With the economy constantly transforming, it can be difficult for manufacturers trying to maintain a successful business. Rising inflation and changes in tariffs are just a couple of the economic pressures threatening the industry’s livelihood. In this article, we’ll explore five strategies to help manufacturers fortify their business to withstand the volatility.
1. Understand the current economic pressures on manufacturing
Inflation, high interest rates, supply chain disruptions and shifting demand patterns are all threats to manufacturing businesses. These challenges lead to higher operational costs and pressure on profit margins, while forcing manufacturers to rework the way they operate.
Right now, tariffs, geopolitical shifts and labor shortages are also weighing heavily on the industry. With rising material costs, trade route disruptions and smaller workforces, manufacturing companies are being forced to pay more and get less in return.
2. Know and regularly monitor key financial metrics
Having a clear picture of where your business stands is essential, so you know where you may need to adjust. Here are a few key financial metrics manufacturers should monitor:
- Cash runway - Use your current cash balance and monthly net burn rate to forecast your company’s survival time.
- Inventory turnover - Divide the cost of goods sold (COGS) by the average inventory to determine how many times you sell and replace your stock over a certain period of time.
- Gross margin - Calculate the percentage of total revenue you keep after paying the cost of making or selling your products by using this formula: [(revenue – COGS)¸ revenue] x 100
3. Strengthen cash flow and working capital management
To maximize cash flow, manufacturers should aim to accelerate receivables, control payables and optimize inventory levels. This can be done by sending invoices immediately, offering early payment discounts, consolidating purchases to gain bulk buying power and building strong ties with suppliers for reliable deliveries.
There are also several financing options that can help, depending on your needs. Lines of credit should be used for short-term cash flow needs, revolving credit facilities should be used to handle large-scale working capital and invoice financing is recommended for business-to-business companies with slow-paying clients.
Also, the SBA is currently offering several incentives specifically for manufacturers through the end of September, including fee waivers, reduced qualification requirements, promotional interest rates and increase financing caps. Talk to your banker about your goals and business needs to see if an SBA loan could be a good solution for your business.
Forecasting cash flow under multiple scenarios and building a contingency buffer can help prepare a manufacturer for anything that comes their way. Here are a few ways to do so:
Cash flow forecasting:
- Build a model using your company’s past data
- Create scenarios for three different situations: optimistic, realistic and pessimistic
- Test how a drop in sales would affect your company
- Update every month with real data
Forming a contingency buffer:
- Calculate your average monthly expenses
- Save 3 to 6 months’ worth of operating costs
- Keep this amount in a separate savings account
- Use it only for business emergencies
4. Work toward operational efficiency and cost control
Prioritizing automation, regular maintenance and process improvements can help reduce a manufacturer's costs. Doing so streamlines tasks, reduces waste and stops machine failures before they happen, therefore cutting costs and causing fewer operational delays.
Additionally, considering conducting a cost-to-serve analysis that measures all expenses that are related to a product or customer. This gives great insight on where your largest costs are coming from. This analysis may include a strategic SKU rationalization so you can determine which products to get rid of, which ones to alter and which ones to keep the same. By going through these exercises, a manufacturing company can easily see how to improve its profitability.
Using data and key performance indicators (KPIs) can help a manufacturer find fast ways to improve and evaluate how well its efficiency efforts are paying off. Measure your time saved, costs reduced, error rate and output speed.
5. Diversify supply chains and use strategic sourcing
Manufacturing companies can work to avoid major supply chain problems by evaluating their supplier risk, nearshoring to closer regions and using multi-sourcing strategies. These practices reduce reliance on just one region, shorten products’ delivery times and help prepare for unexpected global disruptions.
Negotiating certain contract terms and payment structures, such as milestone-based payments, smaller initial deposits, flexible termination clauses and performance incentives, can preserve a manufacturer’s funds and provide flexibility. These practices preserve emergency funds that you may need in the future.
By installing supply chain finance programs, manufacturers can extend their payment terms while allowing suppliers to get fast access to cash. This type of financing not only helps manufacturers improve their cash flow, but the faster payments help build trust between them and their suppliers.