For the small to mid-sized job shop or custom manufacturer, managing cash flow is critical to survival. Do it correctly, and you can experience slow steady growth as you build the company's net worth. Many shops close not because they run out of work, but because they didn't start out managing their cash well.
Below are 8 tips to help you manage your cash flow. Read an except of Tip #4 "Manage Your Cash Flow Forecast" from our latest Business Guide.
Manage Customer Credit - Watch who you give credit to and what type of credit
Manage Customer Invoicing - Invoice promptly to speed revenue income
Manage Customer Payment Options - Provide customers several ways to give you their money
Manage Your Cash Flow Forecast - Know where your cash goes and when it will be needed
Excerpt from "8 Ways to Improve Cash Flow for a Job Shop" Business Guide
Knowing what your company will take in and spend over the next twelve months is the basics of doing a cash flow forecast. You will want to do forecasts over shorter periods of time such as this next month or next quarter, too. Having a good forecast helps you to know when you might experience a dip in revenue or a surplus. It will help you determine future large purchases and overall company growth potential. While future predictions come with a risk, good forecasting can minimize that and give you good information from which to make key business decisions.
Shop management software will help you collect and analyze your business performance data so you will have more than just a “guess” to work with. It will take several months to see the trends. With the right tools you can see the cyclical changes in business throughout the year, including seasonal highs and lows.
You will want to look at the projects you’ve bid on and won versus those you didn’t. What were the variables that made a bid successful? What reasons were given for lost bids?
For the bids that you won, were they profitable? Did the bid amount result in a profit and how much? What could’ve made those projects more profitable?
How does your backlog look? How steady is the work now and what projects will be coming up in the future? Do you have a pipeline of potential projects in the works?
Being able to look at all of the information you have to create a forecast is nearly impossible without a good system. You want to be able to sit down at any moment and get an idea of where the company is and where it’s going. If you have to spend hours with manual spreadsheets to find that out, you will likely not do that very often. That means you will run your business with a very short-term perspective.
You have some goals for your business. Hopefully most are written down in a business plan. But some may be unwritten “I hope it goes this way” kind of goals that you can’t give your banker. You will use a cash flow forecast to measure how well the business is doing against all of your goals.
If you use job shop management software to track your forecast, you can easily see how your actuals compare with your forecasts. This will help you refine your skills at forecasting. You will see where the company did better or worse than your expectations and how you might adjust your future forecasts.
When there is a high variance between your actuals and your forecast, what caused the discrepancy? Was the forecast too aggressive? Or did the company not perform up to your expectations? If the latter, what variables contributed to the below-forecast expectations? You will use your cash flow forecast to fine-tune the company’s performance to meet your overall goals for the company.
Why does all of this matter?
Many profitable companies go out of business because of poor cash flow. In a hurry to grow, some companies become overextended: They may be making money, but it’s going out just as fast and there’s no cushion. The message hits home when the business must suddenly come up with cash -- to replace broken equipment or purchase special machinery for a customer request, for example -- and learns there's not enough to reinvest in the business.
Good cash flow management means predicting when you might need money for something and making sure you have it when that time comes.
Managing What Goes Out
Tracking and controlling what goes out in capital and expense is the other side of cash flow management. While you don’t want to spend more than you make, you should consider the strategic reasons to leverage your company’s credit. Having good visibility to what you are spending, and a good forecast about what you plan to spend in the future, gives you a complete picture of your company’s financial status.
“You have to spend to earn” is any company’s mantra. You can take steps to increase your control of your company’s expenses.
Manage Your Supplier Payment Terms - Make it easier on yourself to purchase materials and supplies
Manage Your WIP and Inventory - Spend less storing inventory
Manage Your Supplier Payment Options - Get yourself some flexibility for purchasing from suppliers
Manage Your Capital Expenses - Be smart on where you spend your cash
Managing your cash flow is made easy and efficient when you use an integrated manufacturing shop management and accounting solution. You will have better visibility to your current shop performance and where improvements can be made. You will be better able to forecast inventory requirements and do purchasing planning. With a good picture of your shop's activity and capacity, you'll be able to bid on more profitable jobs.
Taking the time to understand and manage your company's cash flow is a key way to creating a long and profitable future for your company.