The manufacturing sector has been severely unsettled by the initial Brexit result, and the subsequent uncertainty surrounding this has led to questions on what this means for our clients in industry.
Many businesses list uncertainty of demand and exchange rate fluctuations as key factors for holding back on investment decisions. On one hand, this could limit the true potential of the business and lead to missed opportunities but the primary objective for company owners is to safeguard the business and its assets.
Growing manufacturing businesses
Finance and investments in plant and machinery
Taking the decision to invest needs to be based on the impact the investment has on the long term profitability of the business combined with the impact on cash flow. For manufacturers an investment in plant and machinery may mean greater output, the ability to sell greater quantities, lower unit production costs or move previously subcontracted design or production elements in house. All of these factors need to be considered and the return on investment reviewed from well prepared financial projections, with and without the proposed expenditure. Manufacturers should, where possible, plan timing of their capital investment to maximise capital allowances on the purchase under the Annual Investment Allowance (AIA).
Manufacturing finance options
Once the decision to invest has been made, consideration should turn to how it will be funded. Each business needs to consider what works for them with a varying degree of options around debt available, typically asset finance for plant, or traditional working capital facilities, or even considering an equity sale (internally or externally). If the investment needed is not asset based and is instead previous experience or access to new markets then relinquishing equity is more likely.
Other finance considerations
Businesses should also consider key strategic partnerships, or joint ventures with customers and suppliers to potentially share resources, access to markets (in existing or new territories) or at the very least have an agreed stronger supply chain relationship, sometimes referred to as a Memorandum of Understanding (MoU) which benefits both parties. If the business has a customer with varying levels of demand at short notice then supplier responsiveness is key to meeting the customer’s needs. With the potential of facing financial penalties or damage to goodwill if deadlines are not met a business may consider having more than one key supplier to reduce risk.
As we move towards understanding the fall out of Brexit, manufacturing businesses will hopefully be in a better position to understand their current business situation and how Brexit may impact the future and any investment decisions the business will take.
For more information on growing manufacturing businesses or to speak to Phil Wright by email on pwirght@menzies.co.uk or by phone on 01489 566732.
Phil Wright is a member of the Advisory Services and Manufacturing team, providing insight and business advice to a range of business within the SME community.