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Working Capital for Manufacturers & Distributors

While some issues that severely affected the manufacturing and distribution industries during and immediately following the pandemic have subsided a bit—particularly supply chain bottlenecks and labor shortages—it’s not necessarily smooth sailing for all manufacturers and distributors. One of their best strategies for success is to focus on managing consistent working capital, which will provide the resources necessary to achieve growth objectives and execute their vision.

Let’s dive into the subject of working capital for manufacturers and distributors by starting with some basics.

What is working capital? Working capital is the difference between a company’s current assets—including cash, accounts receivable, and inventories of raw materials and finished goods—and its current liabilities, such as accounts payable and debts. It’s a good measure of a company’s liquidity and short-term financial health.

Positive working capital indicates a company can fund its current operations and invest in future activities and growth. But having high working capital isn’t necessarily a good thing, as it might indicate having too much inventory, not investing excess cash, or not capitalizing on low-expense debt opportunities.

What are the benefits of working capital? Having the right amount of working capital is beneficial for any business because that leads to increased cash flow, liquidity, and solvency, as well as:

  • Greater business agility
  • More effective inventory control
  • Greater leverage for negotiating with suppliers
  • Better management of accounts payable
  • Greater attractiveness to investors
  • Expanded funding options

Working capital is the lifeblood of manufacturing and distribution organizations because they need to keep investing in their businesses—and good working capital management frees up cash to fund those investments.

Now let’s change gears a bit and discuss some of the challenges manufacturers and distributors typically face that reflect on how they manage working capital.

One of the hardest things to manage is inventory, finding the perfect balance between excess inventory—tying up too much working capital—and insufficient inventory, which can stifle growth and damage customer relationships. A close second is operating costs since working capital can dwindle as costs for things like R&D, rent, equipment, and sales/marketing increase. Customer payments also affect working capital, especially if they are late, as does the fact that many manufacturers and distributors handle daily accounting functions manually—when they would be better served to streamline their behind-the-scenes operations.

What are some things that can help beef up working capital? Three options are getting a working capital loan, obtaining new assets, and securing a line of credit that can be drawn from when necessary. No two companies will have the same working capital needs, so how to get to that “sweet spot” is going to vary from case to case.

Clear Skies Capital has helped many businesses secure working capital. Contact us today at 800-230-9822 to discuss your manufacturing or distribution company’s needs.