Ask a savvy cash manager what environment in a manufacturing company is likely to result in the fewest cash flow headaches, and the response may be, “A stable 2 to 3% growth company with high gross margins relative to industry standards.” Why would he or she not choose a high-tech company, with double-digit growth potential? Could it be the constant drain on cash?
At Pro Tapes® we are in the “stable” category, but we implemented actions to more proactively control cash. As part of our strategic direction we are educating our workforce on the importance of cash flow in the business and how each of us has an impact on the company’s cash.
#1: Strengthen Your Cash Flow Controls
We track and project cash flow daily, weekly and monthly in as much detail as possible. An accurate cash forecast on a spreadsheet goes out to two months using sales information from our system, vendor invoices and known recurring payments. This aides in our plans to either borrow or pay down our line of credit. Major, non-recurring expenditures are scheduled based on history.
On the sales side, checking credit references is done routinely for new customers especially the smaller privately-owned companies with potentially large orders. We get to know our new customers at the pre-sale stage and we get them to know who we are as well. We accept all major credit cards and promote their use with our customers.
We pay several of our sales people commissions based on cash receipts, or at rates based on gross margin. Our sales team is made aware monthly of their customers’ aged receivables and how much their sales contribute to our cash flow.
Pro Tapes® maintains a perpetual inventory system visible to all key players. Raw material is the largest component of inventory cost. Buying the right item at the desired quantity and on time has a significant impact on cash outlays, and as importantly, on customer service levels. Our Purchasing team, with support of our Information Technology Manager, relies on material requirements (MRP) reports to meet customer service goals while keeping inventory lean.
We encourage our vendors to allow us to pay with our bank purchase credit card. Monthly payment to the bank is at no interest or other bank fees. This postpones the need to pay for fifteen days on average, and Pro Tapes® receives a rebate check at the end of the program year.
#2: Take Decisive Action When Necessary
We occasionally will stretch out vendor payments a few days when necessary but communicate with them when payment will be little late. We anticipate times like this based off the cash forecast.
In an imperfect world slow moving and excess inventory is part of the business. Excess inventory continuously drains cash. Our cross-functional team comprised of Finance, Purchasing, Production and Sales meets quarterly to review our processes and to find solutions to sell or use the excess product.
We try to keep the lines of communication open with our customers and often our Credit Manager can sense if a customer may be in financial trouble. We work with these customers over a period of time, but we may ultimately place them on cash in advance terms.
#3: Use Technology to Accelerate Cash Flow
We email invoices daily to most of our customers automatically using the capability of our system. For a growing list of customers we have interfaced EDI (Electronic Data Interchange) with our systems to invoice and to receive customer purchase orders. Many large customers now require their suppliers to become EDI compliant, or risk not growing their business.
Pro Tapes® has grown its profit margins through productivity improvements and capital investments in manufacturing. Our manufacturing team headed by our Director of Operations is successful in growing margins by purchasing new and used equipment that add to the company’s offerings of goods and services while controlling costs. Recent machine purchases have reduced waste, the number and length of set-ups and increased flexibility in production scheduling – all significantly contributing to cash flow.
#4: Develop a Scorecard to Measure Success
It’s always important to measure the effectiveness of actions taken to improve cash flow. Objectively and proactively measuring cash management’s effectiveness will give you signs that decisions made were good or not so good, or if there are outside influences affecting cash position. One of several metrics that Pro Tapes® uses gauges cash trends with sales. The metric incorporates the lag in collecting cash on trade sales and uses average cash flow from operations as a percent of average lagging sales. Monthly trends of this relationship helps the company measure the strength of cash flow, or determine if there may be hiccups in the near future.
