In a previous article, we discussed a common pain point for the industrial sector: overcoming slow customer payments. Construction, engineering, and manufacturing businesses are familiar with the cash flow uncertainty this can cause. If you missed that article and are looking for tips on how to plug the cash flow leak, you can find our in-depth article here. Following the tips in that article can help you stabilise your cash flow. Once that happens, the next step is to use your cash flow to take advantage of market opportunities unique to the industrial sector.
Signs of a stable cash flow
Not sure your business is enjoying a stable cash flow? Just like there are signs of an impending crash, industrial sector businesses can look for these indicators that signal their cash flow is healthy.
- Revenue growth. Examine your profit-and-loss statement. If it reflects a steady increase in revenue month over month and year over year, that is a good indicator of cash flow stability.
- Flat spending. The perfect complement to revenue growth is flat spending. This means you are not putting out more money than anticipated. The only exception to this is if your business is growing. If that is the case, make sure your increased expenditures align with increased revenue.
- Long-term growth. Industrial sector businesses must be careful that they are not asset-rich but cash-poor. Making capital investments is an important part of growing a business. There must be a balance between expenditures and revenue to prevent a low or stagnant cash balance. Establishing an emergency fund is a smart strategy during times of positive cash flow.
- Low debt ratios. Take a good look at your debt-to-asset ratio and your debt-to-equity ratio. They are a good indicator of how much your business owes versus its total worth. A good debt-to-equity ratio is 2:1, but lower is always better.
- Profitability ratio. Divide your annual net profits by your annual sales to determine your profitability ratio. The higher the ratio, the more stable your cash flow.
Re-investing your cash
2020 was a difficult year for many reasons, least of all the pressure it placed on the industrial sector. Construction, engineering, and manufacturing businesses are closely tied to the economy. During recessions, their business volume can decline sharply. These businesses must possess strong financial flexibility if they wish to take advantage of profitable investments. Above all else, they must realise that hoarding cash during downturns is a no-win situation.
The outlook for the industrial sector is much rosier for 2021. With that in mind, if your business managed to stop its cash flow leak, there are some recommended ways to reinvest that money to help bolster sustainability.
Technology investments are never a poor choice for the industrial sector. If there is one thing the global pandemic has taught us, it's that the industrial sector must learn how to be prepared for even the most unexpected circumstances. Artificial intelligence (AI) and other technology advancements can help reduce expenses and streamline your budget. Certain technologies bring more bang for the buck, including augmented reality (AR) and smart equipment upgrades (IoT). Augmented reality is used to remotely onboard new workers and deliver continuing education to existing staff. IoT can help maximise production and automatically adjust manufacturing capabilities to reduce overhead costs.
Capital improvements such as new infrastructure and equipment vital to the operation of your business is always a good investment. Obsolete equipment that prevents you from keeping pace with the competition should be a priority for replacement when cash flow permits.
Hiring new talent is one of the best ways to keep your cash flow positive. New people bring fresh ideas to the table that can help your business achieve sustainability. Do not forget to focus on retaining top talent you already have on the payroll with incentives that excite them about helping the company grow and thrive.
Online digital marketing is one of the most cost-effective ways to get your brand on the lips of your target audience. Industrial sector businesses may not think about reinvesting some of their profits into marketing and advertising, but it should be a priority.
Maintaining and managing cash flow
If the last year has taught us anything, it's that good cash flow management during any economic conditions is key to surviving and thriving. Operating capital is the lifeblood of any business. It is especially true for the industrial sector, which relies on expensive equipment to service clients. If the tools of your trade are broken down or otherwise obsolete, you cannot outmatch the competition.
Once you have achieved a stable cash flow, it is important to effectively manage it so you do not find your business in the red again. Here are three of the best strategies for managing cash flow.
1. Keep accurate records
This should go without saying, but we will say it anyway. If you hope to maintain and manage your cash flow well, you must keep accurate records. Part of solid bookkeeping practices involves keeping a watchful eye on every area of your business operation where money is involved. Frequent checks on what is spent versus how much is flowing in are crucial to sustaining cash flow. Identifying problems early can mean the difference between having more money coming in than going out. When problems are identified, do not waste time. Quickly consult with the appropriate professionals who can help solve the situation.
2. Eliminate inefficiencies
Pinpointing any inefficiencies is a natural part of precise bookkeeping practices. It should be obvious when something is inhibiting your cash flow. Even small inefficiencies can lead to big losses down the road if they are not immediately addressed.
The best way to identify wasteful spending is by monitoring your overheads. Are you spending unnecessary funds on day-to-day business operations? Solutions may include selling outdated or infrequently used assets to free up capital to reinvest in your business.
3. Make wise investments
Cutting unnecessary spending is important, but it is not the only measure industrial sector businesses must take to maintain positive cash flow. Whilst it might sound counterproductive, investing in your business eventually increases your profit margin. This means spending more to attract talented and dedicated employees, purchasing new equipment, and expanding facilities to support future growth. The extra income from investments could be placed in a “rainy day” fund used to prevent cash from running out.
A final word on seizing the moment
Industrial sector businesses thrive when they are unafraid to re-reinvest in their sustainability. Spending wisely, not wildly, is the key to taking advantage of your positive cash flow.