Should the Shop Make Extra Stock to Keep Busy?

Imagine this. An owner and a bookkeeper are looking at next month’s production schedule. There are gaps between customer jobs, and the owner wants to fill them by making another 1,000 units of a standard part.

This is a composite for instruction. The people, dialogue, figures, and proposed production run are invented.

“We’re paying for the building and the machines anyway. Why leave them sitting?”

The parts sold well earlier in the year. Making them now would spread the month’s overhead across more units and leave stock ready for the next order. The production supervisor can fit the run into the schedule without hiring anyone.

The bookkeeper sees a different problem. The supplier will want payment before anyone has ordered those extra parts, and payroll still needs cash on Friday.

Neither person is being unreasonable. The owner wants to use available capacity; the bookkeeper wants to know what that choice will cost before a customer pays. Their next conversation needs to connect the production plan to the bank balance, including what happens if the expected order never arrives.

Busier factories don’t guarantee buyers for the shelf

The Federal Reserve’s October 16 release reported that manufacturing output rose 0.3% in September. Manufacturing capacity utilization reached 75.9%, still 2.3 percentage points below its long-run average.

These are seasonally adjusted national measures, and September’s figures are preliminary. The Fed measures production and estimated capacity, not orders for this shop’s parts or the dates its customers will pay.

It’s easy to read rising output as encouragement to get machines running. But an available production slot doesn’t tell the owner whether another batch deserves the cash it will consume.

Start by asking why the shop wants to make the extra units. Is a customer waiting for delivery? Does reliable order history support holding this item, or does the proposal mostly make the production report look better?

Those answers change the analysis. Stocking a proven replacement part can protect sales when customers need immediate delivery. Producing a part after demand has faded can leave the business paying to store something it may later discount.

Ask the owner to show the evidence for the next sale. Review units on hand and recent shipments alongside open orders, including any customer right to cancel. Then check whether customers have changed specifications since the last batch.

A lower cost per unit may leave less cash

Suppose the composite shop expects to make 2,000 units this month and has $20,000 of fixed production overhead. For this simplified management comparison, spreading that overhead evenly gives $10 per unit.

Add the proposed 1,000 units, and the same $20,000 spreads across 3,000 units. The allocated overhead falls to about $6.67 each. The rent payment hasn’t fallen by a dollar.

That distinction matters when someone calls the lower unit figure a saving. Allocation describes how a cost is assigned; the cash forecast needs to show which payments actually change. The company’s accountant should determine the appropriate inventory costing and financial reporting treatment separately.

Assume the additional run requires $12,000 of new materials and $3,000 of outside finishing and variable production costs. Both amounts are incremental, payable within three weeks, and exclude the fixed overhead already in the plan. No additional wages are assumed in this example.

The business must therefore fund another $15,000 before any additional customer receipt. The existing payroll belongs in both cases; counting it again as a new withdrawal would overstate the batch’s cash cost.

Use actual purchasing records to test the assumptions. Already-paid material won’t create a second payment, although using it may bring forward a replacement purchase. Overtime, extra freight, or storage charges would add cash requirements if this run causes them.

Put the batch on the same calendar as payroll

Build the ordinary operating case first in the 13-Week Cash Flow forecast. Include current customer receipts, committed purchases, payroll, and other expected bank movements. Leave the proposed extra run out of this first version.

Now copy that case and add only the payments and receipts caused by the batch. Use supplier payment dates rather than the day production begins. A purchase on credit still needs a bank withdrawal later.

In the composite, the ordinary case ends week two with $42,000 and week three with $38,000. Materials for the additional batch require $12,000 in week two, followed by $3,000 for the remaining costs in week three.

With no additional receipts, the batch case ends those weeks at $30,000 and $23,000. The owner has chosen a $25,000 minimum balance, so week three falls $2,000 below that floor. That is a reserve shortfall, not a negative bank balance or a $2,000 loss.

Check the days within the tight week, too. A Friday receipt cannot fund a Wednesday payment unless cash is already available or an agreed funding arrangement bridges it.

Don’t enter a sale merely to make the batch case work. Add receipts only when supported by a defensible sales assumption and a realistic collection date. Where demand is uncertain, keep a separate no-sale case through the forecast window and carry unsold stock beyond it.

Decide how much stock the evidence supports

The advisor now has something useful to discuss. The full run uses $15,000 and breaches the owner’s floor before any added receipt, while its apparent overhead saving does nothing to reduce the rent payment.

Compare waiting for an order with making a smaller batch. At the illustrative $15 incremental cost per unit, 200 units would require $3,000, provided supplier minimums and setup costs don’t change that amount. Have the production manager verify that a smaller run is practical before relying on it.

Waiting may cost the shop a later setup or a lost rush order. Include those consequences where evidence supports them. If production will simply happen later at the same cost, describe today’s cash protection as a deferral, not a permanent saving.

Let the owner choose a supported quantity and assign a review date. Before another run is approved, compare actual shipments and customer receipts with the assumptions. Unsold stock should change the next production decision.

Return to the owner’s empty production slots. They may be worth filling, but the lower overhead figure alone doesn’t justify it. A busy machine can leave the bank account waiting for a customer.

The Clear Path To Cash Advisor Membership helps advisors practice leading this kind of decision. Clear Path To Cash Advisor is the system for applying the method: investigate the cause, compare feasible actions, and model the cash. The advisor checks the evidence with the client before the owner commits.