A nd whilst the term may now have some critics during recent high inflationary times, it’s still an important concept to consider, particularly for businesses with high capital costs, such as those within the Manufacturing and Engineering sectors. Sam Willis, Audit Associate, explores how and why businesses in the sector should be looking to optimise their cash flow for both stability and future growth. Cash is a key driver of any business and in recent times when interest rates have continued to rise, the ability to pay off debt is becoming increasingly difficult, meaning that future liquidity issues for some businesses are almost a given. And whilst this isn’t to say that for the nearly 2000 manufacturing businesses in the UK who entered insolvency in 2024*, that a cash flow forecast would’ve stopped them from entering administration. What can be said is that keeping on top of cash flow can certainly help to indicate if there is trouble on the horizon. What is a Cash Flow Forecast? Firstly, let’s start with a simple definition: cash flow forecasting is the process of estimating the inflows and outflows of cash within a specific time frame, typically on a monthly or quarterly basis. It involves projecting the expected cash receipts and payments and considering various factors that could influence the financial operations of a company. This forward-looking analysis allows companies to anticipate potential cash shortages, plan for investments, make informed decisions, and implement strategies that ensure their financial stability. What is Working Capital? Working capital, is the money available within a business to be used for its day- to-day operations, and it’s what keeps the metaphorical engines of manufacturing and engineering companies going. Cash flow forecasting aids businesses to manage their working capital effectively. By estimating future cash inflows and outflows, a company can adjust its expenditure, negotiate favourable credit terms, and make sure it has enough liquidity to meet its operational needs. This proactive approach prevents the costly consequences of delays and can help mitigate unexpected expenses, both of which can disrupt operations and damage client relationships.
Planning for Seasonal Fluctuations Many manufacturing companies will experience seasonal fluctuations in demand. Whether due to increases around holiday periods, seasonal sector demand (such as retail) or industry-specific trends, these fluctuations can significantly impact resources such as staffing, stock holding, machinery usage and subsequent maintenance, which will then in turn affect cash flow. But cash flow forecasting enables companies to anticipate these shifts and allocate resources accordingly. By knowing when and where demand is likely to spike or dip, companies can adjust their staffing, usage requirements, project cycles, transportation and storage capacities, to make sure they can meet customer demands without overcommitting resources during the quieter periods. Navigating Capital Expenditure in the Manufacturing and Engineering Sector In this industry staying ahead often means making strategic investments in things like technology, machinery and equipment, storage facilities and vehicle and transportation management. Investments can range from expanding plants or warehousing, to upgrading facilities to become more energy efficient, installing new machinery or automation software and acquiring new vehicles to support operations. Cash flow forecasting helps to provide the financial insights necessary to plan and execute these investments without putting undue strain on the company’s cash balances. Allowing you to then use the information to evaluate whether or not you have the funds to cover the costs straight from the bank or if other financing options are required. Making Informed Decisions Manufacturing and engineering are dynamic sectors, meaning that decisions must often be made promptly and accurately. Cash flow forecasting can facilitate this by providing decision-makers with accurate and timely financial insights. Whether it’s determining whether to expand into a new market, negotiating contracts with customers, or the use of external financing, having a clear picture of the financial implications of future strategy is invaluable. The process has become even more of a consideration after events in recent years that have significantly impacted cross border activity, supply chains, labour and material availability, interest rate fluctuations and technological advances.
Now more than ever it’s crucial that contingency plans are in place. And by using cash flow forecasts, decision-makers can analyse and make informed decisions on varying scenarios and ‘what-if’ events to ensure plain sailing through the murky waters.
A Critical Survival Tool In capital-intensive industries like
manufacturing and engineering, cash flow forecasting isn’t just helpful — it’s critical to survival and growth. With unique challenges such as long project cycles, large upfront costs, fluctuating material prices, and extended payment terms, liquidity can easily be over- stretched And with continuing global disruptions the need for accurate, forward-looking cash flow insights has never been greater. Because it’s not just about seeing what’s in the bank today — it’s about understanding what’s coming, weeks or even months ahead, so that you can stay agile, resilient, and competitive.
Here at Scrutton Bland we can help you overcome your cash flow challenges by:
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Carrying out an initial cash flow review to identify both ‘quick wins’ and opportunities for longer-term improvements. Benchmarking your working capital cycle to compare against your peers’ performance and identify potential opportunities to improve. developing detailed action plans for your business, where the dependencies between cash, costs and customer service are optimised. Recommending appropriate technology solutions so that your company is making the best use of the latest cloud-based accounting packages and apps Supporting the implementation of sustainable procedures, optimising your processes throughout your working capital cycles, and identifying and improving commercial terms
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Get in touch with Sam or one of the team to find out more by calling 0330 058 6559 or email hello@scruttonbland.co.uk *data taken from the Company Insolvency Statistics Commentary - Company Insolvency Statistics September 2024 - GOV.UK
MANUFACTURING A N D ENGINEERING | SCRUTTON BLAND | 5
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