Slow moving or negative cash flow

The number one problem I hear when I first begin working with a client is their cash flow problems. I also tends to catch them off guard when I tell them that cash flow itself is not the problem. No matter how efficient or effective you are at writing checks or depositing funds or reconciling items in bank account, you cannot cure cash flows by studying cash flow.

Cash flow is a symptom, not a cause. In many companies the speed at which cash flows is an indicator of health for other parts of your businesses. Whether it be the health of a sales pipeline, profitability of operations, or poorly structured overhead. The cash flow itself is not the issue.


See if any of these issues sound familiar.


Orders being processed and sold for less than the cost to produce the product. 

One possible solution is to run a report for all costs incurred for the particular manufacturing runs you've been doing during the period in which your cash flow slowed. There's a huge potential that the resources it took, including the overhead resources, were more than the economic value of the product. This is a situation where the product is sold at the right price, but the cost structure for the manufacturer is too high.


Orders are sold at a price points lower than the business model can sustain. 

This is the flip side of the same coin as the first issue. The cost structure is appropriate, but the selling price is too low.

To resolve this consider doing market research to see what your competitors are charging for their products. Also consider indexing your price against what materials cost to make it in prior years. Has the material margin went up or down in the last 10 years? Why?


Bank interest rates are too high, above market

Consider shopping around for a new line of credit or negotiate better terms with your current bank. Perhaps there are some financing options that's specific to manufacturing companies that may make more sense than what you're currently doing.

This may be the case, but don't use this as an excuse to not explore your operating issues.


Too much money tied up in unsaleable inventory.

because the issue has already been created. For this you need to not only focus on a remedy, but also prevention. Consider new markets for the inventory, the cost to convert it into saleable goods. Consider a firesale to get rid of the unsaleable inventory. Many times this issue occurs when sales forecasts were inaccurate or non existent. It can also happen when a firm loses touch with it's customer base. These are all actionable issues. To prevent this in the future consider producing a sales forecast and continually judging and improving the accuracy. Also plan meetings with your bellwether clients. You are tracking your bellwether clients, right?

Poor payment terms with customers

This isn't always easy to fix because it's much easier to set terms right in the first place than it is to correct bad terms. You may have extended terms farther beyond what you needed to in order to win the business. Consider all the bargaining chips on the table. If you can get them to agree to 30 days net payment if you agree to decrease lead time by five days there may be a win-win there.

Poor terms with vendors to be paid

Just as in dealing with customer, there's many ways to negotiate purchasing terms. You could agree to accept a longer lead time if they extend longer payment terms. I'd strongly suggest sourcing multiple vendors for each material and supply item. Having a $30,000 credit line with two vendors is much better than having that credit line with one and can very well free up some cash flow.


Quality, scrap, or yield issues

This doubles as an operations issue and a product cost issue, but if you're only producing 7 out of every 10 widgets as viable finished good when you'd originally planned to create 9 out of 10 as viable goods, then all the rework and scrap will cost you in the short run. It will slow and stagnate your cash flows as it prevents you from bringing in new revenues from the saleable goods that would have the same resources. To reduce this issue try running reports comparing your production runs against production runs in the past and against the same quantity extended against your bill of material. Examine any variances.