no matter how much money a manufacturing business earns on paper, it's good cash flow that really brings success.
How can manufacturing businesses improve cash flow?
Manufacturing businesses are different to other companies in that there's often a long turnaround between signing a contract and receiving payment.
In a retail shop or cafe, the customer pays as they buy the product. With manufacturing you'll likely have to order raw materials, produce the product and ship the goods before you can invoice, let alone be paid. This makes managing cash flow extra important.
Here are our top tips for improving cash flow in the manufacturing industry.
1) Conduct due diligence checks
Before you sign a contract, do some due diligence checks on the company you want to work with.
They'll have to agree to provide you access, but having a professional auditor or accountant take a look at their financial health allows you to ensure you only work with companies likely to pay on time.
If they have lots of overdue invoices, nothing in the bank and little in the way of new business, they might not be the right company for you to work with.
2) Send invoices more quickly
This one sounds obvious, but it's amazing how many companies finish a job and do nothing about it. Given you'll probably have payment terms of 30 - 60 days, the longer you wait to send the invoice the longer it is until you have the money ready to spend.
Develop a watertight system for the person who generates the invoice, so they know a job is complete almost as soon as it is.
3) Make use of invoice discounting
Even with our first two tips, you still can't guarantee when your debtors are actually going to pay up. Working with an invoice discounting company enables you to keep cash in the bank no matter what your customers are doing.
The invoice discounting company advance you the money you're owed by your clients, and you pay them back when your debtor settles their bill. You maintain spending power while you wait to get paid.
4) Keep on top of your own creditors
Take advantage of any opportunity to save some money or at least hold onto it for a while. If your suppliers offer a discount for fast payment, consider how you can make sure your finance team take advantage.
Similarly, ask if your creditors offer a payment plan. By paying your own bills over a longer period of time, you have more cash available to keep up with other essential payments.
5) Consider equipment finance options
Manufacturing equipment is expensive. When it's time to upgrade or a part needs replacing you have to find the cash to spend.
However, there lots of flexible equipment finance options that allow you to access new technology without drilling down into your savings.
Whether you want to hire new machinery or buy it, equipment finance solutions provide payment terms and packages that work with your business model.
There is also an option to sell your existing machinery to a lender and then lease it. This provides you with an immediate cash boost and ensures production remains unaffected.
6) Work with trade finance
If you need to work fast to keep up with customer demand or take advantage of supplier discounts, trade finance might be the option for you. Make the order as soon as you need to and let your trade finance partner pick up the bill. Once your order is delivered to your customer you arrange repayment.
With trade finance, you don't need to wait until you have the cash to take advantage of a new order or great deal.
Classic Funding Group offer a range of financial solutions. Our flexible plans allow you to keep trading as you want to, knowing we're waiting in the wings to provide support.