For Manufacturers, Cash Management Is In Their Hands

Accounting and consulting firm Crowe Horwath LLP says businesses face a balancing act when it comes to cash flow management. Treasurers and money managers need to make the right decisions with corporate money for today, while ensuring the business will be in a good position tomorrow.

A recent research report by the firm explores how these professionals in the manufacturing sector are approaching the issue.

In “Shedding light on working capital management challenges and best practices,” Crowe Horwath uncovered a few concerning practices among manufacturers, despite their intentions to more strategically manage money.

According to researchers, nearly half of the businesses surveyed (46 percent) said they have implemented a strategic working capital optimization plan. But that means more than half haven’t — whether a plan is in the works or is developed but not yet implemented.

Surprisingly, 7 percent admitted they have no strategic plan, nor do they plan to create one.

Analysts found a major gap in how executives understand the connection between everyday financial functions, like inventory management, accounts payable and accounts receivable, and cash flow. The report said a “high percentage” of executives surveyed said they don’t recognize the impact of these activities on cash flow management, while some even stated they believe there isn’t any impact at all.

But there are an array of factors — sometimes beyond a company’s control — that can make executives all too aware of the link between business processes and cash flow.

Among the top external factors that manufacturing executives see as affecting their cash flow include the economy, unreliable customer demand forecasts and industry-wide issues — each cited by nearly half of respondents.

According to Crowe Advisory Services Principal Bart Kelly, who authored the report, it isn’t just external factors that reveal the link.

“While there are certainly external factors that can be attributed to working capital difficulties, companies do not consistently use available methods to better grasp their financial situation,” Kelly said in a statement announcing the research on Tuesday (Aug. 23). “Whether it’s minimizing process wastes and lowering inventories or improving supply forecasting and fulfillment with customers and suppliers, this study reveals the delicate balance and cross-functional collaboration that executives must work to achieve.”

The vast majority know it’s critical to corporate success to optimize working capital; 88 percent said they agree doing so can boost profit margins, while 82 percent said it’s simply important to corporate success.

The problem, researchers found, is that many executives aren’t aware that there are business processes within their control that also affect cash management.

While nearly half of manufacturing executives cite external factors as influencing their ability to manage cash flow, less than a third said internal factors, like long supply chain lead times, inaccurate sales and operation planning, delinquent receivables and business analytics also influence their cash management.

Inventory management, researchers said, is a particularly big missed opportunity for manufacturing firms to realize the power internal functions have on cash management.

The report highlighted the connection between faster inventory turnover and freed-up cash, yet most companies surveyed said they turn their inventory over monthly, at best.

“We found the financial losses for manufacturing and distribution companies are twofold and mutually reinforcing,” Kelly summarized in a statement. “First, they’re not taking advantage of their expensive enterprise resource planning systems that generate an abundance of essential data. Second, this data could reveal specific, actionable opportunities that could result in marked improvements to their balance sheet and bottom line.”