It does not matter what you make; whether you’re a process manufacturer in the pharmaceutical industry or a discrete manufacturer in the automobile industry, you have one thing in common- the need for cash. With materials becoming more expensive, increasing competition, globalization, and the customer demand for higher quality at lower prices, having fast access to cash is critical. The real challenge is of course, that money does not grow on trees. For many manufacturing companies, getting the work and completing the job is not the thing keeping them from better cash flow, it’s getting paid for the work they’ve done.
According to a market trends from Cortera, manufacturing is one of the worst industries when it comes to collecting the money owed to them on time. Accounts receivable is among any company’s largest assets and one of the fastest and easiest ways to get the cash you need for growth, by speed up the collections process you can start capitalizing on that asset. You’ve already spent the money to bring the prospect in and incurred the other costs of doing business, make sure you get paid for it on time. With improved invoice collection, you can reduce overhead and operating costs considerably, freeing up cash to invest back into capital equipment, human resources, R&D, or offer more competitive prices than the competition.
When it comes to how to improve cash flow in a manufacturing business, below are 5 proven strategies to boost operations.
DETERMINE YOUR CREDIT PROCESS
Determine who you will (or will not) extend credit to and run credit checks on all new and non-cash customers before you agree to sell to them on credit. This process helps reduce bad debt since you will be offering credit only to customers who have proven they can and will pay you. We created a resource that spells out the six steps to developing a credit policy that can help you become more consistent in your credit sales and collections.
Offer early payment discounts to encourage early payment. For example, if invoice terms are 30 days, offer a 2% discount if the customer pays in 10 days, so your terms would look like this “net 30/2/10”
On the other side of the coin- you can apply penalties for late payment. While this solution is not a great fit for every business, it may be for yours. Indicate on the invoice when a payment is considered past due and details about interest on late payments.
Develop clear and consistent guidelines for your customers. Make sure invoices are clear about any and all payment terms, penalties for late payments, discounts, payment due dates, and who to contact with questions about a bill.
The above points will help you collect the money owed to you faster, but there is one more step you can take: Invest in the technology designed to help you put them into practice, better manage A/R, and collect on invoices faster. After all, you wouldn’t expect the rest of your manufacturing company to operate without their ERP system would you? It should not be any different for your accounting team.
Accounts receivable management software is a proven way to help you do this through a tight integration with and accounting or ERP system to:
- Integrate sales order and work order information to resolve invoice disputes faster
- View shipments, freight, and bills of lading – common reasons for companies to delay payment
- Provide account credit and collections information for internal sales reps or external brokers, dealers, or manufacturers reps – online, anytime, anywhere