The manufacturing sector has had a turbulent few months. Menzies Manufacturing Team recently held a webinar on the impact of Covid-19 on the sector, discussing what was required to prepare for the New Normal. We spoke with Menzies clients Guy Lord of Automatic Tooling Company Limited (ATC) and Ian McCulloch of Silent Pool Distillers Limited about their experiences adapting processes to maximise opportunities arising as a result of Covid-19. We asked our clients and contacts how the pandemic has impacted them across three key areas: : manufacturing processes, finance and the workforce.
Your Manufacturing Processes
Whilst many businesses have had to temporarily shut up shop, the manufacturing sector remains notorious for its adaptability and resilience, with many continuing to run on a scaled down basis to keep the supply of their products moving. In addition to this, a number of manufacturing businesses have been able to adapt their processes to take advantage of new opportunities that have arisen in recent months.
Over half of respondents to a recent Menzies poll had altered shift patterns and production line management in response to the pandemic. This is not unexpected given the necessary emphasis on social distancing for the health and safety of all workers, and it is reassuring to see that employers in the manufacturing sector are adhering to their responsibilities in that regard.
Significantly, 41% of respondents reported that they have adapted their product in response to Covid-19. It is clearer than ever that innovation is key to the sector’s success, with factories across the country ceasing production on familiar product lines to contribute to front line efforts. Most are familiar with the headline stories such as Dyson supplying ventilator parts and Brewdog turning their attention to the hand sanitiser market, but the role of SME manufacturers in this area should not be overlooked.
As a leading medical device manufacturer, Guy was confident in ATC’s ability to deliver a quality product –
“We could make anything as long as someone wants it”. The challenge of reaching new customers was overcome by reaching out to his existing network, using LinkedIn and establishing a link through an existing customer. “Eventually you get to the right person and find you’re just what they’ve been looking for.”Guy Lord – Owner of Automatic Tooling Company Limited (ATC)
In Ian’s case, the solution to the problem of surplus alcohol stock was straightforward – the World Health Organisation released a recipe for hand sanitizer. The real innovation was in product design:
“I didn’t want to get into the hand cream business, so we re-thought it. We adapted the packaging and focused specifically on the ability to carry it.”Ian McCulloch – Founding Director of Silent Pool Distillers Limited
These insights are a testament to the agility and innovative mindset of those in the manufacturing sector and highlight the importance of manufacturing to the UK economy
Your Manufacturing Finance
As the sector looks forward to bouncing back from a period of uncertainty, cash flow is rightly at the forefront of the mind of most business owners. For a confident return to the “new normal”, manufacturers will need access to funds to invest in continued innovation, while in the shorter term, factory overheads must continue to be met as government support packages are withdrawn.
Coronavirus Job Retention Scheme (CJRS)
The Coronavirus Job Retention Scheme has been overwhelmingly the most popular government support package, with 75.6% of UK manufacturers according to ONS, and 100% of respondents to our recent webinar poll having accessed the scheme. When it comes to support which will eventually be repaid by the claimant, VAT deferments were the most popular option both for manufacturers nationally and for our poll respondents.
37% of our poll respondents confirmed that they are taking advantage, or intend to take advantage of a government-backed loan scheme. Government statistics show that some 71,000 companies have applied for a CBILS loan, however as at the end of May only 36,000 have been approved. A time lag between the need for cash arising and approval of the funds is inevitable, and whilst banks are right to be cautious in ensuring loans are only granted to those who can afford to repay them, it is in the interest of all manufacturers to understand the key reasons for some applications failing.
We asked Menzies Corporate Finance Partner John Foundling what advice he would have for manufacturers ensuring they have the best possible chance of ensuring that their CBILS application is approved.
First and foremost, it is important to consider the eligibility of your business for your chosen scheme. When you have identified the appropriate scheme to apply to, a key test for the banks will be whether the business was viable prior to Covid-19. In John’s opinion, viable businesses may be failing to secure the finance they need where they are not able to present sufficient evidence to the banks to convince them of this viability. For example, many manufacturers were already experiencing a period of indecision or slowdown due to the impact of Brexit.
In an attempt to accelerate the CBILS application process, the government has mandated that banks cannot require applicants to prepare forecasts in support of a loan application. However John feels that this can cause more problems than it solves:
“Frankly, you won’t appear to be a very strong business if you don’t provide financial forecasts. The banks don’t know how you have worked out what your cash flow requirement actually is if you don’t present forecasts, and presenting your case a strongly as possible will be an important part of your negotiations with the bank.”John Foundling – Menzies Corporate Finance Partner
Manufacturing businesses tend to be capital intensive and higher-growth businesses can fall foul of the hard stop position around European state aid. CBILS loans cannot be granted to businesses with losses in excess of 50% of their share capital. If this applies to your business, an alternative option is the Future Fund. Structured similarly to CBILS, this scheme offers convertible loans of £250k-£5m for businesses which have raised more than £250k of third party equity within the last 5 years. The government buys into these businesses on a convertible loan basis, giving businesses 3 years to repay 100% of the loan balance or convert it to equity at a 20% discount. John’s advice to any manufacturer considering their post-Covid 19 working capital requirement is to plan early.
“The application process for a Bounce Back Loan is very easy, so this is an example of government support which could potentially be used to help with investment. As businesses recover, normal funding options such as asset finance, invoice discounting and secured commercial loans will also become more relevant and available.”John Foundling – Menzies Corporate Finance Partner
Your Manufacturing Workforce
Most manufacturers have not been able to offer their employees the option of working from home during the Coronavirus crisis, so it was not surprising to see that 100%of our webinar respondents were making use of the furlough scheme. With changes to the furlough scheme being announced recently, it is time to turn attention to ongoing staffing requirements post Covid-19. Whilst initial government statistics showed that 72.5% of manufacturing businesses had furloughed staff during the period from 20 April to 3 May, the biggest concern amongst our webinar respondents was the prospect of needing to restructure the workforce as part of a “new normal”, with over half of respondents considering the possibility of redundancies or reduced working hours.
Prior to Covid-19 the industry was faced with problems of skills shortages and an ageing workforce, which will make sustainability a real challenge as the sector attempts to recover in a way that is cost effective, whilst supporting future growth. In addition to this, employers in the sector are faced with the challenge of being fair to all employees, including those shielding or unable to work due to caring for children or sick relatives.
Menzies HR Services Director, Ed Hussey advises that an engaged and motivated workforce will be essential in order to ensure employers in the manufacturing sector are making the right decision.
“It’s important to understand your staff’s personal position and how they’re feeling about returning to work.”Ed Hussey – Menzies HR Services Director
The importance of communication
Ed believes that communication is key to identifying opportunities for a flexible return to work which suits both employer and employee. For example, where staff have childcare commitments which make it difficult for them to return to work before their children are back in school full time, a gradual return to normal may give employers a chance to accommodate employees by retaining them on furlough for longer, or returning with reduced hours.
“It’s really important to do the planning and see how closely you can match a phased return of your people to their individual circumstances”. Under this model, redundancy can remain the last resort and employers can maximise government support in the process of returning to a “new normal”.Ed Hussey – Menzies HR Services Director
Preparing for a confident return
As the government indicates that further relaxation to social distancing and movement restrictions may be appropriate within the coming weeks, the manufacturing industry is completing its return to a “new normal”, perhaps with a gradual upturn in demand for core products alongside changes to production processes and diversification of product lines. Looking ahead to the coming months, we asked Guy and Ian what piece of advice they would each give to manufacturers preparing for a “new normal”.
For Ian McCulloch of Silent Pool, the changing government guidance coupled with a range of potential opportunities for financial support provide an unprecedented opportunity for early adopters. “Where you see an opportunity, grab it and go for it” – whether this relates to product and customer diversification, cost saving measures or the potential to raise additional finance for investment in future growth, in a rapidly changing environment opportunities are constantly changing. Manufacturers who can be agile and responsive to changes will benefit the most in this new environment.
Time to Think
The confidence to respond quickly as opportunities present themselves relies on manufacturing business owners having a deeper understanding than ever of their key drivers for success. Reflecting on the opportunities ATC have benefitted from in recent months, Guy’s advice is to create time to think.
“Bad times end, but at the moment it can be very difficult to pull yourself out and think on the business rather than in the business”.Guy Lord – Owner of Automatic Tooling Company Limited (ATC)
This is particularly true in the SME sector, where owner-managers may themselves be juggling the demands of their business with the demands of home-schooled children or vulnerable family members.
“Force yourself to take some time to think, because there are going to be huge opportunities coming up, and as Ian says, you’re going to need to act fast to get them.”Guy Lord – Owner of Automatic Tooling Company Limited (ATC)
With these points in mind, it is also a good opportunity for furloughed employees to undertake training to reskill and refine their abilities. As we move further towards a new normal, this will help drive the business forward. Ensuring the right plans are in place is essential, supported by an understanding of the relevant initiatives available.
Information around support for your business, the importance of effective planning and forecasting and exiting lockdown can be found here:
Re-watch our manufacturing webinar
Statistics quoted are based on the feedback from 19 attendees to a webinar hosted by Menzies LLP on 22 May 2020.