Background and Overview
We typically get asked how do we solve cash-flow issues in a manufacturing company
Every company has its own unique challenges. However, from our experience, there are pattens which we see at lot of manufacturing companies.
Through this guide, we are attempting to solve cash-flow problem with one of the approaches we typically we use with our clients
If Cash-Flow issues are not solved immediately it can undo all the good work which company has done in past and the growth cannot be sustained as company has to keep on raising funds or borrow money from Bank
Here is Background of the company for which we are trying to solve this challenge
Company Background
Established in 2001, ABC Manufacturing Company has steadily grown to be a significant player in the automotive parts manufacturing sector.
With state-of-the-art manufacturing facilities spread across the country, the company boasts an impressive clientele that includes some of the biggest names in the industry.
While its product quality, innovative designs, and commitment to sustainability have garnered accolades, the company’s financial health has recently raised eyebrows among stakeholders.
On paper, ABC Company showcases an impressive turnover of 60 crores.
Their net margin, standing at a promising 9%, suggests robust profitability.
However, like an iceberg hiding most of its mass underwater, the company’s financial statements reveal a different story beneath the surface
The Core of the Problem
Current Cash-Flow Statement
Items |
Amount (crs) |
|---|---|
| Operating Activities | |
| EBITDA | 1.00 |
| Interest Paid | -0.20 |
| Taxes Paid | -0.10 |
| Depreciation & Amortization | -0.15 |
| Change in Receivables | -1.00 |
| Change in Inventory | -0.50 |
| Change in Payables | 0.65 |
| Net Cash Flow from Operating Activities | -0.20 |
| Investing Activities | |
| Capital Expenditures | -0.80 |
| Investments | -0.23 |
| Net Cash Flow from Investing Activities | -1.03 |
| Financing Activities | |
| Proceeds from Loans | 0.00 |
| Repayment of Loans | 0.00 |
| Net Cash Flow from Financing Activities | 0.00 |
| Net Change in Cash | -1.23 |
| Beginning Cash Balance | 1.00 |
| Ending Cash Balance | -0.23 |
While a snapshot provides an overview, understanding the intricacies of cash flow requires a deep dive into the underlying currents.
On a deep dive of issues, we find problems which company is facing and possible solutions to the same
Delayed Receivables
Implications: A 75-day delay in collecting payments post-sales means the company’s capital is tied up, restricting its ability to reinvest or meet operational costs.
This also affects the company’s liquidity ratio, potentially making it harder to secure loans or attract investors.
Potential Root Causes: This delay could stem from offering generous credit terms to customers, inefficiencies in the invoicing process, or not vetting the creditworthiness of new clients adequately.
Addressing the Issue: Collaborate with third-party credit rating agencies to assess new clients’ creditworthiness.
Implement a digital invoicing system with automated reminders to reduce human errors and expedite the payment process. Periodically review and adjust credit policies to balance customer goodwill and financial health.
Short Payable Window
Implications:
A 46-day average to settle supplier payments can strain liquidity, especially when compounded by delayed receivables. This could lead to potential conflicts with suppliers, affecting the supply chain.
Potential Root Causes: Lack of negotiation when setting payment terms or not leveraging the company’s buying power to its advantage.
Addressing the Issue: Engage in discussions to extend payment periods or get bulk discounts. Establishing long-term relationships with suppliers can offer leverage in negotiating better terms. Consider diversifying suppliers to avoid being overly reliant on a few.
Extended Inventory Holding
Implications: Holding inventory for 75 days suggests inefficiencies in either the stock management or sales processes. Excess inventory can lead to increased holding costs, potential obsolescence, and reduced cash flow.
Potential Root Causes: Non-strategic purchasing, lack of demand forecasting, or inefficiencies in the sales process.
Addressing the Issue: Employ data analytics to accurately forecast demand and align purchasing. Implement advanced inventory management techniques, like JIT, to reduce holding periods. Regular audits can help in identifying dead stock and optimizing inventory levels.
Credit Policies: A more rigorous scrutiny during the client onboarding process can prevent potential payment defaults. Implementing stricter policies and ensuring their consistent application can mitigate risks.
Procurement Strategy: Buying in bulk without strategic analysis can lead to overstocking. Incorporating a dynamic procurement strategy that adjusts based on sales data can optimize stock levels.
Supplier Agreements: Proactive renegotiations and exploring partnerships can yield better terms, ensuring the company’s cash isn’t unnecessarily tied up.
The Roadmap to Recovery
Transforming a company’s cash flow situation requires meticulous planning, phased goals, and unwavering commitment.
Immediate Target (0-3 months)
Goals
Curtail Receivable Days to 65.
Extend Payable Days to 50.
Minimize Inventory Turnover Days to 60.
Strategies
Accountability: Cluster of customers are assigned to Sales Executives to monitor the receivables
Negotiate with Suppliers: Engage in discussions to extend payment periods or even get bulk discounts.
Optimize Procurement: Employ data analytics to forecast demand, ensuring purchasing aligns with sales projections.
Cash-Flow Statement (Post 3-months Implementation)
Items |
Amount (crs) |
|---|---|
| Operating Activities | |
| EBITDA | 1.05 |
| Interest Paid | -0.18 |
| Taxes Paid | -0.12 |
| Depreciation & Amortization | -0.15 |
| Change in Receivables | -0.90 |
| Change in Inventory | -0.45 |
| Change in Payables | 0.75 |
| Net Cash Flow from Operating Activities | -0.80 |
| Investing Activities | |
| Capital Expenditures | -0.60 |
| Investments | -0.15 |
| Net Cash Flow from Investing Activities | -0.75 |
| Financing Activities | |
| Proceeds from Loans | 0.50 |
| Repayment of Loans | -0.20 |
| Net Cash Flow from Financing Activities | 0.30 |
| Net Change in Cash | -0.75 |
| Beginning Cash Balance | -0.23 |
| Ending Cash Balance | -0.98 |
Mid-Term Target (4-6 months)
Goals
Achieve a further 10% improvement in all key metrics.
Strategies
Digital Transformation: Migrate to a digital collections system, enabling faster processing and reminders.
Supplier Partnerships: Cultivate stronger relationships with suppliers. Consider partnerships or loyalty programs to get better terms.
Inventory Management: Implement advanced techniques like JIT (Just in Time) and periodic audits for inventory optimization
Cash-Flow Statement (Post 6-months Implementation)
Items |
Amount (crs) |
|---|---|
| Operating Activities | |
| EBITDA | 1.10 |
| Interest Paid | -0.17 |
| Taxes Paid | -0.14 |
| Depreciation & Amortization | -0.16 |
| Change in Receivables | -0.80 |
| Change in Inventory | -0.42 |
| Change in Payables | 0.80 |
| Net Cash Flow from Operating Activities | -0.59 |
| Investing Activities | |
| Capital Expenditures | -0.40 |
| Investments | -0.12 |
| Net Cash Flow from Investing Activities | -0.52 |
| Financing Activities | |
| Proceeds from Loans | 0.40 |
| Repayment of Loans | -0.15 |
| Net Cash Flow from Financing Activities | 0.25 |
| Net Change in Cash | -0.458 |
| Beginning Cash Balance | -0.98 |
| Ending Cash Balance | -1.438 |
Long-Term Target (7-9 months)
Goals
Sustain a 10% improvement across parameters.
Strategies
Client Relationship Management: Establish regular communication channels. Ensure clients are aware of payment terms and potential late fees.
Alternative Suppliers: Explore ties with alternative suppliers or bulk-buying co-operatives.
Continuous Process Review: Foster a culture of continuous improvement. Regularly review processes for procurement, sales, and inventory.
Cash-Flow Statement (Post 9-months Implementation)
Items |
Amount (crs) |
|---|---|
| Operating Activities | |
| EBITDA | 1.15 |
| Interest Paid | -0.16 |
| Taxes Paid | -0.15 |
| Depreciation & Amortization | -0.17 |
| Change in Receivables | -0.72 |
| Change in Inventory | -0.38 |
| Change in Payables | 0.85 |
| Net Cash Flow from Operating Activities | -0.48 |
| Investing Activities | |
| Capital Expenditures | -0.30 |
| Investments | -0.10 |
| Net Cash Flow from Investing Activities | -0.40 |
| Financing Activities | |
| Proceeds from Loans | 0.30 |
| Repayment of Loans | -0.10 |
| Net Cash Flow from Financing Activities | 0.20 |
| Net Change in Cash | -0.179 |
| Beginning Cash Balance | -1.438 |
| Ending Cash Balance | -1.617 |
Conclusion
From an unsettling negative cash flow of 1.23 crores, ABC Manufacturing Company stands on the brink of a transformative journey.
With the potential to bring this down to just 0.179 crores in 9 months—a significant improvement of approximately 85.5%—the future looks promising.
This transformation will not only stabilize the company’s financial position but also strengthen its foundation for long-term growth.
By implementing the strategies outlined, maintaining a hawk-eyed review mechanism, and fostering a culture of continuous improvement, the company can pave the way for a future that’s not only profitable but also financially stable and sustainable.