Did you know that fewer than 50% of manufacturing startups survive past their fourth year?
And, the number one reason they fail is due to poor cash flow.
In the same way a marathon runner needs a constant supply of oxygen to keep going, manufactures rely on cash to keep their heart pumping and blood flowing around their organisation.
Achieving a steady cash flow statement for a manufacturing business is never easy.
Whether it’s buying raw materials, holding excess stock, or waiting on delayed payments, a cash deficit can lead to the entire production process grinding to a halt.
Join us as we explore why cash flow is so vital for manufacturers and offer some top tips to maintain a steady stream of cash using invoice financing.
Why Is Cash Flow Important for FMCG Manufacturers?
Fast-Moving Consumer Goods (FMCGs) are inexpensive products that people tend to use and buy regularly. Whether it’s groceries, toiletries, or household products, the demand for FMCGs is hot.
As a manufacturer, you need to churn out thousands of products each day to meet consumer demand and achieve greater economies of scale over your rivals.
The costs associated with buying raw materials and producing a product requires significant upfront investments.
In theory, this cash is repaid once the products are sold to distributors. However, in reality, inflows and outflows of money aren’t always this simple.
A cocktail of factors makes it extremely difficult for you to strike the perfect balance between supply and demand.
Managing cash flow is essential if you’re to maintain a steady production of goods. If a lack of funds stops production, your distributors may look elsewhere for another manufacturer who can guarantee a consistent supply.
How to Improve Cash Flow in a Manufacturing Business?
So, what steps can you take as an FMCG manufacturer to maintain a steady flow of cash throughout the year?
Whether it’s flogging excess stock or using asset-based financing to free-up some extra cash, there are plenty of tips and tricks to make sure you have the funds you need to meet consumer demand.
Here are our top tips to improve cash flow with invoice financing:
Don’t Hold Too Much Stock
Inventory management is one of the biggest headaches for FMCG manufacturers.
Striking a balance between supply and demand is an age-old problem. Customers are disappointed if they can’t buy what they want and you’re in trouble if you’ve made more than you can sell to distributors.
Manufacturing non-perishable goods often means producing products before distributors have placed any orders.
Premature production requires accurate forecasting of customer demand which isn’t always accurate.
Not only does producing too much stock lead to costly storage bills, but it also means vast amounts of cash is held-up in illiquid assets.
So, what’s the solution for manufacturers?
Many high-end retailers won’t accept products if they’re nearing their sell-by date so that discount stores can get their hands on perfectly safe products at a fraction of the cost.
Whether it’s selling laundry detergent with slightly damaged packaging or Easter Eggs in May, your excess stock doesn’t need to go to waste.
Invoice financing can help you access funds in advance and dig yourself out of a financial rut.
Although excess stock can drain immediate cash flow, it still holds value. Manufacturers can sell the stock at a discount and use single invoice factoring to free up some extra cash.
Protect Against Errors
Like any business owner, you’ll make mistakes from time-to-time.
If something goes wrong during production or product, you might need to issue a recall which can have devastating financial consequences.
With invoice factoring, you can use invoices sent to other clients to manage your cash flow after a product recall. Receiving advance payments on unpaid invoices can free-up the cash you need to ‘put out the fire’ and get back on your feet.
Errors are inevitable, so you need to have plenty of cash in reserve when something goes wrong.
Avoid Payment Lags
A significant drain on cash flow for FMCG manufacturers is the lag time between manufacturing products and receiving payments from distributors.
When buyers place orders ahead of time, you often have to produce products before you receive full payment. This sometimes requires finding funds from elsewhere to finance the manufacturing costs.
Luckily, single invoice factoring helps FMCG manufacturers avoid this lag by receiving payments in advance on unpaid invoices.
While traditional financing firms lock businesses into long-term contracts and only offer advance payments if you continually submit receivables, single invoice factoring provides freedom and flexibility.
Enjoy instant one-off advances with zero commitment on selected invoices to boost cash flow.
Meet Seasonal Peaks in Demand
Whether it’s churning out tonnes of chocolate truffles in time for Valentine’s Day or selling more ice lollies in Summer than Winter, consumer demand isn’t always constant.
Admittedly, some FMCGs such as shampoo and toothpaste are deemed inelastic to seasonal variations — people need to stay clean come rain or shine. However, most consumer goods will be subject to seasonal changes or periodic events which affect the demand curve for manufacturers.
The demand curve is the relationship between the price of a product and its demand.
Balancing cash flow alongside a steep demand curve can be difficult.
Manufacturers want to get as much cash in the bank upfront to take full advantage of huge peaks in demand and once production kicks in, money can be locked up.
Yet, the opposite occurs in the off season. Demand and revenue go down but manufacturers still have to cover ongoing costs like wages or rent.
Selective invoice financing makes it easier to maintain a steady cash flow as manufacturers can pull in cash early to overcome low season demand and prepare for increased demand. A win, win all around.
Check out Lendflo today.