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Cash Management & Obtaining Financing: What Every Manufacturer Should Know

Posted by Andrew Desiderio on Tue, Nov 20, 2018

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mfg emblem-servicesy-1Cash flow is the lifeblood of every manufacturing company. While many business practices factor into your company’s cash flow, two are especially important: cash management and obtaining outside financing.

Effective and efficient cash management practices can help best administer the money coming in and out of your business. And bank loans can sometimes be necessary to provide your company with a cash flow influx, especially during times of expansion or other capital projects.

Read on for tips for cash controls, negotiating bank loans and your company’s cash conversion cycle.

Cash Management: Ensure Proper Controls

In order to effectively manage your company’s cash, it’s important to ensure you have the proper controls in place in your factory. Below are four key steps every manufacturer should be undertaking:

  • Daily match your cash deposits made by your business with the cash receipts shown on your bank statement. Are your employees depositing cash on the proper schedule? Do the amounts recorded as deposited match what was actually deposited?
  • Daily match your cashless deposits. If you are getting deposits from all of your card companies through your merchant services provider, do the deposits match what was recorded on your ISP? Have your merchant services fees changed over the course of the month or the year? If so, why?
  • Daily match your check/disbursements/payments activity. Do your checks paid match the dollar amount and payee name? Do your payments match your invoices? Do you have any unauthorized payments via check or ACH on your account?
  • Monthly monitor your merchant “chargebacks.” With the new rules on chargebacks for merchants who do not offer the “chip-enable terminals,” you could have a great deal more chargeback activity. Credit card billing error challenges require written notice no later than 60 days after receipt of the applicable billing statement.

Cash Management: Conversion Cycle

Tax Credit & Incentives Discovery Report In addition to proper controls, it’s important to monitor and implement steps to increase your cash flow through a sound cash conversion cycle. Below are five steps manufacturers can take to improve cash flow:

  • Improve Your Cash Flow Management: Tracking the timing and amounts of cash inflows and outflows is an important part of cash flow management. Cash inflows arise from cash sales to customers, conversion of accounts receivable to cash, loans and borrowing. Cash outflows come from cash payments for expenses, accounts payable bill payments, and principal and interest payments on debt. Businesses with sound cash flow management policies and procedures in place typically have shorter cash conversion cycles.
  • Collect Your Accounts Receivables Faster: Companies can shorten this cycle by requesting upfront payments or deposits and by billing as soon as information comes in from sales. You also could consider offering a small discount for early payment, say 2% if a bill is paid within 10 instead of 30 days. Businesses also can reduce cash cycles by keeping credit terms for customers at 30 or fewer days and actively following up with customers to ensure timely payments. It also pays to keep on top of past-due receivables, as the chances of collecting reduce dramatically over time.
  • Disburse your accounts payable more slowly: While it’s beneficial to you if your customers pay early, your cash on hand increases if you disburse your accounts payable later. While it’s recommended you pay invoices according to terms you’ve negotiated with your suppliers, you receive no benefit from paying early. To increase your cash on hand, ensure all invoices are paid as close to the due dates as possible if no discount is offered.
  • Manage your inventory more efficiently: Companies can reduce their cash conversion cycles by turning over inventory faster. The quicker a business sells its goods, the sooner it takes in cash from sales and begins its accounts receivable aging. Also, consider cutting your losses on slow-moving inventory items, even if this means selling them at a big discount. Doing so will free up valuable cash that can help carry you through the cash conversion cycle.
  • Take advantage of your bank’s treasury management services: Check with your bank about treasury management products and services that can help accelerate collection and posting of your accounts receivable. These may include remote deposit capture and electronic payments via the automated clearing house. Remote deposit capture, meanwhile, lets you deposit checks remotely from the convenience of your office without even having to go to the bank. And the ACH eliminates check float completely by sending payments electronically, instead of by check.

READ MORE: Tax Tips for Manufacturers Seeking Increased Cash Flow

Negotiating Bank Loans

Almost every manufacturer will need to access debt at some point in the lifecycle of their business. Applying for and negotiating bank loans can be a mystifying experience for some business executives – here are some tips to help you navigate the world of credit:

  • Be prepared: Have up-to-date prepared financials ready for the bank to review at the time of your loan request. Be sure to include at least two years of historical comparative P&Ls and Balance Sheet information. Have ready any written explanations of any one-time credits or expenses and also any changes that have been made that will affect any of the sales or expenses. Have a Personal Financial Statement prepared for your lender to review that accurately reflects your current personal financial position.
  • Understand your terms: When you talk with your banker be sure to look at all the alternatives: short term notes, revolving lines of credit, traditional bank-term loans, fixed rates and floating/variable rates. Can you pay down or pay off the loan early without any financial penalty? What other costs and fees may be associated with the loan?
  • Consider a deeper relationship with your banker(s): Developing a robust relationship with the bank(s) you do business with may be another way to be rewarded with favorable pricing and terms. Banks typically negotiate better pricing on your credit deal if you also have depository business and/or a commercial credit card with them. Build a foundation for a lasting banking relationship that is beneficial for you and for the bank.
  • Check out the competition: Creating some competition among banks is often an easy way to improve the terms of the deal. Invite well qualified banks to provide you with a proposal and pricing that helps your company reach those goals. Compare terms and interest rate options to make the best choice.
  • Clearly understand the terms: What are the loan covenants and how often are they reviewed? What happens to the loan and/or pricing if you have a covenant breach? Do you have prepayment penalties or rate breakage fees? What is being used as collateral? How do you have that collateral released if you sell all or part of your business holdings?
  • Seek good advice: Consult with your banker and your CPA to determine what debt structure serves you best, not just for the immediate borrowing need, but for any future borrowing needs.

Many of these tips will help improve your company’s cash flow, but there are also other steps to take, including ensuring manageable debt levels and taking advantage of tax opportunities. Contact us for other tips or personalized assistance in improving your manufacturing company’s cash flow.

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Topics: Manufacturing

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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