Rodney Sutton BA FCA FCCA CA (SA)
- Advisory and Assurance Partner, and Head of Manufacturing
- +44 (0)330 124 1399
- Email Rodney[email protected]
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The manufacturing sector has faced many challenges over recent years, and 2022 is looking to remain a year where the sector faces further change, however, the sector remains positive, and here is why;
Many manufacturers have felt the effects of increasing red tape and administrative paperwork in cross border trading with the EU, which undoubtedly has caused delays and additional costs. Indeed customs delays and red tape are the biggest challenges for businesses in 2022.
Surveys carried by Make UK across 20,000 manufacturing businesses of all sizes found that although confidence for the future had grown, this was being undermined by the effects of the UK leaving the EU. Additionally, two-thirds of businesses in a further survey of manufacturing businesses warned that further damage to business would be caused by customs delays due to import checks and changes in product labelling, resulting in long delays facing truckers at all UK ports.
These challenges are intensified by the consequences of the pandemic and spiralling prices. Cost prices in UK factories are rising at the highest rate since the 1980’s with supply chain disruption caused by the UK’s exit from the EU as detailed above and pandemic pressures caused by staff absences due to isolation requirements and skills shortages as labour move to different sectors.
This is compounded by the fact that the average manufacturing wage increase over the last 12 months was only 2.8% versus 4.9% in other industrial sectors, causing further issues to the on-going skills shortage issue the sector is facing. In addition, many of the older skilled workers who faced pandemic vulnerability have retired and with EU labour having not returned to the UK due to Brexit the sector is facing increasing labour issues.
These factors have resulted in manufacturing businesses routinely having price discussions with customers, often meaning an increase in product or service costs to the client. However, in some cases where there are fixed price tenders, such as in the construction industry, price rises to the customer may not be an option, resulting in lower margins and profitability.
The issues detailed above have undoubtedly had implications for working capital management as inventory has been stockpiled and trade receivables have increased due to customers settling liabilities much slower. These factors have implications for cash flow which, since April 2020, has been assisted by the government through the furlough scheme and government recovery loans which had generous repayment holidays and deferment of VAT and other tax liabilities. This support has now ceased and companies are now facing loan repayments kicking in, reduced profits and growing cash flow challenges.
Despite all the above challenges facing the manufacturing sector, a BDO survey found that 73% of businesses felt that the opportunities 2022 held outweighed the challenges. Furthermore, in a survey of CFO’s carried out by Deloitte, 37% were planning capital investment on plant and machinery for 2022, a sentiment echoed by a CBI chief economist who was encouraged by more training and retraining to cope with labour skills challenges. Secondly, more companies are planning to expand products and markets than at any time since 2009. And finally, two-thirds of the surveyed companies still regarded the UK as a competitive location for manufacturing with a further one-third looking relocate supply chains to UK suppliers so as to avoid disruption of international delivery of components and raw materials.
While there is much needed positivity from the sector, cash flow remains a key challenge facing many manufacturers, with many seeking additional sources of loan capital necessary for their business to trade out the challenges detailed above. Traditional high street banks, although being open for new loan business, are being extremely cautious and conservative with extensive, time consuming and costly requirements made on potential loan applicants. This is due to the high level of exposure traditional banks faced due to default and bad debts following initial government support schemes.
So the real question for many manufacturers is; Are there alternative sources of finance? With the short answer being yes! At Kreston Reeves we have a platform of options available to borrowers that includes advice and support throughout the process to achieve the most appropriate and cost effective option for businesses.
If you require any further information and advice regarding this service please contact Rachel Emmerson, Head of Funding at Kreston Reeves.
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