With months of state and local business capacity limits and social distance measures implemented during COVID-19, many stores have been forced to close and consumer spending has decreased. In turn, many companies, including manufacturers, have become even more focused on cash flow planning. Now with factories and businesses beginning to open back up, management has the responsibility to review essential strategies and focus on enhanced cash flow planning in order to protect the health and welfare of their basic business operations.
Steps for Improving Cash Flow
Manufacturers can look at optimizing various strategic aspects of their businesses and working capital in order to improve and enhance cash flows. Below are five ideas on how to harness some of these strategies in order to help with cash flow management.
1) Leverage Financing
Many manufacturers have a lot of availability under lines of credit. By identifying strong levels of inventory or receivables, these can be used as collateral to draw on current credit lines, which will ensure immediate cash needs are met. Financing options may dwindle over time as customers choose to extend payments and as receivables age, decreasing the value that inventory and these receivables would provide as collateral, so acting on this sooner rather than later is beneficial to most businesses.
2) Cut Costs
There are many avenues that a manufacturing company can take in order to reduce and manage costs. A couple of examples include postponing a 401(k) match, cutting temporary staff and leasing equipment rather than purchasing it. Another avenue is to streamline processes which can indirectly help reduce costs. By focusing on how to effectively improve a manufacturing process and reduce the time, energy and costs associated with it, this sets up a company to become overall more efficient and stronger which can combat any future slow periods and help the company surge ahead during peak periods.
3) Manage Inventory
Many manufacturers strive to maintain inventory levels that are high enough to ensure a quick and timely reaction to incoming orders. Reviewing inventory needs can lead to companies maintaining more appropriate levels of inventory on hand by lowering safety stock levels to conserve cash without reducing their abilities to fulfill orders.
4) Delay the Accounts Payable Process
Manufacturers can stretch out payments by coordinating and staggering the timing of when to pay vendors and suppliers by reviewing their payment options in order to take advantage of any discounts for earlier payment versus delaying payment in full for vendors who have a longer payment period.
5) Review Accounts Receivable Process
Manufacturers should evaluate their collection strategies by reviewing invoice presentation as many companies struggle to send invoices to customers in a timely manner or the invoices have incorrect information reported that delays a customer’s payments. Also, a company can consider the timeliness of when an invoice a generated, when it is sent to the customer, if there are electronic options to send the invoice to the customer and to have the customer pay, such as ACH, credit cards or other electronic means which can all speed up cash collections. As mentioned in #4, customers may also be utilizing a strategy of delaying payments to vendors. Manufacturers should address and improve their collection policies or offer discounts or incentives to customers for faster payment.
To discover personalized cash flow strategies for your business, contact an Anders advisor below. Learn more about our COVID-19 Business Recovery services or how we work with manufacturers and distributors.
