Funding inventory internally or from external debt sources is a key component for any manufacturer.

Having capital tied up in inventory is a balancing act of fulfilling work in progress, understanding your cash conversion cycle and ensuring that you have adequate funds for the entire operation to run efficiently.

The process of transforming finished resources into completed products is known as Production.

This differs from manufacturing as there are no raw materials used as input to produce goods. Confusingly, both types almost always fall under the industry term of “manufacturing“.

An example of production would be an operation that buys in finished components (or inventory) and assembles them to produce a final product. Think of it as an automotive production line or “assembly line“.

We see this in “contract manufacturing“, particularly in the beverage and food industry. For example:

• Finished ingredients (the liquid beverage)
• Printed labels
• Glass bottles
• Packaging for finished boxed goods

The above items are purchased, delivered and assembled together to produce the contracted work, in this case, bottling of the client’s beverage product for end consumption.

Factories that operate this way, often source inventory from multiple locations to service contracts or purchase orders.

How does funding work?

Often a business owner will seek out a bank overdraft, however, depending on the Director’s willingness to pledge property assets and/or there is enough equity, this can often fail to meet the size requirements.

It’s important for the funding to match the production cycle.

Funding should be matched from the order into the conversion of sale to final payment. This is usually achieved through a method known as “Production Funding”, a hybrid purchase order financing tool.

An upper credit limit is provided with advances made directly to the manufacturer’s suppliers. Each advance is allowed up to 90 days with an additional 90 days provided once the inventory is converted, sold and an invoice raised to the customer.

Once the customer/s pay the invoice/s within the agreed credit terms (up to 90 days), funds are directed to pay down the original advance on inventory with surpluses (profits) returned to the operation for use.

Funding is provided purely on the strength of the buyer’s credit, the strength of the manufacturer’s operation and the supply chain conversion cycle. If the cycle fits within a 180-day window, it will typically be a fit for both the client and financier.

See if Stak can help with your supplier payments.

.   .   .

We regularly share our thoughts on trade finance, lending, company culture, product strategy, and design.

Stak works with clients that sell to some of the largest buyers in Australia & overseas.