An insight into manufacturing business debt

Posted on 22 Aug 2014 by The Manufacturer

Mark Burgess, chief operations officer at Debt Guard Solicitors, discusses debt levels within manufacturing SMEs and how firms can best address financial concerns.

Mark Burgess
Mark Burgess, chief operations officer, Debt Guard Solicitors.

Each manufacturing SME was burdened with an average trade debt of £1.8m during the last financial year, suggesting that despite the economic upturn, the strain on the sector’s smallest firms remains severe.

By unearthing SME trade debt levels from official Companies House records, we have helped illuminate the extent of the cash flow crisis that is unfortunately still impacting upon the sector.

Research into account records submitted by 1,400 SME manufacturers revealed that, more than any other sector in the UK, manufacturing is the deepest in debt.  With £1.8m of debt per firm, the sector’s debt levels are an alarming 38% higher than the national economic average. In terms of the worst affected regions, manufacturing businesses in the North West, Yorkshire and East Midlands are each on average over £2m in debt.

Not all debt is as a consequence of late payment, but with the data revealing that the average time for payment in 2013/14 was a lengthy 44-days, it is certainly a major contributory factor.

Micro-firms with less than 10 staff and a turnover below £2m are proportionately the hardest hit in the sector, with each on average £73,000 in trade debt – accounting for 18 per cent of turnover. Our findings also discovered 11% of these firms are in ‘severe’ debt trouble, defined as debt accounting for more than one third of total turnover.  It is these manufacturers, as the backbone of the sector, that require greatest support from the bigger companies in order to boost their cash flow and stave off the dangers of closure.

At the larger end of the SME manufacturing spectrum, medium-sized companies with 50-249 employees and a turnover between £10m – £100m, as expected, have the highest levels of trade debt at £3.7m – accounting for 15 per cent of turnover. However, the crucial difference here is these more established firms suffer less from the impact of late payment due to higher cash reserves and the ability to set favourable terms to suppliers.

Last but not least, the study revealed the middle tier of manufacturing SMEs, defined as having 10-49 employees and a turnover between £2m – £10m, have a average trade debt of £1m, accounting for 16 per cent of turnover.

To reverse this deep seated late payment culture and debt, we believe more affirmative, regulatory action is required. The government’s new small business, enterprise and employment bill is a step in the right direction by now forcing companies to publish information about their payment terms in an effort to name and shame. However, more could be done, such as considering introducing fines to companies that exceed contractual payment terms or a mandatory maximum timeframe of 60 days for payment before penalty charges are incurred. After all, best practice measure and voluntary codes can only achieve so much and skirt around resolving the issue.

One final message we would give to all manufacturers suffering from late payment is, ‘don’t write off your debt’. Where it is deemed necessary, legal action to professionally recover it is proven to work and can help strengthen credit control processes.

Legal advice on how to stop late payment increasing debt levels:

  • Research customers before doing business with them:  Carrying out checks before extending credit is a basic, but often overlooked credit management tactic. Remember, not knowing anything about a business may significantly increase your risk of accumulating past-due bills. Examining bank and trade payment references will help to decide if it is safe to do business with them.
  • Improve customer communications: Make contact a week before the due payment date to ask them to confirm payment will be received on time. If payment is late, have standard letters ready to send out detailing what is owed and when the final deadline for payment is.
  • Send a solicitor’s letter demanding payment: If a customer is continuously ignoring your calls to pay up, a simple £2 solicitor’s letter can prompt them to settle their invoice in full in just seven days. The authority of the letter and threat of legal action is what encourages payment.
  • Charge late payment interest and compensation onto money owed: Annualised interest charges up to 8% can be legally added onto bills each day an invoice is overdue. This will not only improve your business cash flow, but make crystal clear to suppliers to avoid being late on payments in the future. Plus, compensation charges between £40-£100 can also be added, depending on the size of the debt owed.
  • Find out if the customer is self-employed: If they are, it means they are personally responsible for their debt. This legally entitles you to look into the option of seizing their personal assets to reclaim the equivalent sum of the money owed. But this option should only be used in exceptional circumstances, where your business is under threat as a consequence of habitual late payment.