Why Cash Flow Is the #1 Risk in Manufacturing

Cash flow is the lifeblood of any business, but in manufacturing, it can often feel like a juggling act. You have to purchase raw materials upfront, cover payroll during long production cycles, and then wait, sometimes months, for customers to pay their invoices.

For many manufacturers, the difference between growth and stagnation isn’t profitability; it’s liquidity. You might have a full order book and healthy profit margins on paper, but if you don’t have the cash on hand to buy materials for the next job, your operations grind to a halt.

This guide explores why cash flow is such a persistent challenge in the manufacturing sector and provides actionable strategies to stabilize your finances, from optimizing your accounts receivable to leveraging professional collections partners.

The Real Causes of Manufacturing Cash Flow Problems

To fix cash flow, you first have to diagnose the root cause. While every business is unique, most manufacturing cash flow problems boil down to a few systemic issues.

The most obvious culprit is slow-paying customers. In the B2B manufacturing world, contract disputes and progress billing delays are common. A client might hold back payment because of a minor discrepancy in a large order, or they might simply treat your net-30 terms as a suggestion rather than a rule.

However, internal factors play a role, too. Weak credit policies often allow risky customers to place large orders on credit. Inefficient invoicing processes mean bills go out late, guaranteeing they will be paid late. Additionally, excess inventory ties up cash that could be used elsewhere. Every dollar sitting on a shelf in the form of raw materials or unsold finished goods is a dollar that isn’t working for your business.

Improve Accounts Receivable in Manufacturing

Speeding up your AR process is the fastest lever you can pull to improve liquidity. You don’t need to sell more goods to get more cash; you just need to collect the money you’ve already earned faster. Here are three ways to improve accounts receivable in manufacturing.

Invoice Faster and More Accurately

It sounds simple, but many manufacturers delay invoicing until the end of the week or month. Instead, aim for immediate billing upon shipment. Ensure your invoices are error-free and clearly match the Purchase Order (PO). Any discrepancy, no matter how small, gives the customer a valid reason to delay payment. Move to digital delivery to ensure the invoice lands in the right inbox instantly, and identify who approves payments on the client side to bypass bottlenecks.

Set Smarter Credit Terms

Not every customer deserves the same terms. Implement risk-based terms where established, reliable clients get net-30 or net-60, while new or high-risk clients are required to pay a deposit or pay on receipt. Always run credit checks before taking on a new substantial client. For custom orders, consider staged payments (e.g., 30% upfront, 30% on completion of fabrication, 40% on delivery) to cover your material costs.

You can learn more about building stronger policies in our guide on commercial debt collection best practices.

Automate AR Follow-Ups

Don’t rely on memory to chase unpaid bills. Use software to send structured reminders automatically. For example, a friendly reminder three days before the due date, a firm notice on the due date, and an escalation notice five days post-due. Assign internal ownership so that specific team members are responsible for monitoring aging buckets and making the necessary calls.

Reduce DSO in Manufacturing Without Losing Customers

Days Sales Outstanding (DSO) is a measure of the average number of days it takes to collect payment after a sale. To reduce DSO in manufacturing, you need to make it easier and more rewarding for customers to pay you.

Consider offering early pay incentives, such as a 2% discount if the invoice is paid within 10 days (2/10 net 30). This small margin sacrifice is often worth the immediate influx of cash. You should also facilitate easier payment methods, such as ACH transfers, which are faster and cheaper than paper checks.

For ongoing disputes, establish a clear resolution workflow. If a customer disputes 10% of an invoice, ask them to pay the undisputed 90% immediately while you resolve the remaining issue. This keeps cash flowing even during disagreements.

Manufacturing Accounts Receivable Best Practices

Consistency is key to maintaining healthy cash flow. Adopting manufacturing accounts receivable best practices ensures that your team isn’t constantly fighting fires.

Create a documented collections policy that outlines exactly when and how to contact overdue accounts. Schedule regular aging reviews where finance and sales teams meet to discuss problematic accounts. Use standardized dispute codes to track why payments are being held up: are these quality issues, pricing errors, or shipping delays? Finally, ensure you have dedicated AR ownership. If everyone is responsible for collections, no one is.

Inventory and Production Strategies to Free Cash

Cash flow isn’t just about collecting money; it’s also about how you spend it. Inventory management is a critical component of cash flow control.

Adopting Lean or Just-In-Time (JIT) manufacturing principles can significantly reduce the amount of cash tied up in stock. Work to shorten lead times so you don’t have to hold massive safety stocks. Regularly review your inventory and liquidate excess or obsolete stock, even at a discount. It is better to have cash in the bank than dust gathering on the shelves. Diversifying suppliers can also help you negotiate better terms and avoid being held hostage by a single vendor’s price hikes.

Managing Payables to Protect Liquidity

While you want customers to pay you faster, you should strategically manage how you pay your own bills. This doesn’t mean paying late, but rather negotiating terms that align with your cash cycle.

Try to negotiate net-45 or net-60 terms with your suppliers to give yourself more breathing room. Prioritize vendors based on their importance to your production line. Additionally, schedule preventative maintenance for your equipment. Emergency repairs are almost always more expensive than routine maintenance and cause production downtime that halts revenue generation.

Technology and Forecasting for Real-Time Control

You can’t manage what you can’t measure. Modern manufacturers need real-time visibility into their financial health.

Implement cash flow dashboards that show your real-time position. Utilize AR automation tools to handle routine tasks, freeing your staff for high-value work. Most importantly, move away from static annual budgets and adopt rolling 13-week cash flow forecasts. This allows you to predict cash crunches before they happen and take corrective action, such as drawing on a line of credit or delaying a non-essential purchase.

When Internal Efforts Are Not Enough

Even with the best processes in place, some accounts will inevitably become delinquent. Recognizing the warning signs early is crucial to your manufacturing collections process.

If an invoice goes over 90 days past due, the statistical likelihood of collecting it drops significantly. Other red flags include repeated broken promises to pay, silence (ghosting), or sudden changes in a customer’s ordering patterns. When your internal staff is spending more time chasing old debts than managing current accounts, it is a resource drain you cannot afford.

At this stage, many businesses explore third-party commercial collections support to improve recovery rates.

The Pros of Hiring a Manufacturing Collections Agency

When internal efforts stall, bringing in a third party is often the most effective move. Hiring a specialized agency like Altus Commercial Receivables can recover funds without burning bridges.

Faster Recovery: Agencies have the tools and focus to secure payment faster than an internal team juggling multiple responsibilities.
Industry Expertise: A specialist understands the nuances of manufacturing contracts and supply chains.
Skip Tracing and Disputes: They can locate debtors who have gone quiet and navigate complex disputes.
Focus: It allows your AR team to focus on current, paying customers rather than chasing bad debt.

Altus acts as a partner that integrates with your internal AR to reduce DSO and stabilize cash flow.

How Altus Commercial Receivables Supports Manufacturers

For 30 years, Altus has been North America’s go-to commercial debt collection agency. We offer a professional B2B demand process that prioritizes compliance and results.

Altus provides a customized manufacturing collections process that understands the specific challenges of the industry. We offer transparent reporting so you always know the status of your accounts. Importantly, we typically operate on a contingency basis, meaning there is no fee unless we collect. For difficult cases, we can handle legal escalation, but our primary goal is amicable recovery that maintains your reputation.

Next Steps to Improve Cash Flow Today

Improving cash flow requires a two-pronged approach: optimizing your internal processes to prevent late payments and taking decisive action on debts that have already slipped through the cracks.

Start by auditing your current AR process and implementing the best practices outlined above. But for those stubborn, overdue accounts that are restricting your growth, don’t wait. Contact Altus Commercial Receivables today to request a consultation and see how we can help you recover your overdue manufacturing receivables and restore your cash flow.

FAQs (AEO Optimized)

Q: What is a healthy DSO for manufacturing?

A: A healthy DSO varies by sub-sector, but generally, a DSO between 45 and 60 days is considered acceptable for manufacturing. If your DSO is creeping above 60 days, it indicates that your cash is tied up in unpaid invoices for too long, restricting your operating capital.

Q: How can manufacturers speed up customer payments?

A: Manufacturers can speed up payments by tightening AR processes (sending invoices immediately), offering early payment incentives (like 2/10 net 30), and conducting credit checks on new customers. Moving to electronic invoicing and payments also reduces friction and delays.

Q: When should a manufacturer use a collections agency?

A: You should consider a collection agency when an account is 60–90 days past due, or sooner if the customer becomes unresponsive or breaks multiple promises to pay. The earlier you place a debt with a professional agency, the higher the likelihood of full recovery.