A combination of longer lead times on imported goods, increased red tape and additional costs incurred due to increased stock holdings could see manufacturers facing significant cash flow difficulties in the event of a no-deal Brexit.
So what can Manufacturing businesses do now to avoid this and improve their financial management, bolster their supply chains and future-proof their cash position? Below are some useful tips to consider.
With a lack of certainty around the UK’s post-Brexit trading position, the number of UK manufacturers undertaking stockpiling activity continues to grow and, without the right planning, such a strategy could have a significant impact on their cash flow. Failing to put in place key measures now may cause the business to experience financial distress.
In the automotive industry, where manufacturers typically operate just-in-time manufacturing processes and rely heavily on parts imported from the EU, stockpiling is likely to be an effective risk mitigation strategy; allowing businesses to protect against the impact of potential supply shortages. However, it’s important to bear in mind that this could involve investing in surplus inventory and storing it at their own cost. With UK warehouse space at a premium, prices are on the rise and manufacturers considering whether stockpiling is right for them should factor this in their decision-making process.
Longer lead times
Longer lead times on goods could be another cash flow problem although this will depend on the particular nature of the supplier relationship and the payment terms in place. For example, businesses paying on a pro forma basis or when their goods leave the factory, may experience pressure on cash flow for a longer period.
Taking a proactive approach to forecasting their cash position, based on a number of Brexit scenarios, can help manufacturers to maintain a healthy cash flow and avoid potential business disruption. Three-way forecasting, which involves combining financial data for a business’ cash flow, profit and loss, and balance sheet, effectively allows manufacturers to predict the impact of future trading conditions.
What if scenarios
By building in information for different ‘what if’ scenarios, such as stockpiling and increased lead times on goods, manufacturers can identify potential financial pressure points ahead of time, before they impact business performance. By conducting cash flow forecasts, owner managers will be able to consider their cash flow cycle, taking into account any pressure points which could arise over the coming quarter – for example, end-of-month supplier payments.
While there are a number of external funding options available, which could help manufacturers to bolster their cash position in the months ahead, these can take a few weeks to secure and forward planning is essential. With traditional high street banks becoming more cautious when it comes to lending, seeking expert advice from a professional who specialises in helping businesses secure access to finance may be a sensible approach. Professional advisors will also be able to help organisations identify which funding strategy best aligns with their individual business model. For example, manufacturers undertaking significant stockpiling activity may want to consider a stock facility, which is calculated based on the volume of stock held by the company, while a property backed facility may be a better option for businesses with real estate.
Following the standard rules of good business, such as good credit control and cash flow management, will also be key to mitigating post-Brexit financial pressures. Where the company’s margins allow, offering discounts to customers who are able to pay on time or early may prove an effective option, and businesses could also consider boosting their cash position by shifting excess stock where there is opportunity to do so. Delaying any major investment decisions may also be sensible, and owner managers should consider a thorough supply chain audit to identify and address any inefficiencies in good time.
While the Government continues to make slow progress on clarifying the UK’s position once it leaves the EU, it is essential that manufacturers take action and implement contingencies where they can. By forecasting with greater accuracy and considering their funding options now, manufacturers will be better placed to ride out the current uncertainty and protect their business in the coming months.
For more advice, feel free to get in touch with the Menzies team or visit our Brexit business advice content hub.