Dr Robin Kaushal: Working Capital for Manufacturing Concerns: Financial Management Working Capital Management
Working Capital for Manufacturing Companies
There are many different sources of financing for manufacturing companies who have a proven track record of success. However, many are unable to find the correct form of financing that fits their working capital needs. These are typically the start-ups, the companies who have experienced recent losses or companies who have weak balance sheets with high leverage or low net worth.
Working capital is near the top of the list among business challenges currently faced by manufacturing companies. The only issue ranked as a more serious concern — escalating costs — is also directly related to working capital and cash flow. One accounting description of working capital is expressed as a financial formula in which net working capital equals current assets minus current liabilities. When this calculation produces a negative number, a business has negative working capital and should be alert for near-term cash flow problems.
Working capital management by manufacturers and other businesses is designed to anticipate and resolve such difficulties before they cause normal payments to be delayed. Manufacturing financial managers have several potential strategies to review for cash flow improvement. Two of these are lean manufacturing and asset financing.
Lean Manufacturing
The concept of a lean organization initially was applied to the manufacturing industry and has spread to other businesses beyond traditional manufacturers. Nevertheless, the benefits of lean manufacturing processes are helpful for improving liquidity and cash flow. A lean manufacturer has an ongoing goal of reducing waste and unnecessary costs throughout the manufacturing process. Fewer financial resources are required as lean management goals are achieved, and this translates to improved working capital. However, reducing costs might not be enough to maintain positive cash flow for a manufacturer.
Asset Financing
An ongoing challenge for any business and in particular for manufacturing enterprises is to alleviate the delayed timing between spending resources for producing goods and receiving payment when those products are sold. Even when a manufacturer makes a sale, the customer usually does not pay for the purchase immediately. Accounts receivable represent funds which are due from business customers but are currently unpaid. Extended payment terms and slow-paying customers both translate to a potential cash-flow shortfall until payments are received. Asset financing is a financial strategy that allows manufacturers to receive funds from their accounts receivable before payment has been made by customers. This can be a timely solution for manufacturing businesses to consider when they experience excessive delays in receiving payments. Costs for asset financing can vary widely, and a due diligence review of financial terms are essential.
Bank Lines of Credit
Manufacturers also can seek a working capital line of credit from traditional commercial lenders such as banks. However, credit line services have been discontinued by many lending institutions in favor of other financial programs. Smaller manufacturers will generally have different borrowing choices than large manufacturing companies. While alternative working capital financing is available for manufacturers of all sizes, extensive research can be necessary before the most effective solution can be found.
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Dr Robin Kaushal
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