Have you ever been worried that your business might run out of cash? I know I’ve been there before!
Managing cash flow in a precision manufacturing business is often one of the most difficult but critical tasks. There are so many ways that it’s difficult. When you have to pay for a large order of raw materials, weeks before you invoice your customer for the same parts, or if you have a slow month with not enough revenue to cover expenses, or if a customer doesn’t pay on time, the pain can become acute fast. I still acutely remember the panic I felt when after 9/11, our shop’s workload dried up, and we nearly went bankrupt from running out of cash to pay our employees and vendors. Thankfully we barely scraped through!
Generating revenue for the business is one thing. Strategically and successfully managing cash is something else entirely. In the heat of running their operation, too many manufacturing business owners “wing-it” when it comes to managing their cash. They don’t always proactively make sure they won’t run out of cash - projecting when cash goes out and when it comes in. Are you one of them?
Daily machine shop operations can be expensive as it is, and much more so when you are trying to grow the company. Machine Shop businesses are capital-intensive by nature, and continual reinvestment is required to keep the business functional. This alone can place a significant burden on monthly cash flow. When late customer payments and large vendor bills get thrown into the mix, it can go from bad to worse.
What to do about it:
Shorten your lead times
One of the best ways to improve cash flow is by decreasing your lead times. When you do, you are able to invoice and receive payment sooner. When the window of time between purchasing materials and tooling for a job and getting paid for the completed work is minimized, risks related to cash flow are mitigated. Here are some supporting ideas to consider when trying to shorten lead times:
Shorten the job-planning process- When you have a process in place whereby the planning process can be thoroughly completed in a shorter amount of time, the job can be executed and completed sooner with fewer mistakes. Our recent blog series titled “Focus on the right stuff” can help guide you on this further.
Implement a digital work order systemthat allows for the parallel processing of jobs- When jobs are managed in a digital environment, jobs can be simultaneously worked on by different teams. Planners, programmers, and purchasers can completetasksrelating to the same job simultaneously, increasing productivity and efficiency. This increases throughput, gets jobs completed quicker, and avoids having too many jobs fall onto the dreaded “back burner” (among other benefits!)
Embrace proactive procurement practices- Missed details in the planning process can also play into cash flow issues. When long lead items like special tools or gages are missed or aren’t ordered early enough, this can lead to late delivery and invoicing on jobs. When this occurs on a job which requires a large up-front purchase of raw materials, the impact from delayed invoicing can be significant. Sometimes the impact on customer relationships can be even worse.
Have a system for information transfer that flows through the production process- When jobs are planned for and managed in a digital environment, concise operation-specific instructions can be provided so that important details aren't missed. When customer and job specific requirements are provided to the production teams, it greatly reduces the opportunity for errors and scrap, ensuring that the job is completed as required in a timely fashion. Read through our recent blog, “It's all about Information Transfer,” if you haven’t already done so!
Get jobs out faster - One-piece flow is one of the best ways to dramatically shorten lead time. Consider this example: If you have a part with 2 operations, and you batch and queue each operation separately, the amount of time you have WIP sitting on your floor can be very long. If you have an order of 100 parts, with two 30-minute cycles, for an hour of total cycle time, and you batch them, it would take 50 hours per operation to finish the parts. Assuming a 1 hour setup time for each, the whole order of finished parts won’t come off the machine until over 100 hours after you start your first setup. On a single shift, that is nearly 2.5 weeks. Contrast that with one-piece flow, where you set up both operations at once on 2 spindles, you’ll start getting finished parts off within about 3-4 hours of your first setup, and the whole job will finish in half the time, allowing you to ship and invoice partials, the same day. We had a client tell us that moving to this model allowed him to invoice some very large jobs nearly a month sooner than typical, significantly improving his cash flow.
Invoice sooner and make it easy to get paid
Do what you can to invoice as quickly as possible. Don’t batch your invoicing one day a week - send them every day! Send out customer statements and payment reminders to mitigate late payments from customers. Make it as easy as possible for your customers to issue payments. You might even consider accepting credit card payments. Nobody likes paying credit card fees, but sometimes it might be favorable to lose 3% on an invoice rather than wait for a late payment. Also, don’t extend credit at all to any new customers without a credit check.
Negotiate progress payments on larger projects
When dealing with large jobs, consider working with the customer to negotiate progress payments, a down payment, or at least payment for the raw materials in advance. If you don’t, you’ll likely have to pay your invoice for raw materials and commercial items well before getting paid for the job itself, potentially leaving you with a cash flow problem. Many clients will be open to this if they’re a good partner and care about your success as a vendor for them.
Schedule material deliveries to be just-in-time for large multi-release jobs
When it comes to large jobs, schedule the right-sized deliveries from your vendors. If you have blanket orders from customers whereby you ship a fixed quantity of parts on a recurring basis (ie. 100 parts shipped per month for 12 months straight), set up the same schedule with your vendors. Most are happy to take a larger order from you, and ship and invoice just for smaller batches as they are delivered.
Determine which jobs actually make you money
Have a method to determine job costing and profitability. Knowing which jobs make you money and which jobs don’t can be a huge factor in understanding where to focus your efforts. Accurately tracking labor and out-of-pocket costs is essential to knowing which jobs might be slowly bleeding cash from your business. It’s up to you to know which jobs do this and take action to remedy it.
How ProShop Can Help? ProShop was developed to help Machine Shop businesses thrive with integrated tools that help shops successfully manage cash flow. Digitally managing the production workflow allows for parallel processing of work orders so that job planning and production steps can be executed quickly and thoroughly, often shortening up-front office work from 4-10 days. Our suite of procurement tools give visibility to long lead items that need to be ordered in advance to avoid unnecessary delays. ProShop allows you to manage specific job quantity releases such that raw materials and other commercial items are purchased in exact quantities to the job, no sooner than needed. The ProShop schedule allows you to model one-piece-flow jobs, as well as allowing partials to be worked on and tracked easily on many operations at one time. Job costing tools tied to the digital work order help you understand which jobs are profitable, and which jobs aren’t. Get in touch today. We’d love to discuss how ProShop can help you reduce job costs, shorten lead times, and improve cash flow.