Here at Commercial Finance Group in Los Angeles, we’ve had the privilege of providing custom lending solutions to businesses all over America. These businesses are large and small, consumer-facing and B2B commerce oriented. With a clientele this widespread and varied, you might not think that we could point to any one attribute that they all share, but this isn’t the case. In most cases, the businesses that seek out our financial products all shared a pressing need for more working capital.
In some cases, the need for working capital is spurred by unexpectedly rapid growth. We’re always thrilled to help these businesses find the custom lending solution that allows them to move to the next level of commerce, whether it’s factoring or asset-based lending. In other cases, the need for working capital is spurred by cash flow problems that are putting the business between a rock and a hard place, financially. We’re equally excited to help these businesses find a custom lending solution, because it’s often the difference between surviving or closing their doors forever.
In today’s blog, we’d like to take a look at the type of cash flow problems experienced by a very specific sect of small to medium-sized businesses: the manufacturing industry. The challenges, needs, and goals of manufacturers can often be very different from other types of companies. Our past experience helping manufacturers across the country is put to work for you when you choose The Commercial Finance Group in Los Angeles.
The Difference Between Makers & Manufacturers
Before we delve into our discussion of the cash flow problems that are most common in manufacturing enterprises, let’s talk about the differences between makers and manufacturers, something that often confuses people in the financial industry.
Unlike makers, who are mostly interested in innovating new products on a small, almost artisanal scale, manufacturers think big. They’re interested in efficiency; finding new ways to get more out of their facility while wasting less time, energy, raw resources, money, etc. When many bankers are presented with a manufacturing client, they often fail to comprehend the intricacies of supply chain management, labor allocation, and the challenges of dealing with clients who are slow to pay their invoices.
It’s also important to distinguish the difference between low cash flow and increased cash outflow. “A business often experiences a net cash outflow, for example when making a large payment for raw materials, new equipment or where there is a seasonal drop in demand. However, when cash flow is consistently negative and the business uses up its cash balances, then the problem becomes serious,” clarifies business tutor Jim Riley.
Cash Flow Problems Common To The Manufacturing Industry
- Low Profits Or (Worse) High Losses – Every business experiences a profit cycle that waxes and wanes. This could be caused by seasonal interest in their products, economic distress, or problems with pricing. However, when profits are consistently low, it often results in losses. And when losses are consistently appearing on the balance sheets, the business will eventually run out of cash and be forced to make some difficult decisions.
- Over-Investment In Capacity – Let’s say a manufacturer experiences a brief period of rapid growth. Encouraged and a little punch-drunk, the owners decide to invest in a bunch of new factory equipment to drastically expand their production capacity. But then, just as quickly as it arrives, the demand for their goods drops off for whatever reason. Now the business is left with expensive equipment, for which it’s probably still paying, that’s not being used. This is a waste of cash and could lead to cash flow problems.
- Too Much Stock – Until it’s sold, idle inventory represents cash that’s just sitting on a shelf. Holding too much stock ties up cash and there is an increased risk that stocks become obsolete. Manufacturers have to be very careful to keep just enough stock on hand that it moves quickly but doesn’t sit around gathering dust.
- Allowing Customers Too Much Credit – This is an issue that we touched on in a previous blog, but it bears repeating. Manufacturers are often pressured to allow their customers 30, 60, or even 90 days to pay their bills. While this might be a way to build goodwill with customers, it results in a lack of cash flow that could become permanent if the account goes into collections.
- Overtrading – This is a fancy term for “growing too fast” and as cash flow problems go, it’s not the worst one to have. Exponential growth often puts a strain on liquid assets, especially when the urge to hire more staff and buy more equipment comes before the growth starts to generate profits.
- Seasonal Demand – If you’re a manufacturer of Christmas tree stands, for instance, you’re probably already aware that you’re in a seasonal business that will experience a lull from January to October. Though they may be predictable, seasonal fluctuations in demand can still create cash flow problems for young businesses.
Cash Flow Problems Are A Short-Cut To Failure
As you can see from this list, failing to plan for and address cash flow problems immediately can spell disaster for your manufacturing business. We’ve seen far too many flourishing young manufacturing companies meet an untimely end simply because they can’t find the working capital they need to get them through the hard times, or while they’re waiting for invoices to be paid.
Commercial Finance Group Provides Solutions For Your Cash Flow Problems!
The important thing for all manufacturing businesses to remember is that there are financial solutions to their cash flow problems, and we’re not talking about long term loans that increase your debt and sap away more of your precious revenue. Factoring is a time-tested financial strategy for turning unpaid invoices into assets that you can access quickly and use ease cash flow problems. Read this testimonial from an aerospace components manufacturer to see an example of the success we’ve had in the past, then apply for factoring from The Commercial Finance Group in Los Angeles today!
