Technology is playing a vital role in everyday manufacturing operations. Software programs are allowing companies to better track and predict inventory needs through supply chain and operations data. So why are so many manufacturers dealing with the cash gap and drawing on a line of credit to make up capital shortfalls?
The reason can be traced back to the recession which started in 2007. Countless customers were forced to extend their payment terms to stay afloat. Now that the market is back up, it’s time to either renegotiate the terms or retrain customers to pay on time.
What Is the Cash Gap?
The cash gap is the timing difference between when a company orders materials and pays suppliers and when payment is received from customers. The shortfall is frequently made up by relying on a line of credit. When finan- ced by a bank, the cash gap incurs interest.
Calculating your company’s cash gap is easy: Add the average days in inventory to the average collection period for accounts receivable and subtract the average payment period for accounts payable.
Collection Is Key
A good place to shrink the gap is by looking at your receivables and identifying ways to speed up collections. Sending out past-due or reminder letters and emails, even phone calls, may not be enough to get the process moving. Manufacturers need to take a proactive approach.
Consider performing credit checks on prospective customers. If the results show too much risk, you may want to pass on the business. Flagging new customers in your database, or offering “early-bird” discounts, can help ensure invoices are paid promptly.
But most importantly, manufacturers should assess invoicing procedures to cut down the number of days in receivables. Poor communication between departments can lead to delays and confusion, which ultimately impacts the bottom line. By streamlining collections, you can bridge the cash gap.