How to improve cash flow in a small manufacturing business

Cash flow is the movement of money in and out of your business, so ‘cash flow’ refers to both your income and outgoing expenses. A healthy cash flow is vital to the success of any small business, as a lack of income can have dire consequences. If you notice cash flow problems, it’s important to take steps to improve the situation as soon as you can.

This article will look at how to improve cash flow in a manufacturing business. We’ll discuss various methods and explain the advantages of each. The topics we’ll cover include:

• Offer discounts for early payment
• Debt factoring
• Ask for deposits
• Avoid high customer concentration
• Expand into other markets
• Using Countingup to improve cash flow management

You might use an invoice system to receive payments, which means that customers don’t have to pay immediately for their purchases. 

An invoice will usually have a specific payment date, but if not, a customer is legally obligated to pay within 30 days. This can be a long time to wait for payment, and if your customer takes the entire 30 days to pay you, it can seriously interrupt your regular cash flow. 

To encourage customers to pay faster, you may want to offer discounts for faster payment. If customers pay shortly after they complete their purchase, you’ll have a much healthier cash flow than you would have if you were waiting weeks for payment. 

It’s a good idea to decrease the discount over time. For example, you might offer a 10% discount for payment in the first week, a 5% discount for payment in the second week, but no discount for payment later than that. 

Be aware that the benefits of the discount will vary depending on the size of the customer’s purchase — 5% doesn’t seem like a lot for a £100 order, but for a £4,000 order, it becomes a sizeable amount of money. So don’t offer too significant a discount, or you’ll start losing too much money to notice an improvement in the cash flow of your manufacturing business. 

Debt factoring is a financial service that’s available to companies seeking to improve their cash flow. Basically, you can sell your invoices to a debt factoring company for about 90% of their value, though this varies depending on the company. The debt factoring company then goes to the person who owes the money on the invoice and will attempt to collect the payment. 

Once the debt is collected, the company pays you the remaining 10% of the invoice value, minus a small fee for the factoring service. The fee also varies depending on the debt factoring company you end up using.

Debt factoring improves cash flow because instead of waiting for payment, you can immediately receive a significant portion of the money owed to you from the debt factoring company. 

Instead of waiting for the entire payment for an order, you might consider asking for an immediate deposit with any purchase. You guarantee that you’ll have some cash immediately by asking for a deposit instead of waiting for a larger potential payment later on. 

The key to a good cash flow is consistency. Deposits provide this consistency since they mean you’ll receive payments more frequently: you’ll get a sum immediately as well as the remainder of the payment a few days or weeks later.

If the idea of deposits proves unpopular with your customers, consider combining this strategy with the discounts we mentioned earlier. If you ask for a deposit but guarantee a smaller overall price if you receive a deposit, your customers should be much happier to pay the immediate fee. 

Customer concentration is when a company relies too heavily on a single client or small group of customers. Customer concentration is all about revenue. You might have many customers, but if sales from a single customer provide more than 10% of your revenue, it means you have high customer concentration. 

This is something to avoid because if a large portion of your income depends on a single customer, any delay in them placing an order will seriously harm your cash flow. If that customer stops ordering from your business, your cash flow might be negatively affected for a considerable period.

You can avoid high customer concentration by attracting new customers. There are tons of different ways of doing this, such as growing your business to find new opportunities or investing more in your marketing. Do some research to see what method would be most effective for your business.

By expanding into new markets, you make your business more visible to new customers. New customers mean more income, which means an improvement in your cash flow.

Expanding into new markets can be difficult for manufacturing businesses, as you may only manufacture goods for one particular industry. Look into products that are very similar to those you already produce and check if your equipment can make them. It might be necessary to purchase new manufacturing equipment and get additional training to expand properly. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. It’s great for improving cash flow management because of the amount of information and control it gives you over your transactions. 

The app’s automatic expense categorisation and live cash flow insights are fantastic for keeping an eye on your incoming and outgoing cash.  

With additional features like invoicing on the go, receipt capture tools and tax estimates, you can confidently keep on top of your business finances wherever you are with a Countingup account.

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.