In the past few episodes of Building Your Multi Million Dollar Practice we've been discussing how fiscal management and cash flow forecasting are important in unique ways to different types of businesses. Our last episode started breaking down the sectors by covering discreet manufacturing. In today's episode of "Building Your Multi-Million Dollar Practice," we dive into process manufacturing businesses and how you can best help them. A process manufacturer creates products from raw materials, like a winery or a wooden furniture builder. Inventory and run time are particularly important, which means that advising them has to take specific areas into account.
The fiscal management factors that play into process manufacturing vary by the type of company. When you, as their advisor, are able to consider the "what-ifs" and ask the right questions, this leads to better cashflow forecasting. This, ultimately, addresses their biggest need: long-term cashflow forecasting. When advising for long-term stability and growth, the factors that can affect process manufacturers are:
Raw material cost
- Some of the largest process manufacturing companies are food manufacturers. They capture whole markets of food and work closely with the agricultural sector, but with this comes risk. Process manufacturers need to be aware of the the risk involved with crops, since a harvest isn't always guaranteed. This is factored into the cost of the raw material, and many times process manufacturers create long-term contracts with the raw material supplier to help control the supply of food coming in.
- Finding a balance with the amount of raw material is crucial. A process manufacturer wants to have enough inventory to meet demand, but not get all of the company's cash tied up in inventory that sits on shelves. This balance also needs to be worked out with the supplier, as they can manage holding their inventory before it passes to the process manufacturer. Just as cashflow forecasting into the future is crucial, forecasting for raw materials is key to making sure there are no hiccups. How far out does your inventory need to go? What's the quantity you need? Projecting the raw material needs will ensure that you can always meet demand.
- Cash reserves help maintain your liquidity from the time someone orders items until the are delivered. A process manufacturer needs to have sufficient cash reserves to float the company for any unforeseen delays. Although the amount you keep may vary, we recommend having 2.5-3x the general administrative fixed costs for a month. If the process manufacturers don't spend it, it's easy to turn this into net pre-tax profit at the end of the season.
- Capacity and efficiency rely heavily on what you're manufacturing. Some products have a shelf life, which means that the capacity can't be bigger than the demand, as expired products aren't able to be sold. If there isn't a termination date, then the capacity isn't as dependent on the demand, but can easily be altered if demand grows. When demand grows, there are many "what-ifs" that can be considered: Do you hire more people? Do you slow down the order? Do you fulfill the order in pieces? Do you start an extra shift? You have to compare the revenue vs. the cost of sales/cost of goods to figure out what strategy is best.
Essentially, there are a lot of variables when it comes to process manufacturing, so your job as their advisor is to help them weigh all of these different fiscal management factors and choose a path. At the end of the day, they want financial stability and increased profitability, and this comes when they can accurately forecast. Through proper monitoring of inventory, efficiency, cash reserves, and forecasting, process manufacturers can accurately assess their cashflow and plan for the future.
Listen to the episode to learn more, or book a time with our team to learn more and get started today!