Understanding the financial challenges facing manufacturing

Simon England, Managing Director at Equals Money, on the financial challenges of the cost-of-living crisis in manufacturing and across its supply chain

The UK’s manufacturing sector is facing a variety of financial challenges right now. Some of these issues, like tight margins, have been characteristic of the sector for many years. Others are relatively recent, yet equally as concerning.

According to S&P Global, overall sector activity hit a two-year low in June 2022 – new orders contracted for the first time in 17 months. With inflation only set to increase, many industry decision makers will face tough financial choices in the short to medium term.

Cash flow issues stifle manufacturing production

While inflation obviously affects prices, there has also been a sharp decline in cash flow confidence in the manufacturing sector. A recent survey conducted by Equals Money found that 90% of businesses in the sector have cash flow issues to some extent. Unsurprisingly, a quarter of respondents cited supply chain problems as a driving factor in this, as well as rising energy prices (25%) and rising interest rates (19%).

It is true that cash flow is vital for any business, but it is especially important in the manufacturing sector. Projects incur a significant amount of upfront costs, with the average cash conversion cycle – or how long it takes to convert funds in production and sales into cash – being substantially longer than other many types of business.

Additionally, the industry is especially prone to cashflow bottlenecks, meaning that issues such as outstanding payments are liable to delay project delivery. With this in mind, it is not surprising to learn that 19% of those surveyed stated that they are struggling with late payments from both customers and suppliers, stifling the sector’s output overall.

Rising manufacturing costs across the board and the supply chain

Upfront costs also become an issue as the cost of vital materials increases. Held up supply chains and the resulting shortages in materials necessary for work to take place have driven up costs of everything from electronics and oil to paper and timber. As a result, the price clients pay for the finished goods must be increased. Reduced output translates into reduced revenue, leading to 19% of our respondents admitting to struggling with employee salary expectations – only made worse by an inflationary environment.

Rising costs have also caused many firms to modify their pricing strategy. Our survey revealed that a third of businesses (33%) have had to make adjustments to their pricing strategy. Indeed, a recent piece from the British Chamber of Commerce found that 61% of manufacturing firms have been forced to raise prices. Naturally, the rising cost of vital commodities will cause the price of the product to rise. But, as inflation bites and wages remain behind, the sector is seeing a contraction in both supply and demand.

The cost-of-living squeeze

Almost all businesses (97%) have been presented with new challenges as a result of the cost-of-living crisis. The most recognised issue (37%) among manufacturing business owners is the increased employee turnover the sector is experiencing. This then places a further financial burden on firms, as they must use funds to replace the lost labour. Combined with a declining employee morale and productivity (34%), this is causing fewer businesses to meet their growth targets as productivity and sales experience a downward trend.

The long shadow of Brexit and the pandemic

Upstream issues also remain large factors in this alarming industry outlook, namely the ever-present legacies of the pandemic and Brexit. Two in five businesses (39%) claim that these two events have driven up their business costs. In the case of the former, supply chain disruption has contributed to the majority of issues above. Brexit has also had a significant effect; nearly half of respondents (48%) cite higher import/export costs and 42% are struggling with Brexit-induced raw materials price hikes.

Combined, these challenges are causing many business leaders to consider drastic action. Our research showed that 35% have been required to modify their business model and another 30% have considered doing so. Alarmingly, as many as a quarter (24%) have admitted to trying to sell their firm.

What businesses can do about it

While the outlook may seem bleak, the right answer isn’t to sit tight and wait to see what happens. With a more proactive approach, manufacturing businesses can build their resilience, get ahead of the competition, and ultimately triumph over adversity.

Here are four important actions manufacturers can take right now:

1.       Conduct a detailed cashflow/spend analysis: Doing this will allow businesses to eliminate repetitive expenses and unmanaged ‘tail-end’ spend. While these can often be small transactions, the cumulative savings can be substantial. 

2.       Liaise with suppliers and review payment terms: Businesses can use this as an opportunity to ask themselves: “Could I get a better deal here?” with key suppliers including, for example, their energy companies. They can also enquire into modifying payment structures for greater flexibility (i.e., when payments are released). 

3.       Partner with a currency expert: Given current unpredictability, working with a currency specialist would be a major advantage. Professional FX advice allows businesses to leverage techniques, such as hedging with confidence, as well as giving them deeper overall insight into foreign currency markets. Ultimately, this makes for better exchange rates and lower transaction fees on international payments.

 4.       Improve reporting capabilities: Decision makers and investors alike use a variety of financial metrics to determine a company’s worth and effectiveness. Because there are several metrics to keep track of, businesses should ensure that their data is as unified as possible in order to paint the clearest picture – and this means developing more advanced, tech-driven reporting capabilities.

 

Simon England, Managing Director, Equals Money

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