Connections for Success



Best Practices: Cash Flow Forecasting
Danielle M. Winkle

Capital is the lifeblood of any manufacturing business. Each week, your payroll must be met, overhead covered and suppliers paid. Meanwhile, your plant’s customers might not pay on time — or in full — and unanticipated expenses may come up, straining your cash flow.  Cash flow forecasting can help eliminate much of the heartburn associated with managing a manufacturing facility’s day-to-day capital.

Applying the following best practices can help you eliminate much of the heartburn associated with managing your manufacturing facility’s capital and help keep your cash flow positive.

Identify Your Peak Needs

Most manufacturing businesses are cyclical and their cash flow needs may vary by month or season. Preparing a monthly forecast is essential – an annual plan will not work as trouble can arise when an annual budget does not reflect the cycle of the business.  For seasonally focused operations, using a one-size-fits-all approach can throw budgets off, sometimes dramatically.  Identify peak production times so you can forecast your company’s cash flow needs and plan accordingly.

Account For Everything

Effective cash flow management requires anticipating and capturing all expenses as well as — to the greatest extent possible — the timing of each payable.  It also requires capturing the company’s cash receipts and timing of these receipts.

Pinpointing exact costs and expenditures for every day of the week can be especially challenging. Unlike a retailer who functions as a middleman for finished products between producers and the public, manufacturers can face an array of additional costs, overruns and payment delays.

When developing a cash flow forecast, manufacturers should put everything on the table, including all known and expected overhead, labor, raw material, energy, and legal and tax expenses. It can be a tedious and time-consuming exercise to inventory all possible expenses, but doing so can help avoid problems down the road.  In addition, small and midsize manufacturers can be overly dependent on large orders from a few big customers, who may demand generous payment terms and quick turnaround.

Cash Flow Obstacles

While considering the above best practices, it is important to keep in mind key cash flow obstacles. One of the biggest obstacles is slow invoicing that can result in delayed payments. One way to avoid slow invoicing is to offer easy and convenient ways for clients to pay, such as online bill pay or payment via a credit card.  If a customer is to pay via a credit card consider charging the fee to the customer that your company will need to pay.  Also, do a thorough check of customers’ financials and credit history to help eliminate selling to customers that will eventually default on payment.

Another common obstacle is poor resource management. Redundant machinery, misguided investments are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow.

Finally, lawsuits can severely hurt cash flow. Granted, some unfavorable legal situations are unavoidable.  However, by following best practices in safety, insurance and general business operations — and keeping a watchful eye out for risks — you may be able to avoid costly litigation.

Adjust As You Grow

Your plant’s cash flow needs today likely are not what they were three years ago, nor will they be the same three years from now. That is why it is important to make cash flow forecasting an integral part of your overall business planning.

If you have cash flow concerns or questions, please contact Danielle Winkle at [email protected] or 312.670.7444 to discuss your specific situation.

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