Finland's manufacturing industry is internationally competitive: metal processing, engineering, food manufacturing, and wood processing are our traditional strengths. Yet the biggest challenge for manufacturing entrepreneurs is often not winning orders – but financing them. Raw materials must be purchased before production, salaries are paid monthly, but revenue does not arrive until weeks or months later.
The Anatomy of the Manufacturing Cash Flow Challenge
The manufacturing cash flow challenge is multi-layered. A company's capital is tied up in three places simultaneously: raw material inventory, work in progress, and accounts receivable. This is known as the working capital cycle, and in manufacturing it is typically longer than in any other industry.
As an entrepreneur, I have seen cases where order books are full, production runs in three shifts – and yet a cash flow deficit threatens the entire company's operations. This is the manufacturing paradox: the more you sell, the more working capital you need.
According to the Federation of Finnish Enterprises, 55% of manufacturing entrepreneurs consider working capital adequacy a significant challenge. According to Statistics Finland, the average accounts receivable turnover for manufacturing companies is 48 days.
The Working Capital Cycle in Manufacturing
Typical working capital cycle for a manufacturing company:
- Day 0: Raw material order – payment term to supplier 14–30 days
- Day 14–30: Raw material payment to supplier
- Day 7–60: Production process (from raw material to finished product)
- Day 60–90: Delivery of finished product to customer and invoicing
- Day 90–150: Customer payment (30–60 day terms from invoicing)
- Total: Capital is tied up in the process for 90–150 days
This means that financing a EUR 100,000 order requires working capital throughout the entire production cycle. If a company's annual revenue is one million euros and the working capital cycle is 120 days, approximately EUR 330,000 is continuously tied up in receivables and inventory.
Invoice Financing in Manufacturing
Invoice financing partially solves the working capital cycle problem: it significantly shortens accounts receivable turnover. Instead of waiting 30–60 days for customer payment after delivery, you receive the funds within 24 hours. This frees capital for financing the next production run.
In my experience, manufacturing companies benefit from invoice financing especially when the order book grows rapidly. A new large order immediately requires raw material purchases and personnel – but payments from the previous order are still coming in. Invoice financing bridges this gap.
Manufacturing Financing
Tailored financing solutions for manufacturing companies
Financing Raw Materials and Inventory
Raw materials are manufacturing companies' other major capital tie-up point. Procurement of metals, wood, chemicals, or components often requires advance payments or short payment terms. At the same time, raw material inventory ties up capital that produces nothing until the product is manufactured and sold.
Raw material financing options:
- Supply chain financing: The finance company pays suppliers' invoices faster; the company pays the finance company on longer terms
- Inventory financing: Raw material or finished goods inventory serves as loan collateral
- Invoice financing: Freed cash flow is directed to raw material purchases
- Supplier payment terms: Negotiate longer payment terms with key suppliers
- Finnvera working capital loan: Suited for larger raw material batches and seasonal stock
Financing Investments
A manufacturing company's competitiveness largely depends on its production machinery and processes. Machinery investments are expensive – a new CNC machine can cost EUR 100,000–500,000, a production line millions. Several options exist for financing investments, and the right choice depends on the investment size and the company's situation.
Manufacturing investment financing options:
- Finnvera investment loan: Affordable interest rate, long repayment period. Requires a growth plan.
- Leasing: Does not tie up capital; monthly payments are predictable. Suited for technology that becomes obsolete quickly.
- Hire purchase: Machine transfers to ownership after the payment period. Suited for long-lasting production equipment.
- ELY Centre business development grant: May cover 20–35% of the investment in certain regions.
- Business Finland: R&D funding for developing and deploying new technology.
According to Finnvera, investment appetite among SME manufacturers has grown significantly. At the same time, access to financing is considered a challenge – especially for smaller companies that lack sufficient collateral for traditional bank loans.
Practical Tips for Manufacturing Entrepreneurs
Best practices for cash flow management in manufacturing:
- Invoice as quickly as possible after delivery – every day of delay is another day in receivables
- Negotiate advance payments for large orders – e.g. 30% of the order value at the start
- Use invoice financing to accelerate the largest invoices – free capital for production
- Optimize inventory levels – excess stock is tied-up capital
- Prepare a cash flow forecast based on the production plan – anticipate capital needs 3–6 months ahead
- Combine financing models: invoice financing for working capital, leasing for machinery, Finnvera for major investments
"When we received a large export order, we immediately needed EUR 200,000 for raw materials. A bank loan would have taken weeks. With invoice financing, we freed up our previous invoices' receivables and were able to start production the following week."
Summary
Manufacturing cash flow challenges are structural: a long working capital cycle, raw material advance payments, and customers' long payment terms tie up significant capital. Invoice financing shortens accounts receivable turnover and frees capital for production. Combined with supply chain financing, inventory management, and the right investment financing options, a manufacturing company can grow steadily and competitively.
📌 Summary
The manufacturing working capital cycle is typically 90–150 days. Invoice financing shortens accounts receivable turnover and frees capital for production; the cost is 1–2.5%. Supply chain financing suits raw material procurement; Finnvera loans or leasing suit investments. Cash flow forecasting based on the production plan is critical.
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