What are the advantages of healthy cash flow during uncertain times?

How can you make your money work better for you and create a business advantage in difficult trading conditions?

With increasing instability in the global trading market, good cash management is more important than ever. Fluctuating FX rates, political instability and the impact of the COVID-19 pandemic are affecting manufacturers’ ability to both plan and produce.

As you know, without strong working capital, it’s harder to react to shifts in consumer trends. And you won’t have the necessary funds to drive innovation.

So, how do you create and maintain strong cash flow within your business? We spoke with a number of finance professionals at manufacturing and producing businesses around the world to see what kind of pressures they’re facing. We also wanted to know how they ensure sufficient cash flow in a rapidly changing trading environment.

Is there a better way to combat crunches in your working capital?

Long cash conversion cycles can be the enemy of steady cash flow. This is particularly true for manufacturing businesses that develop highly technical products. As the finance director of a large manufacturing corporation tells us, “Our contracts are very large and complex and take a long time to produce.”

These long conversion cycles can be even more problematic if you’re dealing with indirect sales distribution channels. “If we sell to an intermediary like a department store,” says the financial controller at a large luxury manufacturer, “it can take 60-90 days to realise our sales proceeds. Department stores are no longer our preference for distribution.”

Waiting too long to receive funds from buyers is impacting many manufacturers’ ability to pay suppliers – meaning potentially less favourable deals on price and payment terms.

If we push too hard on days payment outstanding (DPO) then we end up paying higher prices to our suppliers as a trade-off. We want to build good relationships with key suppliers.

Senior Procurement Officer, international medical equipment manufacturer

What else could you do to manage the extra cash pressures of today’s conditions?

The world is changing, faster than ever before – and even more so in the wake of the COVID-19 crisis. For manufacturing and producing businesses to meet the challenges that arise, you need to be constantly assessing the effectiveness of your operations. And you need to remain agile to exploit these opportunities.

Advances in technology, like the Internet of Things (IoT), Artificial Intelligence (AI), blockchain and 3D printing are helping manufacturers drive new developments in logistics.

They’re helping producer businesses to dramatically reduce shipping and manufacturing times1. And this gives them extra agility to expand into new markets.

While this is all positive for businesses like yours, new opportunities invariably bring new challenges. For example, an increase in global competition will likely put extra pressure on the price of products and the payment terms you’re able to negotiate. As the senior procurement officer for an international medical equipment manufacturer says, “In some countries we sell to, the demand side is much more competitive than others. That means we don’t get to push our DSO out, otherwise customers will expect to pay less as a trade-off.”

Because of these demands, businesses that prioritise sales often fall into the trap of extending credit to their customers. But this can create even more problems, especially if they have a long cash conversion cycle.

Sometimes when customers are late in paying it creates problems like additional expensive hedging costs to compensate.

Finance Director, large manufacturing corporation

Producers also face the risk of materials becoming more expensive, affecting profitability. Or the price of materials can fluctuate wildly, meaning they’re harder to track and businesses could end up buying at the wrong time. The finance manager at a growing mid-market packaging manufacturer tells us: “In a production business, we are very exposed to the commodities markets and the price of materials. Volatility is bad – we’re exposed to materials as well as fuel prices for distribution.”

In unpredictable times it can be tempting for manufacturers to start stockpiling inventory. That way, they’ll still have products to sell, even if supplies dry up and production falters. But this simply traps cash in the business. And if money is tied up in stock, it’s not working for you. That’s where technology can help. As the CFO of a mid-market manufacturer and retailer says, “[Things like] IoT and automation will optimise supply chain management and shorten our production cycle. Being agile means we don’t have to keep 100 pieces of stock, which reduces the amount of trapped cash.”

Is your cash reserve healthy enough to meet your needs?

To make sure their money is really working for them, businesses are looking in increasing detail at where cash is trapped in their operations – like in accounts receivable or inventory. This allows them to free it up and redeploy it to where it’s needed most. As the finance director of a large aerospace corporation says, “We need to make sure we’re always using our cash wisely.” The treasury systems manager for a large corporate technology manufacturer agrees, saying, “Cash just sitting in the bank account does not match our needs.”

By increasing the speed of your production cycle and, of course, the time it takes to realise the money from sales, you can really improve your operational efficiency. But it also helps you to make more funds available to invest in growth or adding value to your business.

We invest 8-10% of all our revenues to support the growth agenda, and in projects supporting automation and improvements.


You can use freed cash to maximise returns for your shareholders. And, importantly, you can outperform your competitors. “We can see a material difference every time we implement a successful transformation initiative,” says the same finance manager. “We are therefore highly focused on freeing up capacity in our cashflow. Any capacity we create, we use this as capital for investment purposes.”

As uncertainty continues to affect businesses of all kinds, good cash management is essential. Whether you’re looking to buy new manufacturing equipment, expand into new premises, enter new markets or bolster your team with new hires, you need cash to do it. Not to mention having funds to pay for the day-to-day and simply keep your operations running. Plus, if you manage cash flow effectively, it reduces your need to borrow money, or helps you secure cheaper funding if you do need it.

What more could you be doing to improve your cash position?

Any successful business needs to continually optimise its cash flow. It not only helps you keep the lights on and production chain moving, it creates opportunities to grow your organisation faster or protect it during uncertainty. But there are a few key questions you need to answer. Are you able to plan for crunches in working capital? Can you identify what opportunities are being created by different global trends and trading conditions? And do you know how to free up cash within your business, and where best to spend it when you do?

1 https://www.mckinsey.com/featured-insights/innovation-and-growth/globalization-in-transition-the-future-of-trade-and-value-chains

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