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GM BUSINESS connect
December/January 2018
debt recovery
Are manufactu suffering Any manufacturing company needs a strong cash flow to help operate smoothly, but many find this aspect of running a business difficult. Manufacturers have certain unavoidable costs, and these costs can seriously affect their working capital. These basic costs are: direct materials, direct labour and factory overheads. While businesses will look for ways to improve their efficiencies, they shouldn’t ignore potential ways of improving cash flow, alongside any other potential cost reductions.
The challenge of working capital According to ‘The Manufacturer’, there’s a liquidity imbalance in the UK economy, with large amounts of cash concentrated in the hands of a few large corporations. At the same time, industry as a sector has experienced a deterioration in working capital. Where manufacturers may be looking for greater cost reductions to alleviate customer-driven pressures, this can be at the expense of working capital. This kind of pressure may make things worse, especially if they’ve already got cash flow issues. If a manufacturing business is experiencing problems with cash flow, it may then risk becoming
mired in troubles paying back its own creditors. It is all a question of balance. It must keep its sales volume at a level that brings in money, but to do so may require more expenditure on inventory. More expenditure requires more cash. The risk is that business may get pulled into a spiralling debt crisis.
Cash flow and debt recovery The key thing for manufacturers is to speed up receivables while trying to cut costs. Manufacturers cannot simply focus all their energies on growth and sales without looking at their expenses. This means looking at how they are performing in the present, not just at projected performance. An experienced investor will look at cash flow, not just profit, because cash flow shows how much money is available for day to day operations, and is therefore a basic for a sound business. There may be ways a manufacturing business can improve its cash flow by reducing its inventory or its overheads, for example; or improving its mixture of products to focus more on those items yielding higher margins. However, getting paid on time should always be a priority.
Don’t disregard debt recovery. If a business is making cash flow a priority, then they must consider their options for recovering money owed, as well as efficiencies in other areas. Commercial debt recovery should not simply be a last resort, but rather a strategic, cash flow option that can be employed in certain circumstances.
What are the growing pains of exporting manufacturers? When manufacturers face long payment cycles, this can spell trouble. This is especially true for first-time exporters. Without careful planning, companies beginning their export journey can soon find that they have insufficient cash to cover multiple costs. These costs include: materials, labour and building and equipment overheads. Also, exporting manufacturers also must consider costs associated with the supply chain, including freight and insurance. Business owners often regard exporting as a challenge because of finding overseas customers, when in fact cash flow can be a far more pressing issue.
Growing pains and cash flow problems Businesses will typically seek to drive greater cost reductions to meet customer pressure for better value, however, inventory costs can typically contribute to a reduction in working capital. A manufacturer may find that while they are ready to grow, the demands of growth bring with them certain problems, and pains.
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If, for example, an overseas customer ends up awarding a business a major contract far greater than the company’s domestic value then this provides an opportunity for growth. However, it may also mean that the
business needs more capital to meet this new demand, or face a shortfall.
Complexities in the supply chain may then exacerbate this problem. As an exporter, they can then find that the whole process slows down their cash flow, so while they need more working capital upfront, they’re also not recouping cash quickly enough, dragging the business further into debt.
Recovering debt as a cash flow strategy Whereas organisation and planning are crucial to helping businesses grow in export markets, the issue can come down to collecting money owed to make sure they maintain working capital. “As part of a cash flow strategy, manufacturing exporters should consider international debt recovery - not as a last resort, but rather, as another arm of their operations. Managing international payments has its risks, from currency issues to local political problems, alongside corruption and the risk of nonpayment. As part of understanding and managing a business’s risks as an exporter, they must consider how they can secure their cash flow. Its important to familiarise themselves with finance sources available, and then get cash reserves in place, but it’s crucial to be prepared for issues to arise, and know what action they will need to take to recover their debts overseas,.
Tackling cash flow in manufacturing Cash flow is not just about problemsolving. Given that manufacturers have unavoidable costs, it makes sense for them to approach the issue strategically.
