DUBAI, UAE, 18 August 2019: Manufacturers need to have tight reins on the cash flow if they are going to be successful, said Ahmed Fahmy, Chief Financial Officer (CFO), SKM, who pointed out that considering manufacturers often have to wait for payments far longer than other businesses, such as those in retail, cash flow management is one of the most vital aspects of a manufacturing company. “For manufacturers, the cash flow is everything, as the business cannot produce more products without having enough money to fund it,” he said. “Manufacturers have a longer cash conversion cycle than other businesses, starting from purchasing and stocking raw material to manufacturing the products, then the wait time to deliver and, after that, the customer payment terms.”
The longer cash conversion cycle is only one of the challenges manufacturers have to face, as many also deal with additional stressors, such as deadline pressures. Fahmy pointed out that manufacturers need to undertake smart approaches when it comes to handling such stressors on the supply chain. He said that smart stocking agreements with the manufacturer’s supplier of raw material is a must, as well as multiple line-up of suppliers for each of the main raw materials.
Fahmy added that manufacturers must also be vigilant when it comes to identifying potential red flags in contracts, as some are critical and dangerous, especially when the project involves production of non-standard or customised HVAC products. He explained that when such projects are cancelled in the event a contractor withdraws, this will result in heavy losses for manufacturers, because even though it may be backed up by strong contractual terms and conditions, the products can no longer be sold to other customers.
Fahmy said it is important for manufacturers to be flexible when looking at different versions of contracts and that it is important to have a holistic approach. “All legal, sales, commercial, logistics and technical clauses need to be reviewed by the respectful departments and reviewed as a whole by the company heads to consolidate all risks and opportunities in the contract to take decisions,” he said. Fahmy also emphasised the strong value of investing in legal consultation from the onset. “In sensitive market situations, it will be foolish not to have legal consultation on contracts,” he said. “The risk mitigation, in my opinion, is a must, as it may cost a lot and even take businesses down.” He added that a strong finance setup in any organisation will always calculate the risk compared to the cost of mitigating risk.
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Hannah Jo Uy is Assistant Editor at Climate Control Middle East magazine. She may be contacted at email@example.com