Glenpoint Finance, a small-business funding service in Dubuque, Iowa, explains how to improve cash flow in a manufacturing business: measuring the cash conversion cycle, shortening receivables and inventory days, preparing a 13-week cash flow forecast, and choosing between working capital and a credit line for the gaps. Dubuque County manufacturing figures are included.
What is short-term cash flow?
Short-term cash flow is the money coming in and going out over the next few weeks: customer payments in, payroll, supplier invoices, rent and loan payments out. A profitable manufacturer can still run short in a given week if a large customer pays late while a steel order and two payrolls fall due.
The cash conversion cycle
Three numbers describe how long cash is tied up:
- Inventory days. Average inventory divided by cost of goods sold, times 365.
- Receivable days. Average receivables divided by sales, times 365.
- Payable days. Average payables divided by cost of goods sold, times 365.
Inventory days plus receivable days minus payable days is the cycle. Illustrative example: 50 days of inventory, 55 days of receivables and 30 days of payables give a 75-day cycle. Every day cut from it frees cash.
How do businesses improve cash flow?
- Invoice on shipment, not at month-end, and follow up on day one of lateness.
- Offer a small early-payment discount only if it costs less than borrowing.
- Ask large customers for progress payments on long jobs.
- Order raw material closer to need; carry safety stock only where a shortage would stop the line.
- Negotiate supplier terms that match your customers' terms.
- Separate one-time purchases from operating costs when you borrow.
How to manage cash flow in business comes down to seeing the gap before it arrives, which is what a forecast is for.
How to prepare a cash flow forecast
- Start with today's bank balance.
- List expected customer payments week by week for 13 weeks, using actual payment habits, not invoice terms.
- List payroll, supplier payments, rent, loan payments and taxes on their actual dates.
- Subtract out from in each week and carry the balance forward.
- Mark any week where the balance falls below what you need to operate. That is the gap funding should cover.
Update it weekly. A forecast that shows the same shortfall every month points to a credit line; one large dip from a single order points to a one-time loan.
Matching the gap to a structure
A one-time gap from a large order fits a working capital loan with fixed payments. A gap that recurs with every billing cycle fits a line of credit, drawn and repaid as customers pay. Machines are a separate decision; see machine shop funding.
Illustrative forecast: one large order
Illustrative only. A manufacturer with a $90,000 opening balance takes a $240,000 order. It buys $110,000 of material in week 2, pays $28,000 of payroll every second week, ships in week 8 and is paid in week 14. Without other receipts, the balance would fall below zero in week 2, when the material is paid for, and stay there until week 14. Regular receipts from other customers soften that, but the forecast shows the gap's size and length before it happens, which is the kind of question a partner may ask about.
Manufacturing in Dubuque County, IA
Dubuque County's manufacturing sector had 156 employer establishments in 2023, 10,191 employees and $748.0 million in annual payroll, the largest payroll of any sector (County Business Patterns 2023). Fabricated metal manufacturers alone numbered 41 with 2,061 employees, and food manufacturers 14 with 1,138. Payrolls of that size make the timing of customer payments matter.
County figures are on the Dubuque, IA data page. More articles are on the blog.
By Glenpoint Finance · Updated
