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Manufacturing Industry Updates

Creative Cash Flow Strategies for Manufacturers


COVID-19 has created upheaval at both the personal and commercial level. As many factories and businesses re-open shuttered facilities, they are doing so without a blueprint for the yet to be defined “new normal.” In the absence of proven roadmaps, organizations need to look for methods and processes that make them more adaptable and resilient to future unforeseen events.  

Essential strategies to address another pandemic outbreak will include those that protect the health and welfare of employees through work-from-home options, enhanced robotics and other enablers that limit human-to-human contact. However, other essential strategies will also be needed to effectively protect the health and welfare of basic business operations through enhanced cash flow management.   

Cash Flow Dilemma

We’ve learned a lot about the economic fallout from a pandemic. One of the consequences of an unexpected economic shutdown was the abrupt impact on cash flow. When businesses needed it most, sources for working capital reviewed and tightened lending criteria. Even companies with solid financial positions found themselves in unchartered waters. There were no pre-established guardrails protecting businesses against such an unprecedented event.

Therefore, it’s logical to assume that as businesses begin their individual recovery, they will work with existing options and basic strategies that replace investing for growth with more draconian measures that limit operational and investment spending to the bare essentials. Is it possible to mitigate this level of austerity with more progressive financial structures and models?

Existing Financial Structures

Over the past several decades, leasing options have frequently been offered by manufacturers as a means to address end-user cash flow strategies. It’s a traditional enabler of capital investment that provides for multi-year payment structures. Before we delve into more transformational options, there are a few opportunities that end users can explore under these more traditional structures:

  • Sale/Leaseback: As COVID-19 casts a shadow on new investment spending, some end users are eyeballing their pre-COVID-19 capital purchases. If they were acquired with cash, there is an option to convert these assets into lease transactions for a quick cash injection. The resulting transactions are referred to as “sale/leaseback” transactions. In a sale/leaseback, the end user sells the asset for cash to a leasing company that, in turn, leases it back to the end user. It’s a paper transaction with virtually no operational disruption. A key component of this type of transaction involves the fair valuation of the asset at the time of the sale/leaseback. For this reason, sale/leasebacks that involve newer asset acquisitions, with available market pricing,  are easier to value and negotiate for both parties to the transaction. 
  • Lease Payment Vacation Terms and Conditions: Even with equipment lease options, most leases do not have lease payment vacations that are permitted for broad disruptive events, like pandemics. Currently, lessees must have sufficient cash flow to meet contractual minimum monthly payment commitments even during periods of disruption unless they are granted a deferral by their leasing company. Going forward, there may be an opportunity to pre-negotiate payment vacation terms for situations that arise from mandatory shutdowns. This would eliminate delinquency issues and the need for time consuming restructuring of the lease debt.

As popular as lease and sale/leaseback programs have been over the past 30 years, and even with potential changes in terms and conditions, these traditional methods may no longer be sufficient to mitigate the risk that we’ve experienced with a complete economic shutdown.   

Newer Financial Structures

Manufacturers can play a more critical role in sustaining and supporting healthy end-user demand by creating unique financial structures for the placement of their commercial and industrial assets. 

One strategy for manufacturers is to more rapidly embrace options that focus on the use versus the ownership of an asset. The simplest example might be the cost-per-copy model that the office products industry introduced several decades ago. End-user payments were based on the number of copies produced. The “per copy” price included hardware, paper, toner and maintenance. The ability to measure the number of copies, or the output, initially involved time consuming and costly manual effort.

However, this was ultimately simplified when devices were effectively connected to a network. Fast forward to today and there’s an overwhelming number of connected devices that can be incorporated into variants of this original model.  

Prior to the pandemic, these options were gaining in popularity in many industries including manufacturing to address end-user issues related to inefficient asset utilization, recycling obstacles and complex service support. Today, we can add business disruption as another key issue that needs to be addressed.

End-user pricing based on output or consumption can help eliminate business interruption costs when production is severely limited or temporarily halted. End users might pay a premium on their output during normal periods of production but are relieved of the cash flow burden during periods of restricted output.   

Depending on the terms and conditions of the underlying contracts as well as the level of risk recourse, there is often an opportunity for the manufacturer to assign end-user payments to lessors in return for lump sum cash.  

Guardrails for the Future

Capital spending is crucial for the on-going health of our economy, but new cash flow roadblocks can impede this necessary growth. Rather than be resigned to these roadblocks as part of the “new normal,” manufacturers need to establish more creative guardrails and solutions.   

As users of production and assembly assets, manufacturers may want to look at strategies for payment vacations under traditional lease structures or examine options to pay for the use of these assets under consumption or output based models. As suppliers of capital assets, manufacturers may want to stimulate customer spending by offering these same financial options to their end users.

Under certain end-user terms and conditions, these contracts can then be sold to leasing providers in order to enable immediate cash flow to the manufacturer, similar to a cash sale. Cash flow strategies can take multiple shapes and forms. 

As we look through a lens clouded by a recent pandemic, the knee jerk reaction might be to curtail capital spending. However, with creative financial structures, manufacturers can protect cash flow, sustain growth strategies and provide assistance to their customers to do the same thing. 

Diane Croessmann is a director of The Alta Group consultancy, and former executive with Lenovo Financial Services and Xerox. She can be reached at dcroessmann@thealtagroup.com.