Manufacturers and distributors often encounter cash flow challenges. Here are five common causes and tips on how to correct them.
1) Cash can’t flow when stock won’t go
Don’t get caught with producing or buying too much stock and then holding on to it too long. Product that is sitting in warehouses can be likened to a river that runs through too many dams. Building reserves is one thing, but cash can’t flow.
How to fix it – Do your research on past sales. Inventory needs to be monitored and based on average sales turnover. However, you can lose money if you don’t have key products in stock when you need them, so sales forecasting is a balancing act that has to be continually reviewed.
2) Keep overhead costs from overwhelming your profits
Allowing the everyday expenses of your business to escalate is a common problem and a cash flow killer. From salaries and stock to the smallest stationery orders, overhead expenses need to be kept in check.
How to fix it –Regularly audit these expenses. Assess what is really necessary and cut expenses wherever you can. Be careful, though, to avoid cuts that could hurt business growth, such as reductions is sales and marketing efforts.
3) Say farewell to “dead weight” products
Many manufacturing and distribution businesses have a few very profitable products and yet doggedly hang on to others that don’t sell. They may try to justify this as offering customers a wider range of products, but it can also stifle cash flow.
How to fix it – Focus on the products that give your business the highest profit margins. This will not only improve cash flow, but will ensure that your business keeps growing.
4) Invoices paid late can close the gate!
Waiting 30, 60 or even 90 days to get paid for products that you have shipped cripples cash flow for many manufacturers and distributors.
How to fix it –You can try to incentivize customers to pay more quickly by offering discounts, but this may not work when your profit margins are tight. A better option: get paid now on your slow-paying invoices with invoice factoring, which immediately improves cash flow. A good invoice factoring company can share with you how the process works.
5) Bad debt
Too many manufacturers and wholesalers have been hurt when customers fail to pay for the products they received. Unpaid invoices kill cash flow altogether when customers go out of business or default on what you are owed.
How to fix it –All your customers need to be checked for creditworthiness. A good invoice factoring company can protect you against business loss. Credit professionals analyze potential customers’ credit ratings and payment histories – and will warn you of risks that could damage your cash flow.