How to manage cashflow as a manufacturer

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Careful cashflow management is a must for any manufacturing business. In a production environment where costs and overheads are high, and income can be unpredictable, keeping a close eye on your company’s cash position is essential.

Manufacturing technology has evolved hugely over the past few decades, with automation, robotics and software control allowing manufacturing businesses to create streamlined, efficient business with the potential for scalable growth.

But has your use of technology also extended to the accounting, financial management and cashflow reporting that underpins the future health of the business?

The key cashflow issues in manufacturing

Managing the operational cashflow in your manufacturing business is all about maintaining a positive balance between your cash outflows (costs, purchases and expenses) and cash inflows (sales income and other revenue streams).

But in an industry sector where the running costs of even the most basic manufacturing business are relatively high, there are a number of key cashflow issues to overcome:

  • High operational costs and overheads – to manufacture your products, you need raw material, equipment, machinery and a labour force, all of which must be paid for prior to any revenue being generated from sales of the product. So your cash outflows are likely to outweigh your cash inflows without some very proactive management of your finances.
  • Unpredictable revenue streams – a manufacturing business relies on the forces of supply and demand to sell its products in the marketplace. If demand drops, or the economic situation shifts, your products sit in inventory, predicted sales can fluctuate and your expected revenue numbers can fall – reducing your all-important cash inflows.
  • Slow payment and extended payment terms – when your customers are feeling the financial squeeze, they are likely to defer payment of your invoices, or request payment terms that spread the cost. If your finance team aren’t proactive in chasing late payment, or don’t agree on favourable payment terms, this can have serious implications on your income levels and the liquid cash coming into the business.
  • Poor cashflow information and inventory reporting – with such a complex set of operational costs to manage, having detailed, up-to-date cashflow reporting to hand is vital if your finance team are going to attain and maintain a positive cashflow balance.

The combination of these cashflow issues makes managing your cash position a challenge. But by investing in the right accounting software and fintech solutions, you can quickly improve the quality of your cash information, your ability to forecast cashflow problems and your overall agility when it comes to promoting a positive cash position in the business.

What’s the best accounting software for manufacturing?

Cloud accounting software has revolutionised the level of control that a business can have over the day-to-day financial running and management of the company.

A modern cloud accounting platform will offer deeper financial reporting, tailored inventory systems, online invoicing and payment and enhanced cashflow statements and forecasts, to help your manufacturing business keep cashflow in check.

We’ve highlighted four of the top accounting platforms to consider:

 

  • Xero and Unleashed – for small manufacturing business, Xero is an ideal cloud accounting choice, giving you all the real-time bookkeeping, invoicing and accounting tools you need. Integrating the Unleashed inventory tool keeps you in control of materials, stock and sales, with a dashboard to track your overall profitability.
  • QuickBooks Enterprise For Manufacturing – this vertical Quickbooks package takes their standard cloud product and adds in manufacturing-specific tools, including inventory management, a customised chart of accounts and deep financial reporting.
  • Exact For Manufacturing – Exact has a big presence in European manufacturing, with their vertical product for larger manufacturers integrating the manufacturing tool you need with your core accounting. You also get order management, inventory management and relationship management all connected through the one platform.
  • NetSuite For Manufacturing – For larger manufacturers, NetSuite provides an enterprise-level solution for managing the entire business. You’ll have access to inventory management, production planning, warehouse management, financial accounting and a host of customer relationship tools as well.

 

Your manufacturing cashflow template

Setting up your cashflow statement in the right way helps you have the most relevant numbers to hand – by tailoring your accounting codes and Chart of Accounts to track and measure the most important cash metrics.

Key elements of your manufacturing cashflow statement will include:

    • Accounts receivable (cash inflows) – this will include your cash sales, cash collected from your debtors, loans you’ve introduced or other income coming into the business. In short, these are your cash receipts – the money that’s coming INTO the business.
    • Inventory – the longer your products sit in storage as part of your inventory, the worse this is for your cash flow. You have the costs of storage, overhead and labour to factor in, and an unsold product obviously doesn’t generate income. So it’s important to monitor your ‘Days in Inventory’ number to keep this low – only producing what you know can be quickly sold.
    • Accounts payable (cash outflows) – this includes all cash that’s going OUT of the business, including invoice payments to suppliers, repayments on loans and plant hire and any expenses you’re incurring around overheads, expenses and labour costs etc. Your aim is minimise these outflows, to boost overall cashflow.
    • Cash cost of sales (cash outflows) – keeping in control of your cost of goods sold (COGS) is vital for manufacturing cashflow. By coding, recording and tracking the costs of materials, overheads and direct labour costs you can aim to monitor this COGS number and keep it as low as possible.
    • Net cashflow – all your cashflow lines will be summed together to provide your overall cashflow number for the period. Your goal is for this to be a positive number (i.e. cash inflows are higher than cash outflows), and to prevent the business falling into a negative cashflow position.

Keeping in control of cashflow

The high running costs for a manufacturing business do make cashflow management a challenge. But with the right level of control, and a proactive approach to boosting your cash level, you can achieve the Holy Grail of positive cashflow.

By utilising the latest in cloud accounting, integrating with a smart cashflow solution like Fluidly and keeping a close eye on your cash levels, you can have a hugely positive impact on the financial health of your manufacturing company.

With the right ledger lines set up within your accounting software, Fluidly will pick up these lines and reflect them back in your cashflow forecast – giving you the best possible line of sight when it comes to the future position of your cash.

Find out more about managing cashflow with Fluidly