Manufacturing: Managing Cash Flow
Manufacturers are responsible for the production of almost all the goods used around the world. Products that are imported and exported start at manufacturing headquarters. At these locations products are assembled by either man or machine before being distributed and put on store shelves. From airplanes to the chair you’re sitting on, both were likely designed and built by a manufacturer.
Manufacturers also have to deal with the risk of defects with their products.
There are many different types of manufacturers; there are large firms responsible for filling orders of tools, equipment, and technology, and then there are firms that concentrate on the creation of smaller goods, mainly to be bought by individuals. Because of the large scale of orders these companies receive, it is important for them to always have access to immediate manufacturing working capital. In between pay periods operations still need to function at max capacity. That requires having plenty of money in the bank. If you do not have this cash on hand, your business may start to feel strapped for cash.
It’s important to always have a strong business model that outlines your specific financial goals. This will help you monitor cash flow closely, and make sure the business is not over extending itself, especially when taking on large orders.
Another key to monitoring your cash flow is realizing how long your business can sustain payment periods from customers. Some businesses allow customers to make payments longer than 60 days out, which can be dangerous for business. Before you come to an agreement for your customer’s payment periods, look ahead at what projects and orders you must fill and how much cash the business is going to need to get the job done. If you are dependent on your last customer’s payment then you should reconsider taking on more orders.
Manufacturers also have to deal with the risk of defects with their products. If you produce a faulty product, it can easily cost twice as much or more to correct. A defective product will take paid time to correct and tap into the business’ resources to do over. Not only are you letting your customer down, but defected products have often been the reason for a business failing.
All the above can be avoided by having a very clear business model. A business model will be what guides your business to success. Looking at your model and understanding what you are spending versus how you are getting paid will help you make smart decisions. However, in the event that you find yourself in a jam, or shorthanded, there are financing institutions available to help get you through the tough times.
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