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.
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:
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:
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.
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!}
Now that you know the top financial challenges for SMEs in the manufacturing sector, want the solutions to these problems too?
Stay tuned for the next part of this blog where we’ll spill the beans on some useful tips and tricks to conquer these challenges and keep that cash flowing in your business. We’ve got some practical and tangible solutions – that you can actually implement in your business,
coming your way and not just gyaan!
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!
Feel free to book a slot here for a personal one-to-one review with one of our business consultants: https://calendly.com/reachout-_g/30min?month=2023-06
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.
- Excessive Inventory Levels
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
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.
- 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
- ROI generation
- Unfavourable Debt Structure
Now that you know the top financial challenges for SMEs in the manufacturing sector, want the solutions to these problems too?
Stay tuned for the next part of this blog where we’ll spill the beans on some useful tips and tricks to conquer these challenges and keep that cash flowing in your business. We’ve got some practical and tangible solutions – that you can actually implement in your business,
coming your way and not just gyaan!
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!
Feel free to book a slot here for a personal one-to-one review with one of our business consultants: https://calendly.com/reachout-_g/30min?month=2023-06
