Why working capital is essential to Manufacturers

We have all heard the term “cash is king” and research has shown that 82% of small businesses fail due to cash flow problems. Cash flow management and working capital management are essentially the same function. Working capital are the funds within a business that allow it to trade on a day to day basis. The main sources of working capital in a manufacturing business are essentially the cash, debtors, creditors and inventory.

Gaps and inefficiencies can be bridged by sourcing finance but it makes sense to continuously review your own working capital management practices first. Why pay for an overdraft, invoice discounting or factoring, when there is scope to manage the funds already within your business more efficiently for zero extra cost.

The provision of credit between suppliers and customers is what makes the working capital cycle in manufacturing industries different to other businesses. In simple terms, you receive goods from your suppliers before you have to pay for them and likewise you ship finished product to your customer first and are paid later. It is the window of time between one point and the other that makes up the working capital cycle. The more efficiently a manufacturer can order, receive and process raw materials and then ship and get paid for their finished goods, the more effective their working capital cycle and the profitable their business will be.

The critical points in the system open to

  1. Negotiating the best possible terms with your raw material suppliers.
  2. Manage the extension of credit to your customers carefully and ensure collections are dealt with effectively.
  3. Ensure that purchase ordering and stock management systems are set up in such as way as to optimise the use of funds. It is equally important that a regular review system is incorporated to constantly tweak your practices and procedures to suit your businesses as it evolves. A lean project can be really beneficial here?

The key takeaway point here is that this is not a once-off project but an ongoing part of your business’s day-to-day operations.

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