6 Mistakes Manufacturers Make With Their Finances (and How to Fix Them)
6 Mistakes Manufacturers Make With Their Finances (and How to Fix Them)
Manufacturing is having a better year than it's had in a while. Order books are healthier, sentiment has improved, and there's a sense of momentum returning to the sector after a difficult few years. But better trading conditions don't automatically mean better financial health. Manufacturing insolvencies remain stubbornly high even as confidence rises, and the businesses that get caught out are often those whose finances haven't kept pace with their growth.
If you have unhealthy financial habits, good conditions will only delay the point at which those habits catch up with you.
I work with a few manufacturing businesses (one of which is my husband’s!), and I’ve noticed the same handful of issues come up again and again in businesses that are, by every outward measure, doing well. Here are the six I see most often, and what to do about each one.
1. Managing stock purely from an operational decision, not a financial one
Stock is usually managed by the people closest to production and fulfilment, which makes sense operationally. The problem is that stock decisions are also financial decisions, and they don't always get treated that way.
Carry too little stock, and you risk missing orders or paying a premium for rushed replenishment. Carry too much, and you've tied up cash that could be working elsewhere in the business, such as funding a hire, new piece of equipment, or simply giving you more breathing room. I find a lot of manufacturers know intuitively when stock feels too high or too low. Far fewer are looking at what that stock position is actually doing to their cash flow and liquidity.
The fix is connecting your stock management to your cash flow forecasting, so decisions about what to hold and when to reorder are made with the financial picture in view, not just the production schedule.
2. Underestimating the complexity of imports and exports
Many manufacturers either bring in components from overseas or send finished products abroad, and the financial side of that- customs duties, VAT treatment, and the rules around international trade - is more involved than it first appears. It's an area that's easy to under-resource, because it doesn't feel like the core of the business, even though it directly affects margin and cash flow on every order that crosses a border.
The fix here is to stop treating import and export costs as a fixed fact of doing business and start reviewing them properly, at least once a year, ideally more often if your supply routes or trading partners change. That means checking whether you're classifying goods correctly, whether you're paying more duty than you need to, and whether the cash flow impact of import VAT is built into your forecasting rather than just absorbed as a surprise each time. It's often where easy savings are hiding, simply because nobody's looked closely enough at it in a while.
3. Planning labour reactively instead of financially
Payroll, shift patterns, and capacity are usually managed day-to-day in response to what's needed right now. But with wage costs and employer National Insurance both having risen, labour is one of the fastest-moving parts of a manufacturing business's overheads, and it deserves the same forward planning as any other major cost.
The businesses that get caught out are the ones treating labour cost as fixed and unavoidable, rather than something to actively model against demand. If you can see three months ahead what your order book requires, you can plan your staffing and capacity to match it, rather than reacting once the pressure is already there.
4. Only knowing overall profitability, not profitability by product line
A manufacturing business will have a good general sense of whether it's profitable overall, but very little visibility into which products, sales channels, or customer types are driving that profit.
Selling directly to consumers usually generates a different margin to supplying trade customers. Different product lines carry different production costs and different pricing power. Without breaking profitability down to that level, it's entirely possible to be busy, growing, and profitable overall, while subsidising your least profitable lines with your best ones.
5. Forecasting without building in seasonality and supply chain risk
Manufacturing is exposed to repeat order cycles, seasonal demand, and global supply chain disruption in a way that many service businesses aren't. A static budget produced once a year and left largely untouched doesn't hold up well against that kind of variability.
Forecasting needs to flex with what's happening, not just internally, but in the wider world. That means revisiting projections regularly, not filing them away in January and pulling them out again the following December.
6. Not treating the sales pipeline as a financial early-warning system
This is the one I'd put at the top of the list if I had to choose. If orders start to slow, a manufacturer's cash position can deteriorate fast, because stock, labour, and overheads don't slow down at the same rate. The costs keep coming even when the revenue doesn't.
Pipeline health tends to be treated as a sales metric, tracked and discussed in a sales meeting, rather than viewed through a financial lens. But understanding your cash runway, how long the business can comfortably run if the pipeline weakens, and spotting the early signs of a slowdown before it shows up in the bank balance, is one of the most valuable things a manufacturing business can build into its regular financial routine.
What next?
If you’ve recognised any of these, it’s not a criticism of you or your ability to run your business. They're just highlighting the gap between what's happening operationally, on the shop floor, in the warehouse, in the sales pipeline, and what that means financially. Manufacturing businesses are often excellent at the first part and under-supported on the last one.
I'm currently working with a client on this gap: rebuilding their stock management, cash flow planning, and setting a proper financial focus for the year ahead, after things had become a little muddled under previous arrangements. It's ongoing work, not a one-off fix, and it's a good example of what proper financial partnership looks like in a manufacturing business day to day.
If any of this resonated, take a look at our fractional FD service where we provide a trusted partnership without the costs of a full-time hire to get all of this and more sorted.
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