As a contract manufacturer (CM), you’re focused on producing products, managing inventories, winning new business, and other critical activities that generate revenue. While these areas of focus are essential, CMs who effectively manage accounting activities are able to increase their manufacturing cash flow. Successfully increasing manufacturing cash flow is the key component that will allow you to invest in R&D, buy capital equipment, offer competitive prices, and take other important steps toward growth.
At its simplest, increasing manufacturing cash flow means improving the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. Speeding up the flow – converting sales into cash as soon as possible – to build a cash cushion is vital to the long-term, sustained growth of every CM. Implementing the tips below can help ensure your manufacturing company remains stable:
- Require pre-payment. When working with custom CM order, require a pre-payment up to 50% of the total price. Pre-payments reduce the likelihood of a financial loss in the worst of circumstances. This also aids material and labor costs for an ongoing job, ensuring that you’re not “fronting the bill” before the finished items are shipped and payment is received. When quoting, provide your customers with 2 or 3 different pre-payment options. Remember, either the OEM is using their bank or your bank to finance the order. Adjust the terms accordingly.
- Be proactive – and NICE – about delinquent payments. Enforcing payment discipline is essential, but it doesn’t require sacrificing kindness. A good collection system may include: implementing penalties for late payments, examining delinquent payments frequently, and being open to renegotiating terms for the slowest-paying customers. All of these activities can be done in a thoughtful manner – it’s important to acknowledge the human element, especially when collecting. The presence of this system will emphasize the importance of paying on time, every time. More importantly, Accounts Payable departments are more willing to pay those that seem cooperative. Balance both elements for success.
- Encourage electronic payments. Providing your customers multiple ways to pay gives them flexibility to issue payment faster. A preferred method is ACH payments. Since they’re electronic, it’s a faster, reliable and predictable method of payment versus the old method of mailing via postal service.
- Extend payments to vendors. Extend payment to vendors to the last possible date according to the terms of the sale. If there is no penalty for late payments, set a pay cycle up to 45 days from the receipt of the invoice. While slowing the outflow of cash is important, it is equally important to maintain a great credit rating and positive relationships with key vendors.
Security and Stability Paints an Attractive Picture
Employing the recommended cash flow tips listed above can build up your bank balances and extend the number of strategic options available to you as a company. You will reduce your liability while becoming more attractive to clients, banks and vendors. Moreover, your employees will enjoy job security and the stability of working for a contract manufacturer that strategically manages their finances. Increasing the cash flow of your manufacturing company will assist you in making sound business decisions.