Worried about covering production costs? Read on.
Cash flow problems can occur for a myriad of reasons. Late-paying customers, a blip in sales, too much cash shored up in inventory, and so on. The problem with cash flow is that unless you’re paying attention to every aspect of your business, it can quickly creep up on you, even if your profits on paper look good.
If you’re a manufacturing company or produce a product, this can also happen when you incur upfront costs to support production—particularly if the market is volatile and you experience an unexpected surge in demand and don’t have the cash flow to cover the costs.
2 Ways to Manage Production Costs
Forecast and Model
Make sure you have your arms wrapped around your key financial statements—income statement, balance sheet, and cash flow forecast. The cash flow forecast is particularly important because it will show you how much cash is projected to flow in and out of your business as well as the timing. This is different from your profit and loss statement, which shows you how much money you’ve made, but not whether that cash has been paid yet.
Cash flow, not profit, is in fact a truer reflection of the financial health of your business. You can be profitable and yet still face a cash crisis—one does not mirror the other. Read more about the difference between profits and cash flow.
At this point, it’s a good idea to forecast potential sales and assess the impact on cash flow as a result of associated production costs. Use historical information, market trends, and/or pipeline probability to achieve realistic numbers.
Consider Funding Options in Advance
Now that you’ve conducted a forecast, use the projection model to see where you cash flow gaps will be and plan your funding options in advance. Perhaps a line of credit from your bank or higher credit limit on your credit card. Analyze your cash flow forecast carefully for accounts receivables trends too. If a big client is likely to ask you to step up production in three months’ time but you know for a fact that they are slow payers, then you may have another problem on your hands, so explore your options.
While a line of credit or loan can help you fund production, other financing options like invoice financing can help you out when a client doesn’t pay you on time, preventing further cash flow problems.
Explore all your options in our comprehensive guide to business financing options.