In today’s business climate, manufacturers often face volatility and uncertainty in both demand and supply. Rising overhead costs and tight budgets make careful cash flow management a priority. These conditions force executives to focus on demand forecasting, securing suppliers and the core competencies of the business to make sure that operations are smooth and predictable.
The focus on core operations can make it difficult to manage administrative tasks. It is always challenging for a manufacturing company to scale administrative staff adequately to meet normal changes in demand; in high volatility times, this difficulty is amplified. Not having the ability to handle prompt invoicing, track accounts receivable and handle collections can mean manufacturers don’t receive payment on large invoices and have to find cash from other means operate their business.
Tariffs Require Conservative Demand Projections
New tariffs and supplier volatility can mean being caught without the raw materials manufacturers require to meet production demands, creating a real concern. Demand changes can mean manufacturers over-produce and end up warehousing excess inventory. Sometimes procurement chases a discount from suppliers but then gets stuck with the wrong materials to fulfill the next order.
If there are cash flow issues, the manufacturer will incur additional debt to obtain stock to fulfill that next order. When a purchase order requires more materials than the cash flow of the business can support, a funding partnership for at-need purchase order financing and other forms of alternative finance can ensure that a business has the cash flow it needs, on demand.
Design an Invoicing Process to Fit your Business Needs
Over the last few decades, the manufacturing floors of America have become lean and automated for increased productivity but does the back-office structure of these manufacturers support efficient operations? Inefficiencies in administration can cripple a business, negating competitive advantage and complicating management of inventory levels and business needs.
Key contract details can affect a manufacturer’s cash flow and ability to grow, or even operate, successfully. Understanding which contract terms pose business risks helps you plan for them.
- Return Policy—Many larger companies build in return policies for goods that don’t sell, especially if you are selling to a major retailer. The average rate of returns varies from company to company sometimes as high as 25 percent to 30 percent.
- Payment Terms—Ensure that payment terms are clearly stated on all your documentation. Don’t be afraid to bring their attention to terms, and the discounts and penalties associated with early and late payment respectively. Large companies often have unique payment policies. Ensure you know what they are before agreeing to the order.
- Inspection Periods—The sale may not be "complete" until an inspection of the goods is confirmed. Be conscious of inspection periods and the process undertaken to inspect goods before acceptance of an order. If your customer pays you before the inspection is complete any issues found may mean they reduce payment on the next order.
Robust Accounting and Administrative Processes Mitigates Risk
Uncertainty leads manufacturers to tighten budgets, especially when it comes to scaling up back-office administration. If administrative tasks are not efficient, tightening budgets can cause a ‘deadly spiral’ as a lack of cash flow reduces the ability of manufacturers to reinvest in the business by upgrading equipment or expanding capacity. Basic best practices such as offering payment terms, prompt invoicing and calling on clients to collect late payments maximize the payments received. ‘Automating’ this part of your business ensures that payment from your customers is as efficient as your production floor.
Create a standardized process for the evaluation of each customer and order, payment terms, invoicing and accounts receivable collections. This process should be tailored to the unique needs of your business and industry with mandatory adherence for all clients and by all employees.
- Corporate credit-checks should be performed on every customer who is offered payment terms. Use this information to determine the time-frame, size and terms of the credit extended.
- Invoicing should be prompt and adhere to standard invoice formatting (including invoice number, date prepared, services rendered, date of services, total due, payment due date, etc.)
- Before payments are late, on the invoice due date and on a regular schedule after an invoice is overdue, customers should be contacted to discuss payment. Take a diplomatic but firm approach and discuss the situation with your customer. Negotiate new payment terms; the last thing you want to do is lose a client. You can always reach an agreement. Discuss temporary payment terms and stipulate a timeframe and an end date.
Even with these best practices, late payments can be difficult to manage. If you’re concerned about a client’s payment habits, you can consider invoicing weekly. Administrative departments should always make prompt invoicing a business priority so the business can collect as soon as possible. Another solution to cash flow stability is to leverage outstanding customer payments to finance working capital needs and increase business liquidity.
Funding Your Manufacturing Business
A good funding partner can help manufacturers reduce risks of late or overdue payments and increase cash flow through accounts receivable financing or "factoring". Factoring allows manufacturers to report invoices to their funding partner weekly or even daily, who then handles the payment collection process for them. Typically up to 90 percent of the accounts receivable balance is paid to the manufacturer up front, with the balance (less the agreed fees) paid after the customer pays the due invoice. Even with the most thorough planning, manufacturers can’t continue to operate if they don’t get paid. Assessing your supplier, administrative and late payment risk ensures your business is engineered to maximize cash flow and flexibility to respond to a changing market.
Ian Watson is Chief Executive Officer—North America, having been appointed in June 2016. In his current role, Ian is responsible for implementing the regional strategic plan and growing the Bibby Financial Services business in both the U.S. and Canada. From 2010 to 2016, he served as CEO of the BFS Asia Pacific Region where he grew the company’s regional presence and increased revenues. During this time, Ian resided in Sydney, Australia and in Singapore and was responsible for the company’s operations in Australia, New Zealand, Hong Kong, Singapore, Malaysia and India. Ian has more than 30 years of experience in the banking and finance industry. Prior to joining BFS, he held senior executive roles in GMAC, Bank of New York and Lloyds International Factors. Ian served for three years as an elected board member of the International Factors Group. He attended Kingston Polytechnic.