When it comes to cash flow, running a manufacturing business requires a steady hand on the tiller. Raw materials, components, machinery, and freight all cost money. Suppliers won't supply if they're not getting paid and customer orders can't be fulfilled without that supply.
Cash flow is crucial for any business, but manufacturers are particularly vulnerable because it's often only when the goods are actually delivered that they start generating income. For many small manufacturers who sell directly to end-users, the cash from those sales can take a long time to filter down.
In addition, as well as having to fund daily expenses such as payroll and suppliers' bills, manufacturers have high capital costs for machinery and equipment which must usually be paid up-front before they generate any income.
So if a customer hasn't paid on time, you could be waiting a long time for the cash to come in, creating a ripple effect throughout your entire business, which can be extremely damaging, particularly if you're relying on that money to pay other bills and salaries, or fund investment or other manufacturing work so that production doesn't slow down.
What can you do to improve cash flow? This blog looks at some of the ways manufacturers can improve cash flow and ensure they get paid on time.
- Ensure your contracts are set out very clearly stating what your payment terms are, the consequences of late payment, and the remedies and "compensation" you would reasonably expect in a situation of late payments.
- Ensure in the customer onboarding process that you perform a company credit search, identifying the risk of late payment. There are many providers out there and at Mushroombiz we have our recommendations.
- Make sure you differentiate credit terms to different customers based on your due diligence (company credit search). For example: if a company has a high risk rating, specify payment terms in advance or within 7 days (depending on your commercial objectives). If they are lower-risk then you will have more confidence in offering 14 or 30 days payment after the invoice date.
- Make sure this is well communicated and dovetailed to your sales strategy - there is nothing worse than poorly communicating serious commercial points. Manage expectations.
- We recommend having all of the credit control paperwork (reminders, chasers, phone scripts, and letters before action) prepared so you can run an efficient process without wasting time when you need the money.
After the invoice has been sent
- Be proactive - call and email after you have sent the invoice to confirm your customer has received it.
- Monitor the situation closely and make sure your scheduled reminders are sent out, some accounting software includes automation (but don't just rely on this).
- If you are in a supply-chain-sensitive industry (like manufacturing) be sure to understand any industry-wide problems such as shipping delays.
When the payment is late
- Get in contact straight away - phone and email
- If the customer is experiencing difficulties paying (they have said this or it may be implied) offer a way to part-pay immediately or create a payment plan so that you have done everything in your power to reasonably resolve the issue.
- Chase follow up - phone and email
- If the payment plan is missed or there has been no response, apply late-payment interest to the payment.
- If it is not paid within 30 days of your invoice date, you are now entitled to use debt collection agencies - do so.
- Using this tactic will normally yield a much higher success rate than chasing manually or through an accounting software reminder.
- Debt collection companies have the power to charge interest on the invoice debt in accordance with the Commercial Debts Act 1998.
- Begin looking at a debt recovery process.
So don't sit back. Get control of your cash flow by running a structured, organised and efficient credit control process that brings you your money sooner and keeps your manufacturing business making money!