For companies that manufacture, cash flow has become more critical
Companies that make products are the backbone of the U.S. economy, but to survive a turbulent business environment, they need to find creative ways to build more flexibility into their cash flows.
Manufacturing accounts for 11.9% of the U.S. economy and supports many more businesses that rely on the products and components they build. The range of goods that are manufactured or assembled in the U.S. is extensive, including clothing, furniture, machinery, food products, beauty care, cookware, electronics and more.
Keeping these companies healthy and strong is vital to the country’s economic growth, but they are facing extraordinary challenges, including an unpredictable supply chain, rising material costs, soaring interest rates, and a tight hiring market.
These problems worsened during the pandemic but have persisted. In fact, two-thirds of U.S. manufacturing companies (68%) report that the pandemic changed their operations permanently.
Top growth challenges
Despite the complexities of doing business, most manufacturing companies are optimistic about the future and planning to grow. Expanding product and service offerings in the immediate future is one of the top three priorities for manufacturing companies.
However, pursuing that growth mandate will not be smooth sailing as these companies face the following significant challenges.
Manufacturing is the fifth-largest employer in the U.S., and it is struggling to hire enough workers. A recent survey of manufacturing companies found that replacing skilled workers lost during the Great Resignation was the top challenge for 83% of respondents and that most planned to address the issue by raising wages, expanding benefits, and increasing bonuses.
Material and energy costs
Increased raw material costs topped the list of primary business challenges for 90.1% of manufacturing companies in 2022. While some materials, such as lumber and metals, increased significantly in price, virtually all materials have become more costly since the pandemic. Energy costs have also spiked, with American businesses paying an estimated $41.4 billion in additional energy costs this year.
Inflation has increased the cost of everything from raw materials to freight and transportation to wages to energy. It has also made buyers more price conscious, which has placed growing pressure on business margins and increased the difficulty of maintaining strong sales and securing new customers.
Shortages and delays
According to a Deloitte survey, more than half of manufacturing companies were affected by material shortages and shipping and transportation delays. The inability to reliably access the materials and components required to fulfill customer orders can place additional financial pressure on businesses by delaying the order fulfillment and payment cycle.
Creative solutions: A case study
With no sign of these challenges evaporating any time soon, companies that manufacture products need to explore new solutions in the quest to maintain financial resilience.
For example, a company that builds modular transportation carts for warehouses and factories decided to supplement traditional bank loans with invoice factoring.
Despite the impact of the pandemic, the company experienced 100% year-over-year growth over the past few years. But because it takes up to 200 days from the manufacture of the product to payment, they struggle to free up enough cash to fund growth. When they were faced with the need to finance a move to bigger facilities, they began researching alternative funding options that could give them short-term, flexible access to cash. Their search led them to invoice factoring as a solution.
Invoice factoring advances cash on the company’s accounts receivable so that they can access up to 90% of the value of any invoice as soon as it’s issued to a customer. (The balance is released when the customer makes the final payment.) The modular transportation company was able to secure a factoring line in the amount of $4 million through invoice factoring, and they use those funds to smooth out the cash flow and ensure that they have the working capital they need to grow.
The company’s CFO says, “There are a lot of pain points for growing businesses, especially in manufacturing, and planning for liquidity is important.”
He recommends that manufacturing companies plan even further ahead in a volatile business environment.
“For as long as you are growing, there will be growing pains. There will be negative cash flow. In a B2B environment, that cash gap can widen as you grow, because if your customer base goes upstream, you may need to lengthen the payment terms. Be prepared so that you can act quickly when you need to.”
The CFO says that the company plans to continue their current level of growth indefinitely and is actively seeking to lease another facility.
“Although we also make use of traditional loans, we will continue to rely on invoice factoring to smooth out the spikes.”
New opportunities, new approaches
According to the National Association of Manufacturing, three-quarters of manufacturers are optimistic about the future of their business. In fact, many are seeing opportunities to expand and grow. But seizing that opportunity in the face of considerable challenges will require new approaches to smooth the way and create the level of financial flexibility and resilience that a complex supply chain and volatile economy require.
Are you a company that manufactures products? Find out whether invoice factoring can help you.
Want more financing insights for manufacturing companies? Read “How manufacturing businesses achieved remarkable growth during the pandemic.”