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A strong P&L and a cash flow problem can show up at the same time. In most manufacturing businesses, the gap between the two comes down to timing.
Why Profitable Manufacturers Run Short on Cash
If your P&L looks healthy but your bank account tells a different story, the gap is usually sitting in your receivables and WIP. It's a common pattern and the fix is usually operational, not financial. The cash is already in the business, just not where it should be.
Revenue and cash are not the same thing, and that gap becomes very real when you're staring at a strong income statement and wondering how you're going to make payroll on Friday.
You buy material, pay your people to work it, ship the part, and invoice the customer. The customer pays in 60 days, but you've already spent the cash to produce the job. Do this across dozens of jobs at once, in a business where spending is growing month over month, and the gap between what you've spent and what you've collected quickly widens.
What DSO Is Costing You
Days Sales Outstanding is the average number of days between when you invoice and when you collect. Most manufacturers don't track it, and most would be surprised by the number if they did.
DSO is usually somewhere between 45 and 75 days. Some run higher without realizing it because nobody has ever calculated it. The way to calculate it: divide your current accounts receivable balance by your average daily revenue. If you're doing $10M a year, your average daily revenue is about $27,400. If your AR balance is $1.6M, your DSO is roughly 58 days.
Now put a dollar value on what it costs to carry that AR. If you have a line of credit at 7% and you're carrying $1.6M in receivables, the annual financing cost on that balance is roughly $112,000. Beyond the direct cost, every dollar sitting in AR is a dollar you can't use to buy material for the next job, invest in equipment, or simply keep in the bank as a buffer against a slow month.
Tightening your DSO doesn't require sophisticated financial tools. It comes down to a few simple policies and a consistent operational cadence. Invoice on shipment, not on a weekly billing cycle. Follow up on invoices approaching terms before they go past due. Have a defined escalation process for invoices that go past due.
WIP as a Cash Trap
WIP is cash you've already spent that you haven't billed yet. Material, labor, overhead, all of it sitting on your floor waiting to move to the next operation or ship, and in most operations it sits longer than it needs to because partial completion keeps getting interrupted by hot jobs.
A job is 60% complete when a customer calls about a late order. The crew gets pulled, the job sits, something else comes in, and two weeks later that job that should have shipped ten days ago is still on the floor and the invoice hasn't gone out.
The fix is tightening job priorities so partially complete work doesn't get set aside when something more urgent arrives. That means a written priority list the floor and the office both understand and follow, and someone with the authority to hold that line when a customer calls with pressure. It also means scheduling with enough visibility to see a hot job coming before it becomes an emergency. When that discipline holds, jobs complete in sequence, ship on time, and the invoice goes out when it should.
The Customer Terms Problem
Most manufacturers accept whatever payment terms a customer proposes because the relationship feels important and pushing back feels risky.
What most haven't done is calculate what those terms actually cost. A customer doing $500K a year with you on 90-day terms is keeping roughly $125K of your cash at any given time. If your cost of capital is 7%, that customer is costing you about $8,750 a year in financing costs you're not recovering. That's before you account for the collections effort, the follow-up calls, and the stress of watching that invoice age.
Knowing what those terms cost doesn't mean you should fire every slow-paying customer. It means you should factor the real cost into how you price their work, whether you pursue more business from them, and what terms you're willing to accept going forward. A customer on 90-day terms isn't necessarily a bad customer, but they should be a more profitable one than a customer on 30-day terms because they cost more to serve.
The manufacturers that manage this well have a simple rule: extended terms get priced in, and if a customer wants 90 days, the quote reflects the cost of carrying that receivable.
What Tightening This Up Looks Like
Invoice on the day the job ships, not on Friday and not at the end of the month. Every day between shipment and invoice is a day added to your DSO for no reason. When an invoice is approaching its due date, follow up before it goes past due — by the time most manufacturers make that call the invoice is already 30 days late, the customer’s AP department has moved on, and your leverage is gone. The call at day 25 of a 30-day term is far more effective and far less uncomfortable. WIP sitting on the floor is a cash flow problem with a scheduling solution. Partially complete work that keeps getting interrupted is just an invoice that hasn’t gone out yet — tighten the priority discipline and the cash follows. Finally, know what your terms actually cost by customer, not in aggregate. A simple spreadsheet of your top twenty customers, their average days to pay, and their revenue tells you exactly where the problem is concentrated and which relationships are worth renegotiating.
Reach out at veritops.com/meet if you'd like to talk through what this means for your business.
