In the ever-changing economic landscape, it’s critical for manufacturers to continuously evaluate their cash conversion cycle.
In this timely video, PNC’s Greg Clarkson, EVP, SBA Segment Executive, shares ideas that manufacturers can leverage to help drive success.
For more tips and ideas for manufacturers, visit our Solutions for Manufacturers.
Hello, my name is Greg Clarkson and I manage PNC's Government Guaranteed Small Business Lending Program in conjunction with the U. S. Small Business Administration. Normally, I talk about the benefits of SBA business loans, including extended maturities and lower down payments. But today, I would like to briefly talk to you about your cash conversion cycle.
This relates to the time it takes to convert raw materials to finish goods, to completing the sale, and ultimately collecting your accounts receivable. For the past 15 years, interest rates have been artificially low in an effort to stimulate economic growth. However, the recent interest rate hikes have created an additional expense if your process requires borrowing or an income opportunity if you have idle cash to invest.
Either situation warrants an examination of your cash conversion cycle to identify inefficiencies or delays. Here are some specific items to consider. Number one, don't leave idle cash uninvested. Maximize additional earnings by putting your excess cash reserves into safe, liquid investments that earn a market rate.
From money markets, to sweep accounts, to certificates of deposit, this can add revenues without increasing risk. Or it may be the right time to use excess cash to pay down debt, to reduce overall borrowing costs, and improve your company's ability to withstand economic uncertainty. Number two, evaluate how you purchase your raw materials.
You may be currently taking advantage of bulk purchase discounts, which saves money. However, if you have to borrow to obtain these discounts, it may not make economic sense. While you wait to obtain your raw materials at the lowest cost in the cycle, and minimize overall carrying costs, you want to always have enough raw materials on hand to avoid supply chain interruptions.
Number three, despite the current interest rate environment, it may be a good time to invest in new machinery or expand your production capacity and physical plant. Evaluate technology and production line configuration to ensure you can maximize efficiency, provide scalability, and maintain production quality.
This would also be a good time to take a look at your debt structure to ensure you have the right maturities, interest rates, and capacity for future capital expenditures. May be the right time to consider obtaining longer term fixed rates to minimize adjusting interest rate risk. Number four, distribution and transportation costs are always a place to review since these have a significant level of variable expenses.
Is the delivery that your product to the end users the most cost efficient method or are other options available? Five, finally, evaluate the method in which you receive payments for your products. Consider the various options for payments, including wire transfers, ACH, and credit cards. Understand that while this may speed up collections, there may be a cost associated with it that needs to be evaluated.
Accounts receivable factoring may be another option to return cash to your cycle faster. But be sure and understand all of the benefits and limitations before entering into this type of arrangement. If you sell on credit, then consider offering discounts for early payment by your customers. This will return cash faster to your cycle.
However, a critical part of offering terms is to have a written robust credit evaluation program before offering terms to your customers. There are very few things worse than spending all the time, energy, and money to produce your product, only to have to write off a sale because a customer can't pay. I hope these suggestions help.
The goal is to minimize the cash conversion cycle and keep your money working for you. Be sure and engage your trusted advisors when evaluating your business model. From accountants, to bankers, to attorneys, we are here to help maximize your returns and profitability. Thank you for listening. For more information on this and other business related topics, please visit pnc.com/insights/smallbusiness. Strengthening your business strengthens your community and supports America's economic engine. Have a great day.