For a producer looking to grow, risk often comes in the form of cash flow management. They need to bring money into the business to fund production. They can’t afford to waste time chasing customers for payments. And securing credit can be problematic and expensive. Plus, as they look to expand into new territories, they face the problem of forging new trade and supply relationships and dealing with unfamiliar working practices.
For global organisations, the key problems are often caused by their own size. Supply chains are vast, complex and harder to manage. Also, with so many moving parts, and operations spread across different continents, it’s difficult to get clear visibility into all areas of the production chain. This makes it harder to plan. And it means they might not always be able to react quickly to volatile markets and the changing availability of supplies.
So, how can you protect your business from these kinds of threat? For a start, it’s worth looking outside your own doors and seeing what tactics others are employing. We spoke with a number of finance professionals – at mid-sized, growing companies and also large, global firms – to see what they’re up against and what they’re doing to safeguard themselves.
Are you keeping up with other global manufacturers when dealing with complexity?
Established manufacturers with global operations work across numerous regions, so they have to understand and collaborate with different working cultures. There are different regulations to comply with and multiple payment processes to adhere to. And, of course, with currency exchange (FX) rates continually fluctuating, they need to keep their eyes on the price of goods in different markets.
There’s also the potential headache of dealing with suppliers dispersed across different geographical regions. Many will have different demands on payment terms, and some could be operating with strict measures in place in the wake of COVID-19. So, you could have different ways of paying and working with multiple suppliers, creating extra work and processes. As the senior procurement officer for a large international corporate that makes medical equipment tells us, “With an international supply chain it is difficult to standardise payment terms globally. There are different market standards in different sectors and countries – from 30 to 120 days.”
Some larger producers also need to help their suppliers financially – to counter the risk of them failing to produce. This could be in the form of early invoice payments, financing through supply chain finance programmes, or physical investment in the supplier. “Some equipment needs to be purchased overseas, like German machinery,” says the group treasurer for a global manufacturing corporation. “For equipment that’s too expensive for our suppliers, we have to buy this ourselves. Usually we will pay with a deposit, and then milestone payments, so we will put a hedge in place.”
How are growing manufacturers managing their cash flow to help protect their business operations?
One of the main concerns for any growing producer business is making sure it has enough cash to keep operations running. A lack could mean you struggle to purchase resources. And that could see your supply chain break down. So, good cash flow is essential. But this is easier said than done – especially when financing is hard to obtain. As the director of a tech manufacturing start-up tells us, “It’s very difficult for smaller companies to get working capital. If you need financing short term, there is a gap in the market.”
As your business grows, you could face extra problems with more money going in and out. It can impact your working capital, as you pay more on production costs, then wait to get paid for the products you’ve made. So, it’s essential to have robust cash management strategies in place to mitigate against this shortfall – or free up the funds your business needs to grow.
One way that many manufacturers are streamlining this cash conversion cycle is by investing in technology. With digitised payment tools, they’re able to automate processes to release payments and speed up collection. It also gives them access to lots of useful data.
This kind of automation not only speeds up cash coming into the business, it can also reduce the amount of time you spend on manual finance processes.
As the Head of Accounts at a growing manufacturer says, “We would like to not have so many different means of receiving payments. Our target is to get to being paperless. TT forms, cheques – would prefer it to be all online. We have bulky procedures. We want to improve our processes and make them more efficient and automated.” Digitisation frees up more time for you to focus on the jobs that help your business grow.
Could you be doing more to mitigate the impact of unpredictable FX?
As a growing business, to keep production steady and your supply chain moving, every single penny needs to be invested the right way. And you need cash to spend on innovations that aid business growth. So, you need to be mindful of the effects of FX. You can’t afford to be hit by FX fluctuations that change your buying or selling prices and impact your margin. Unfortunately, many businesses feel too small to do anything other than simply react to FX changes. “We are not a very large company,” says the treasurer at a mid-market packaging manufacturer, “so we think it would be difficult to do anything like complex hedging. We just have to take the risk, and we know this costs us.”
This perceived complexity actually stops many businesses from taking positive action to protect themselves from FX risk. As the finance director at a mid-sized global manufacturer and retailer of consumer goods tells us, “We do not hedge exposure. We consciously do nothing. Yes, it’s not clever enough. Market up or down, we take on the risk.”
But it doesn’t have to be this way. Regardless of where you are in your growth strategy, hedging against FX can be beneficial. You can avoid overpaying for supplies when the rates go up, and then buy when they swing in your favour. It may seem complicated, and like an extra risk in itself. But the benefits to your bottom line can be extensive. And by putting proactive processes in place, you can protect your business from sudden volatile FX shifts.
What else could you do to prepare for increasingly complex production challenges?
As global instability abounds, the manufacturing and production industry will continue to face uncertainty – and the way you react to different kinds of risk will depend on what stage of growth your organisation is in. So, are you doing everything you can to protect your business? If your focus is on growth, is your cash flow management working as effectively as it can be? With complex operations, do you have insights into every area of your production chain? And are you being proactive to protect yourself against FX risk, and take advantage of opportunities when they arise?