Manufacturers warned of perfect storm in 2011

Posted on 23 Nov 2010 by The Manufacturer

Business planning and forecasting specialists Numeritas has warned manufacturing companies that 2011 may prove to be "a dangerous year".

The company is warns that the cumulative effect of a whole range of financial issues hitting manufacturers in 2011 will push many profitable, but unprepared, businesses into insolvency.

Stephen Aldridge, managing director of Numeritas, said: “There are a whole range of cost and cash flow pressures facing UK manufacturers in 2011. Individually each would be painful, but probably not dangerous. However, their combination and timing will stretch the cash flow and working capital of some manufacturers, and many profitable businesses will be forced into insolvency if they are not prepared and taking pre-emptive action.”

Financial pressures facing manufacturers in 2011 include:
• Employers’ national insurance up 1%
• VAT up from 17.5% to 20%
• Variable costs, particularly raw material costs, increasing
• Customers taking longer to pay (if customers take just a few more days to pay on average, this marginal increase can have a particularly major effect on cash flow)
• Customers becoming insolvent and their debts being written-off (this has a particularly devastating effect on both cash flow and profitability)
• Problems caused by exchange rate movements (on exports orders and imported items)
• Increased orders

Stephen Aldridge added: “It may sound odd that in the current environment increased orders could be bad news when, of course, they are the lifeblood of a business. However, it is well known that more companies go insolvent once a recession is passed its worst and orders are picking up. This is because manufacturers overstretch their working capital through spending too much on inputs such as raw materials and labour, but do not have the working capital to last until payment is received. This is a particular danger area in 2011.

“The key for manufacturing companies surviving 2011 rests around a really strong performance by their financial director, head of procurement and the sales team. Each company will be affected differently depending on its circumstances, so a robust forecast of possible scenarios will show where potential funding gaps may occur and allow early action to avoid a disaster.”
“The FD really needs to be on top of the firm’s cash flow, working capital and aged debtors. If these are not tightly controlled and accurately forecast, even very profitable businesses may go insolvent because they cannot pay their day-to-day bills. Keeping costs down is also important with consistent price increases likely on raw material and other costs in 2011, so the head of procurement can also make a massive difference to both profits and cash flow – whether through negotiating better prices or longer payment terms.

“The role of the sales department is particularly critical too. Clearly new sales are good, but the risk attached must be recognised – especially as cost pressures may make once-profitable prices now loss-making. Profitable sales to robust companies that pay on time with upfront deposits are clearly fantastic. Keenly-priced sales to shaky companies that will pay late or not at all are going to prove fatal.”