Optimising Cash Flow and Profitability in Manufacturing Organisations
For many manufacturers, cash flow is the limiting factor that determines how many new business opportunities they are able to pursue, and how ambitious their strategy can be as they plan for the future.
The demands of Industry 4.0 require data-driven management both inside and outside the factory, requiring continuous capital investment to keep pace with a fast-moving business environment. Pricing pressures add to the challenge, reducing margins even as customer demands increase ever more quickly. Even the most forward-thinking manufacturers will have trouble staying ahead of the curve if they cannot access enough internal cash flow to keep the wheels of innovation turning.
Yet cash flow turns out to be a far more complex variable than it first appears. Its relationship to the cost of doing business is evident, but many businesses make the mistake of measuring cost in a one-dimensional way. It is a fallacy to equate cost with the monetary price paid for any given item or service. The true cost of a product or service includes its opportunity cost as well, together with all of the direct and indirect overheads that must be factored into the equation.
If a product sells slowly, the seller must pay a price for holding excess stock. If a customer requests a rare item, your procurement team must spend time and effort tracking it down. Customers that buy less but pay on time may indeed be worth more to you than customers that buy more but make a habit out of paying late. All of these concerns inevitably relate to your operational cash flow, and therefore also affect your business’s ability to re-invest earnings into future projects and strategies.
Although such considerations may seem intuitive once they are spelled out, a full accounting of all the relevant variables – also factoring in the time spent to procure materials or research, develop, and design a given product, for example – remains elusive to a large proportion of manufacturers. In our recent seminar focusing on optimising cash flow for manufacturing companies in Thailand, we conducted a live polling on working capital optimization and of the businesses we queried, fully 50% admitted that they did not know the ‘true cost’ of their products when measured in this way.
The treasure hidden away in your data
Data analysis can review and compare several streams of information at the same time, isolating which kinds of products sell more quickly, and who the customers are for these products. These insights can help you streamline your portfolio, reducing inventory costs and shortening the cash conversion cycle. When that happens, your business can free up more of its capital to expand and improve its offerings.
By analysing costs at a product, customer, and supplier level, it at last becomes possible to know the true cost of each relationship. This understanding in turn lets you track the performance of your current business model, so that you can refine and optimise it. Data analysis, in short, lets you go back to your customers and suppliers, and re-negotiate from a position of strategic clarity.
This type of holistic view also lets you resolve conflicting priorities across revenue, profit, and cash flow, while viewing each variable independently when needed. For example, when a manufacturer decides to expand its product range, its efforts will inevitably have an impact on cash and profit – but these decisions are too often made with a pure revenue mindset. Current and historical data can be invaluable when determining lead times, production plans, and other key operational tasks.
By keeping the right focus on cash and profit, a business can reduce wasted resources and focus its efforts on the true keys to growth. This approach will result in better informed strategic decisions, also opening the door to more practical relationships with customers and suppliers. Greater liquidity will soon be within reach, allowing the company to pursue a greater number of new opportunities to stay ahead of a rapidly evolving market economy.