Manufacturing Cash Flow Planning in Two Steps

Fast access to cash is critical for companies to maintain a competitive edge. Cash flow planning is critical for leaders in a manufacturing business to maintain liquidity to meet daily operations, long-term capital needs, and the demands of customers. In this article, we will focus on how to execute basic cash flow planning as well as offer a few tips for the experienced cash manager. In general, cash flow planning can be broken down into two steps: the annual cash budget including, the related capital budget and rolling short-term forecasts.

Cash Budget

The annual cash budget is an in-depth look into where the company plans to go over the upcoming twelve months. This should be done prior to the upcoming year and should involve key individuals from various parts of the company, including production and purchasing. Often companies will start by taking their financial forecast and backing into the cash flow effects of the related production sales and purchases. Understanding the cash flow cycle and recognizing the patterns, including seasonal sales trends, is a critical step in building out the cash flow budget. After starting from a modified financial forecast, adjustments should be made to the annual cash budget resulting from cash inflows and outflows that differ from their recognition for financial purposes. These would include billing differences, health insurance payments, tax payments, and a litany of other items. Lastly, one should consider significant cash inflows and outflows that fall outside of the operational process, namely financing and capital activity. Financing through a line of credit is a common tactic to smooth cash flow during lean times but should not be relied upon to subsidize operations.

Capital Budget

In connection with the annual cash budget should be a capital budget that includes the company’s long-term capital requirements. Capital budgets consist of large capital projects and expenditures planned well in advance and funds set aside for maintenance and planned replacements of equipment and vehicles. These planned replacements are ideally designed to have significant equipment on a set retirement and replacement schedule, so machines are always being cycled out as opposed to replacing an entire production floor at the same time. A capital budget will look ahead three to five years. However, for purposes of the annual cash budget one would be using the upcoming twelve months of information to feed into the annual cash budget.

Cash Forecasts

Once the annual cash budget is complete and the year is underway, cash forecasts should be prepared on a recurring basis to project highly detailed cash inflows and outflows during the upcoming weeks. Depending on the sophistication of your company, some may even prepare both a weekly forecast that plans every outflow down to the day as well as an eight-week forecast that looks out over the next two months. The eight-week forecast intends to take the annual budget and significantly refine it using the information that has been gathered since. The weekly forecast is designed to ensure that you maintain enough liquid cash to meet all obligations of the upcoming week while mitigating the opportunity cost of leaving cash in a non-interest-bearing checking account. One particularly challenging aspect of a weekly forecast is to project the date on which a vendor will physically cash a written check and draw down the company’s cash balance. The calculation of average float days by the vendor for commonly used vendors can be particularly useful in this regard.

Expert Support

Proper budgeting followed by accurate planning and forecasting is the key to the management of cash. Seek out the experts, work with an advisor or accountant to create projections, and update them as circumstances change. Maner Costerisan specialized experts provide manufacturing businesses a range of accounting and financial management solutions. From CFO-level to part-time bookkeeping needs, our advisors can eliminate headaches and pain points in the financial sector of the business while supplying critical information on a timely basis to help leaders make decisions.