Working Capital Management For Manufacturers
In the business-to-business world, there are specific sectors where cash flow plays a lifeblood role in the day-to-day operations, and continues to be the most frequent villain of hindering a company’s operation and its ability to scale.
When exploring all industries, manufacturing is a sector where the connection between working capital, returns and investment is particularly strong.
Manufacturing is generally an extremely inventory and capital intensive business, where cash flow management is especially important. Industry practice usually allows customers to have a long payment cycle, especially recurring customers.
While this means that manufacturers can reach profitability running at high capacity, they would also have to balance the cash flow for daily operations and fixed costs. Businesses in this industry are also susceptible to unexpected expenses such as defects and rejects, machine breakdowns and accidents in the workplace.
Speaking to a manufacturing industry expert, Anish Popat, Operations Director at JnJay Fabrics, tells Populous World, “We supply textiles and fabrics in large quantities to high street retailers that usually take up to three months to pay, and whilst we don’t want to lose repeat business with them, the long payment cycle can substantially disrupt our cash flow cycle and operations, it is a payment cycle term that manufacturers unfortunately cannot control”.
Late payment of invoices is a common problem in the business-to-business sector, and when it occurs regularly it can cause an imbalance in a company’s cash flow.
According to PWC’s report on global manufacturing, “receivables days or ‘days sales outstanding’ (DSO) — are now at their highest level for five years, after deteriorating relative to sales by an alarming 6% year-on-year — well above the 2% to 3% annual swing that might be expected in the normal course of business”.
These results can significantly indicate that the slow pace of collecting payments from customers has a counter effect on business operations and the pace at which it produces inventory. It is commonly perceived that a shortfall of available working capital is a result of excess inventory or a lack of business confidence, but this is not the case for manufacturers.
Invoice discounting for efficient working capital management
To effectively manage working capital forecasts and increase business productivity, manufacturers can look at invoice discounting as a form of managing extended payment terms and freeing up cash locked into outstanding invoices.
We have discovered from PWC’s report that manufacturing’s capital-intensive nature springs from the need for businesses to invest continuously in their plant and operations to sustain their competitiveness and long-term stability. So, while cutting investment can produce short-term cash flow benefits, it can also have the effect of undermining a company’s longer-term success.
Invoice sellers are incentive's to utilise fintech platform Populous World’s invoice discounting service, where the process implements an invoice bidding mechanism. Invoice buyers (investors) will bid to purchase the invoice at their lowest acceptable interest rate, and the bidding process will result in the invoice sellers (in this case, the manufacturer) receiving the best interest rates. The bidding process will only take 24 hours before the funds will be released to the invoice seller, which is similar to the industry practice.
The Populous World platform is hosted on the blockchain where it utilises smart contracts to perform automated tasks, to determine the interest rate of the invoice that is sold. This provides users with a seamless transaction where there is little idle time in the transaction. The throughput of an invoice successfully bought will be a little over 24 hours, before the funds will be released to the invoice seller, which is similar to the industry practice.
