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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I recently attended an informative and incisive meeting of manufacturing businesses in the South East, where my immediate impression was that many businesses in this sector are showing remarkable resilience and agility to all of the challenges that have arisen over the last two years.
Some of the key, positive messages arising from the sector include:
Businesses are being strategic and are forward planning both from their sales forecasting and the robust sourcing of raw materials for production. This includes financial forecasting that timeously identifies shortfalls in cash flow and when action needs to be taken to recover debtors and reducing inventory via increases in sales. Early warnings regarding cash flow shortfalls to banks are very much appreciated and likely to be favourably considered whilst last minute crises around cash are not welcomed by most financiers. Clearly all parts of the business need to be working closely together and accessing real time data to allow management to make important and timely decisions.
Partnerships with both customers and suppliers are also based on trust and close mutual co-operation. Price is not the only determinant in decision making, but other considerations that include the reliability of a supplier business, both financially and operationally. Businesses also need to balance this with issues around the environment and sustainability and I envisage these close, working partnerships will get more important over time. Customer partnerships are still largely based on volumes of business transacted and the ability of the customer to pay.
Pricing is vitally important amidst rising prices and the erosion of profit margins. Yearly pricing changes are no longer the norm with more regular discussions being held around prices being far more routine than was the case 12 months ago. However, clearly the balance needs to be achieved between higher prices and losing customers to the competition, so the evaluation of market data around pricing is vital, as well as communicating to them your ability to deliver and the confidence they can have in you as a supplier.
The business recovery scheme has largely remained untapped in this sector as businesses that are generating profits and cash flow and have ability to secure finance are largely being offered normal commercial terms by high street lenders. Indeed, debt activity has tailed off dramatically following the termination of CBILS and the Bounce Back loan. In addition, the experience of our clients indicates that many companies are relatively cash rich due to CBILS loans that have been unused, capital expenditure that has been halted and in the manufacturing sector many companies have had a record year as they catch up with demand.
Inflation and interest rate expectations: at our last manufacturers’ forum on 29 July this year the Bank of England forecasted that inflation would reach 4% by the end of 2021. However, today, it was agreed by the entire forum that this prediction was well short of the actual experience of significant price rises and the feeling is that we will see an 8-10% inflation rate by end 2021. This undoubtedly will have interest rate implications and rises in rates are expected to be sooner rather than later. Indeed, Barclays have already factored rises in rates of 0.15% and two further rises of 0.25% into forward hedging contracts. The question is the timing of these rises and whether government will be influencing the Bank of England to delay them into the new year. Furthermore, what effect will a rise in interest rates have on business and consumer confidence? We can guess, but we will have to wait and see.
Shortages of labour and skills particularly in the haulage sector is not a new phenomenon or one exclusive to the UK, but rather a systematic failure of the industry to modernise and improve working conditions and facilities that has meant that average age of drivers now is 55. The attraction to the industry is extremely low, particularly to women, as they have safety fears and many facilities do not cater for their needs. The work force needs to be incentivised via more structured career paths, development of skills and clear pay structures that respond to an improvement of skills and loyalty. The industry knows that this section of the workforce will respond to:
Clearly businesses have a lot of work to do and many challenges to face but it is encouraging to see businesses doing what they do best – being proactive, rising to the challenge and being agile to adapt to the changes needed to enable them to succeed and grow.
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