What it means
Make to Order, often abbreviated as MTO, is a vital concept for non-finance managers because it directly impacts cash flow and operational risk. In traditional retail manufacturing, companies forecast demand, build products in advance, and hope customers buy them.
If sales fall short, the business is left with expensive, unsold inventory that drains working capital. Under a Make to Order model, the production line stays idle until an actual customer places an order.
This means raw materials are only purchased when needed, and labour is directed precisely where there is guaranteed revenue. For finance teams, this is a dream scenario because it minimises inventory holding costs and drastically reduces the need for expensive warehouse space.
However, this strategy introduces trade-offs, primarily around delivery times and customer patience. Because nothing is pre-built, customers must wait longer to receive their goods.
Non-finance managers must carefully balance the financial benefits of zero inventory against the risk of losing impatient buyers to competitors who offer immediate delivery. In practice, this method requires strong supplier relationships and flexible manufacturing processes.
If your suppliers take weeks to deliver raw materials, your delivery times blow out, damaging customer satisfaction. Successful companies use this strategy for high-value, customisable, or slow-moving goods where customers expect to wait for a tailored result.
In practice
Real-world examples.
Example
A bespoke kitchen designer takes a thirty percent deposit before ordering any timber or hardware from suppliers, ensuring all production costs are fully covered by the customer upfront.
Example
A small custom bicycle shop builds frames only after a buyer selects their specific gear ratios and frame size online, avoiding the cost of storing pre-built bikes.
Example
A commercial printer produces bespoke corporate marketing brochures strictly after receiving a signed client purchase order and final artwork approval, avoiding wasted paper stock.
Think of it
“Imagine running a restaurant. A make-to-stock restaurant cooks dozens of meals in advance and hopes people buy them, often throwing away cold food at the end of the day. A make-to-order restaurant only fires up the grill after the customer places their specific order.
Formula
Calculation
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding. In a pure Make to Order business, Days Inventory Outstanding drops close to zero because raw materials move straight into production and out the door.Case study
Seen in the real world.
CustomCraft Furniture, a medium-sized workshop, used to build dining tables ahead of time and store them in a rented warehouse. This tied up sixty thousand pounds in stock that sat unsold for months, straining their bank account. The finance director advised shifting to a Make to Order model. Customers now pay a fifty percent deposit upon ordering, which covers all material costs. The remaining balance is paid upon delivery. Within one year, CustomCraft eliminated their warehouse rental costs, boosted their cash reserves by forty thousand pounds, and completely removed the problem of write-offs for damaged or outdated stock. While order lead times increased from two days to three weeks, their target customers gladly waited for furniture built precisely to their specifications.
Watch out
Common mistakes.
- Failing to collect a sufficient deposit to cover the full cost of raw materials.
- Promising unrealistic delivery times without factoring in supplier lead-times.
- Treating custom orders the same as mass-production items in financial reporting.
Questions
People also ask.
Why is Make to Order better for cash flow?
Because you collect deposits before buying materials, and you do not tie up working capital in unsold stock sitting in a warehouse.
Is Make to Order suitable for all types of products?
No. It works best for high-value, customisable, or rare items. Everyday low-cost goods rely on fast, mass-production models.
How do longer delivery times affect sales?
Customers expect to wait longer for custom items, but if your lead-times are too slow compared to competitors, you may lose sales.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related