8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS.

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1 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS

2 2 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS INTROdUCTION: 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS This paper provides an eight-step plan for small to mid-size manufacturers to improve cash flow. You will learn best practices for cash flow management, along with concrete methods for implementing them. The recommendations come from customer surveys and observations of cash flow practices among JobBOSS customers nationwide between Tracking cash flow has never been more important for small manufacturers. It is the lifeblood of your current net worth and future profitability. Cash flow forecasts can fine-tune your company s performance to meet overall goals. Having a sound cash flow management predicts upcoming cash needs and ensures cash availability. Even the most profitable companies can go out of business due to poor cash flow. In a hurry to grow, they become overextended and have no cushion. Cash flow also influences your ability to seize opportunities. The message hits home when the business needs cash to replace equipment or purchase special machinery for a customer request. Cash flow s influence on capital and credit is particularly important in the manufacturing sector, which requires longer term financing of inventories and receivables than other areas of the economy. In national surveys of manufacturing companies, results point to cash flow as a major factor in obtaining access to capital. Credit Offerings Both of these credit options can work based on customer size and preference: 1. Offer a short-term, low-interest payment plan, or an incentive to pay within 90 days with no finance charge. Add the finance charge after 90 days if needed. Always encourage early payoff. 2. Accepting purchase orders is another option. This is your customer s promise to pay on receipt of an invoice. A legitimate business will create a PO for the product you make from their specs. This enters their accounting system as a future expense; for you it creates visibility to revenue coming in 30, 60 or 90 days. If you have a high volume of customers to track, you may want a third party to help manage credit accounts, send out statements, receive and post payments and deal with non-payment issues.

3 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS 3 WHY BUSINESS LOANSGET REjECTEd Debt load Size of company 6% Customer concentrations 6% 5% 13% 23% 29% Qualifying New Customers With the above options, you still must determine credit worthiness of customers. Do a credit check on each, then decide based on your own business criteria. You may decide not to extend credit to customers with a credit score below a certain value, or make certain credit options available based on certain scores. Size or availability of personal guarantees 4% Economic concerns Weakening industry Other 4% 4% 3% 2% 2% Existing Customers Last year s prompt payer may struggle with the same invoice amount this year. It pays to do a periodic credit review. If you ve given good service, few customers will object. Source 2014 Capital Markets Report, Pepperdine University Exhibit 2 Cost comparison of in-house and cloud-based solutions Traditional in-house 12 Typical one-time costs (US$ in millions) Traditional in-house Cloudbased Cloudbased Typical ongoing costs (5-year cumulative, US$ in millions) Strategy& pwc.com 2013 PwC. All rights reserved. Please see for further details. This report was originally published by Booz & Company in 2013 Keep good records of customers previous payment habits. If they paid every invoice late last year, will it be different this year? Offer a payment plan or payment on delivery to customers who are marginal credit risks. Understand what factors might affect your customers ability to pay. Are they affected by the seasons or other recurring scenarios in their business? Paper or Electronic If the agreement is that your customer will pay on receipt of invoice, or terms such as net-30 or net-45, your responsibility is to deliver an invoice, either paper or electronic. Though it happens rarely, an invoice sent through the mail can be misplaced. Electronic invoicing through has helped, but can still pose problems-- Our system was down for a few days and I lost a bunch of s. Electronic data interchange (EDI) works well because your system communicates with your customer s system. Expect verification that the invoice was sent and received.

4 4 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS When to Invoice? Bill customers right away. If you do partial shipments, bill those immediately as well. Use an integrated shop management and accounting solution for automatic invoicing. Daily invoicing will generate a steady stream of revenue throughout the month. ERP or business management software will relieve you of coordinating invoicing, and will furnish a record of when the invoice went out, when it s due, and those outstanding. Managing the Backlog Bookkeeping can be a nightmare when manually tracking who paid what and when. Even a minimal software package can help manage invoicing with alerts, automatic functionality and reports. Don t be afraid to send reminder notices three or four days ahead of the due date. Hiring a part-time bookkeeper to make collection calls on accounts far outside the terms also helps. A freelancer s rate will be recouped with the increase in revenues from collections. If your shop is just starting up, do cash on delivery whenever possible. Start your cash flow moving at a steady pace before you give out credit and begin invoicing. The cash buffer will cover the inevitable late or no payment situations. What to look at: 1. Projects won vs. lost 2. Variables that made a bid successful 3. Reasons given for lost bids 4. Profitability of bids won 5. Factors making projects more profitable 6. Current backlog 7. Steadiness of current work 8. Future projects and pipeline Achieving this visibility is difficult without an ERP system, especially if you want to sit down at any moment and see where the company is and where it s going. Spending hours with manual spreadsheets mean you will not look into the future often, and risk running your business with short-term perspective. ERP or business management software: Tracks actual stats vs. forecasts Helps refine your skills as a forecaster Shows where the company did better or worse than expectations Indicates how to adjust future forecasts Reveals causes for discrepancies in forecasts vs. actuals Uncovers reasons and variables for lack of performance up to expectations Goals are written into your business plan.

5 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS 5 Figure 4: Cash management profile $ 1200 B $ 1000 B $ 800 B $ 600 B $ 400 B $200 B $ 4,200 B $ 4,000 B $ 3,800 B $ 3,600 B $ 3,400 B $ 3,200 B $ 3,000 B Raw material should be linked to the intended project. Study your WIP lead times and for each finished product, determine when a particular material is needed. Procure it just in time. Schedule work as the shop area becomes available. Find ways to use your current setup and tooling for multiple jobs before a changeover. Release jobs to the floor only when they can begin. Projects should be started on a schedule that ensures an acceptable on-time performance. The sooner the finished parts reach your customer, the sooner you invoice. $ B Cash on hand $ 2,800 B Total debt (right axis) Top public companies in the US surveyed by REL in its 2013 Capital Survey showed a 14% year-over-year decline in free cash flow between US Working Capital Survey, REL, a division of The Hackett Group, Inc. Having a cash flow forecast will measure business against these goals, yet even in top 1000 companies, cash flow can be problematic. The top public US companies surveyed by REL Capital Survey in 2013 showed at 14% year-over-year decline in free cash flow, the capital a company generates beyond what is required to maintain or expand its asset base, between 2009 and Shop Scheduling and Material Management The solution is to make adjustments in Work-in-Progress. The use of ERP or job shop software to track and control WIP and inventory is a proven way to reduce costs. A software solution will predict future job schedules and when you need inventory to feed into your WIP. Purchasing Changes To better manage WIP and inventory, use the closest suppliers to reduce delivery costs. Negotiate longer-term purchasing agreements (yearly) for quantity discounts. When making a bulk purchase, ask the supplier to deliver only the material you need, when requested. An ERP system, or production, inventory and scheduling software will furnish the data necessary. Simplified what if forecasting allows you to test before handing changes to the shop floor, as well as cut inventory costs and respond to inventory fluctuations. YOUR CASH FLOW IS YOUR COMPANY'S LIFELINE. For the small to mid-sized manufacturer, managing cash flow is critical to survival. Work diligently to improve cash flow management and analysis using the best practices above. Gain visibility of what money should be coming in vs. going out on a weekly, monthly, and annual basis. Do what ifs. Become skilled at forecasting. As you put your vendors on just-intime to keep your cash longer, as you forecast inventory requirements and plan your purchasing with an eye to cash flow, a clear and brighter picture of your business s future will emerge.

6 6 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS TIP #1 MANAGE YOUR data for MAxIMUM VISIBILITY Visibility is key. Enterprise Resource Planning (ERP) software improves your ability to collect and analyze data in your shop, giving you a broader picture of cash flow realities and a competitive edge. Implementing ERP software not only aids in your processes it shows you vital action items affecting you now and in the future such as: Can we make payroll six months down the road? Can we afford to bid on a project twice our normal size? Today change happens in an instant. Being in the know anywhere, anytime has a huge advantage as a result, utilizing a cloud-based ERP solution adds further benefits to the equation. Software in the cloud addresses the critical needs of your organization while significantly reducing acquisition and implementation costs. Instead of a large initial capital expense or outright purchase of a traditional system, you pay through a subscription model. You can roll out a cloud-based ERP system in the time it takes to update any affected business processes and convert your relevant data. The advantages: Cloud based providers scale up easily to meet your growing needs. The subscription model includes not just the software but also hosting and support costs. The expenditure required for implementation and ongoing operation is lower than with traditional software. Vendors maintain both the hardware and software including all patches, upgrades, and refreshes. Backups, system monitoring, and user support fall to them, not you. Even the largest US organizations often choose a cloud-based solution over the traditional in-house system. In a 2013 survey of Fortune 1000 companies by Strategy& (formerly Booz & Company), the total cost of ownership for a cloudbased ERP system ended up 50 to 60 percent less over a 5-year period.

7 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS 7 TIP #2 TIP #3 TIP #4 MANAGE CUSTOMER CREdIT Shrewd management of invoicing and payment is vital to improving cash flow. Your customers will expect credit options and flexible terms. What type of credit do I offer? How do I qualify customers for credit? MANAGE CUSTOMER INVOICING Every invoice should provide your customers with all the information to pay without questions. The information to include on any invoice is: The word Invoice prominently displayed A unique number to identify the invoice Your company name, address and contact information The customer s name, company name, address and contact information A clear description of the products or services being invoiced The date the products or services were delivered The date the invoice was created The total amount of the invoice clearly displayed The breakdown of the amount into products, services, taxes and any additional fees If any of this information is missing or unclear, you run the risk of a delayed payment. MANAGE CUSTOMER Payment Options Today s market has established credit cards as an approved and primary payment method. They can reduce your risks and collection costs, and provide a built-in payment plan, eliminating the need for your own credit options. There is usually a transaction fee and monthly fee from the processor. Sometimes your bank can offer you a deal to accept credit cards through them. Determine if you want to take company checks, then work with a processor that handles them. Some processors do checks, credit cards, debit cards and payment plans. To improve cash flow and incentivize customers to pay promptly, you may want to offer early payment discounts

8 8 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS TIP #5 TIP #6 TIP #7 MANAGE YOUR CASH Flow Forecasts and Analysis Knowing what your company will take in and spend over the next twelve months is a basic cash flow forecast. Do them monthly, quarterly and annually. ERP software will help you collect and analyze your business performance data. Instead of guesswork, you will have visibility to: See what should be coming in vs. going out by time frame Do what-ifs on cash flow Recognize cyclical or seasonal changes An accurate forecast reveals surpluses or future dips in revenue. It helps determine timing for large purchases and shows company growth potential. MANAGE YOUR SUPPLIER PAYMENT TERMS Tracking and controlling capital and expenses is the other half of smart cash flow management. Take steps to put your vendors on just in time so you keep your cash as long as possible. Negotiate the best terms possible in three primary areas: The actual terms for the payment(s) you will make, such as net-45 days The activity that triggers a request for your payment, such as the delivery date The activity that triggers your payment to the supplier, such as an electronic invoice Your response to favorable terms from a supplier should be repaid by: Increasing your reliance on them Paying the full invoice amount on time, consistently Communicating with them if a problem arises Remember, when negotiating payment terms, match or exceed what you typically offer your customers. If you normally pay invoices every 30 days, ask your supplier for a net-45 or net-60 arrangement. If you give your customers net-45 terms, do not take net-30 terms. Until you have sufficient leverage with a supplier, you may have to accept cash on delivery terms. Just as you evaluate your customer s ability to pay, your suppliers will evaluate you. MANAGE YOUR WIP ANd INVENTORY According to the Lokad Inventory and Costs Definition and Formula Report ( definition-inventory-costs), excess inventory can actually cost you an additional percent. Stockpiling raw materials or finished products beyond customer demand seriously adds to your overhead. A rule of thumb is that for every $1 in inventory, you spend another 25 cents in carrying costs. That s $250 for every $1,000 of inventory, or a 25% increase in expenses affecting your cash flow. These additional costs are made up of: Insurance Taxes Warehouse space Handling Inventory losses (spoilage, theft, scrap, damage) Employee theft

9 8 WAYS TO IMPROVE CASH FLOW FOR SMALL MANUFACTURERS 9 TIP #8 MANAGE SUPPLIER Payment Options and your Capital Expenses A choice of payment options will improve cash flow: Credit Cards find a business credit card with no annual fee and a low annual percentage rate. Pay it off each billing cycle and avoid interest. Letter of Credit use when making a large purchase or placing a custom order from a new supplier. Obtain it from your bank at little or no charge. The letter says the bank is holding the funds to be released to the supplier when goods are received. Cash on Delivery you pay the delivery company for materials when they arrive, and the delivery company pays the supplier. With little or no credit starting out, COD and letters of credit beat high-interest credit cards or finance plans. efficiency will pay off, but only if you purchase wisely. Looking at a large capital expense? Determine the long term revenue potential. o Look at lease options. o Look at refurbished machines What would speed up your manufacturing process the most? o A little capital spread over several machine upgrades might increase efficiency more than one new machine. o What is the most timeconsuming step in your shop process? What could speed it up? Don t forget information and back-office needs. It may be time to purchase or upgrade job shop management or ERP software for added visibility. Now that you re established and have money in the bank, take a deep breath before spending any of it. Spending capital to increase IMMEDIATE ACTION STEPS Adapt each of the eight tips to your own organization Meet with employees in the next two weeks to reassess and implement change. Look into upgrading or implementing a cloud-based ERP system. To learn more, contact or talk with an expert at today.

10 JobBOSS Shop Management Solutions serve over 7,000 shops with software and business support. Since over 30 years we provide the technology and knowledge that fuels their productivity and profits, innovation and growth. JobBOSS is a job-based system designed specifically for custom and mixed-mode manufacturers an integrated, quote-to-cash solution that offers complete visibility and control of a manufacturing business. JobBOSS is an ECi Solutions product. ECi Solutions builds business software for SMEs and their accountants. Our innovative technology is aimed at specific business needs, providing an overview of today and insights into the opportunities of tomorrow. ECi Solutions inspires businesses to grow. Our employees love, share and support our customers ambition. Like them, we aim high. Like them, we aspire to lead the way. That s how we know it s a bumpy road to success. And that s why we build software to help smooth it out, enabling our customers from all over the world to grow. JobBOSS. Shop management solutions. JobBOSS American Blvd W Bloomington, MN United States Tel: Site: JobBOSS, All rights reserved. All trademarks mentioned herein belong to their respective owners.