In a rapidly changing world, the manufacturing industry faces significant challenges due to disruptions and uncertainties. Micro, Small, and Medium Enterprises (MSMEs) in particular struggle with supply chain disruptions and workforce issues. However, MSMEs are crucial to the manufacturing landscape, comprising around 90% of all enterprises and employing about 70% of the manufacturing workforce globally.
Despite these challenges, these companies have great potential for growth and innovation. Embracing Industry 4.0 opportunities like automation and digitalization can help them compete effectively with larger enterprises. They contribute to GDP growth, foster innovation, and drive export potential, making them vital to the global economy.
Navigating the Financial Hurdles in the Manufacturing Maze
Due to the nature of this industry, the most common manufacturing challenges the companies face is – managing cash flows (apart from the multiple others, although we can help you there too!).
Cash flow serves as the fuel, helping their businesses to move forward. But, when your available cash is allocated to debts, assets, and overhead expenses, you’ll have little left to invest in new components and production.
Even though that doesn’t sound as bad, it can create a multitude of problems like – financial losses, dissatisfied customers, and much more.
Here are the 6 key financial challenges for companies in the manufacturing sector:
- Non-Profitable Production Lead Time:
Efficiently managing the time it takes for production is essential for business owners looking to control costs. Lengthy assembly periods can tie up valuable capital and hinder potential investments. By minimizing idle time and optimizing the allocation of resources, business owners can effectively reduce expenses and guarantee timely delivery, thereby avoiding order cancellations and refunds.
Let’s look at the impact of a higher lead time with the help of Telsa.
In 2017, Tesla Motors announced that it would be producing its Model 3 electric car at a new factory in Fremont, California. The company had originally planned to start production in 2016, but delays pushed the start date back to 2017.
The delay in production caused Tesla to incur additional costs, including:
- Rent and utilities for the factory.
- Interest on loans
- Wages for employees who were not yet producing cars.
The delay in production also led Tesla increasing their prices. Tesla had originally planned to sell the Model 3 for $35,000, but the final price was $39,990.
- Excessive Inventory Levels
Excessive inventory ties up cash, jeopardizes profitability, and exposes businesses to setbacks like shrinkage and spoilage. It helps gauge the company’s effectiveness in converting their stock into sales.
Hence, it’s very important to manage your inventory turnover period. But, how do you keep track of this metric? This is where the inventory turnover ratio helps!
Inventory turnover enables businesses to make informed decisions about aspects such as – pricing, manufacturing, marketing, purchasing, and warehouse management.
- Customer Credit
Being generous with customer credit may seem like a good way to build relationships, but it can hurt your business’s profits. When customers delay payments, it creates a gap between inventory purchase and cash flow, limiting your available funds.
But, how do you know which customer has delayed payment and their payment pattern? This is where DSO – Days Sales Outstanding, comes in!
It measures how long it takes a company to collect payments from its customers. It’s important to manage DSO effectively during customer credit policies.
Let’s take the example of one of our marquee clients, a 55 year-old industrial battery manufacturer who serviced every major power company. They constantly struggles with liquidity issues and often resorted to bank funding. Why was this? – Because their debtors never paid on time.
How did Contetra help them resolve this issue? We identified their major issue, which was – their Debtor Collection. We helped them reduce their debtor collection period from 75 days to 45 days by modifying their working capital policy. They did not need to resort to bank funding anymore and had more funds at their disposal.
{Read here to know more about how DSO can help you identify which of your customers are actually making you profits!}
- Segmental Profitability
Segmental profitability can be a major financial challenges for companies in the manufacturing sector Accurately determining the profitability of each business segment is complex due to shared resources and cost allocation. Inaccurate analysis can lead to inefficient resource allocation and misguided pricing decisions, impacting overall financial performance.
To understand this better – let’s look at one of our other clients – MDS, a pioneer in digital marketing. They had no visibility on segment-wise profitability due to which the company had no direction for allocation of fixed costs. How did Contetra help them? We gave them a breakdown of:
- Segment-wise sales and insights from those on which segment they were performing better in and where they were not
- Geography-wise sales analysis and insights on which states they were performing better in
- Geography-wise breakdown of their segments to know which segment was working best in which state
This helped them have better visibility of their revenues and resulted in their budgeted figures increasing by a whopping 50%!
- ROI generation
Generating a strong return on investment (ROI) is crucial for manufacturing industries. According to industry data, companies that effectively manage ROI see an average increase in profitability by 10-15%. Challenges arise from diverse investments, fluctuating market conditions, and lengthy payback periods, which can lead to inaccurate ROI calculations. In fact, studies show that 40% of manufacturing companies struggle with accurately assessing ROI. However, optimizing ROI can lead to efficient resource allocation and growth opportunities.
- Unfavourable Debt Structure
Manufacturing industries require substantial capital for investments, and statistics show that approximately 70% of manufacturing companies rely on loans to finance their operations. However, managing debt effectively is crucial as studies indicate that 40% of manufacturing companies face challenges in meeting debt obligations. Implementing debt restructuring strategies has been shown to reduce financial risk by up to 25% and improve long-term financial stability. By negotiating favourable loan terms and exploring alternative financing options, manufacturing companies can mitigate the burden of debt and enhance their overall financial position.
At Contetra, we have worked with 125+ business owners to – release blocked cash, prepare their business plan, set budgets, remove bottlenecks, and implement other strategies to take their business to new heights!
Set up a FREE exclusive call with our team of strategic consultants who will give you effective solutions!
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