It is vital to remember that successful companies tend to leverage cash flow management strategies to maintain and deal with healthy profit margins. Still, it is not secret that the expenses that stack up and increase, which means contractors must think about upfront expenses such as raw material, labor and equipment.
Therefore, you must properly plan these expenses, unless you plan on entering negative process. However, if you are struggling to receive cash, we can differentiate a few management strategies that will help you improve overall situation. In further article, we will talk about the ways to improve and manage your business’s.
What is Cash Flow?
Regarding a construction cash flow, you should remember that we are talking about money that moves in and out of your company for a specific period. For instance, you can consider the inflow of revenue as well as outflows of expenses over month, week, year, quarter or season, depending on numerous factors.
One of the ways is to put together a statement to determine how well your company is handling the process. A statement will determine how much money enters and gets out of your business for a specific period. It will also list where the money is coming from and where it is going, which is vital for understanding each step.
If your goal is to Improve Cash Flow in a Manufacturing Business, you should analyze the processes. We can differentiate revenue streams you should consider, including:
- Projects
- Equipment rentals
- Subcontractors
- Investments
- Maintenance
- Company property
- Consulting
These are all income streams that will help you get money towards your business. However, if you wish to understand the entire picture, we recommend you to list your expenses as well. The most common expenses are:
- Upfront projects costs
- Labor
- Insurance
- Equipment
- Marketing
- Utilities
- Fuel
Understanding the differences between your expenses and revenue will provide you a perspective on the amount of money coming in and out of your company. That way, you can use the information to identify cash flow trends and sales slumps.
For instance, you may notice that you have higher revenue during summer months than the winter season. If that is the case, you may need to cut costs and save money to ensure you have enough cash to deal with slow periods and off-season moments.
Negative vs. Positive Cash Flow
You probably understand that it can either be positive and negative. The analysis will help you identify in which category your business falls into. We recommend you to enter here to learn more about cashflow.
As the name suggests, if more money is coming into your business compared with expenses, the chances are high that you have a positive cash flow. However, if you are spending more money than you make, you are entering a negative cash flow that can affect your business future in the long run.
You should know that surplus cash allows you to use it for further investments such as paying down debts or saving for future projects. Therefore, we recommend you to always aim for positive cash flow, which will help you stay afloat and become profitable.
Since the negative means that you are spending more than you make, you should remember that the processes may force you to delay project timelines or open new line of credit. However, interest may stack up quickly, while project delays will lead to payment delays and lower as a result.
Net Profit vs. Cash Flow
It is vital to remember that net profit and cash flow are two completely different approaches and options. You should know that cash flow refers to the money entering your business and going out based on the expenses and other factors.
You are following a certain period and determining the flow. On the other hand, profit is the amount of money you will get after dealing with expenses, meaning you can use it for further investments, buying new equipment or save it for future projects.
Working Capital vs. Cash Flow
When we compare these two options, you should know that both are crucial for keeping your business in perfect financial health. However, working capital is the difference between your current liabilities and assets. In simple words, we are talking about money that you are using to finance daily operations.
In case you have negative cash flow, that will directly translate into lack of working capital. Of course, positive flow means that you will have more money to deal with short-term operations and expenses. Enter this link: https://www.federalreserve.gov/releases/z1/ to learn more about this topic from FED.
Final Word
You should know that dealing with manufacturing is not as simple as it seems. Still, you can improve the business by taking specific measures that will provide you a peace of mind.
The main idea is to implement profit first method, which will prioritize profit over expenses. That way, you can increase overall profitability, which will translate into a positive flow.