British manufacturers are tackling cashflow pressures head on, but a strategic decision to stockpile could put their progress at risk.
Ed Thurman, managing director of Global Transaction Banking at Lloyds Bank Commercial Banking, argues that manufacturers must tightly manage their working capital as they increase their inventories to ensure they don’t hinder financial flexibility.
We know the UK’s manufacturers have been working hard to improve their working capital position.
The Lloyds Bank Business in Britain report revealed that while half of manufacturers (49%) have seen their cashflow cycle – the amount of time it takes to turn inventory and outstanding payments into cash – lengthen over the past year, three in five (61%) have taken proactive steps to shorten it.
These steps include negotiating payment terms with suppliers or customers and improving cash management practices.
At the same time, six in ten (62%) have moved to stockpile raw materials and semi-finished products, primarily in response to concerns regarding the impact of the UK’s exit from the EU.
More than half have asked businesses in their supply chains to follow suit.
So, while manufacturers have made various efforts to unlock cash tied up in working capital, it appears these funds have been used to stockpile assets rather than increase firms’ liquidity or invest in growth.
Working capital management
Although an understandable reaction to current pressure, stockpiling has an inevitable impact on working capital.
Tying-up cash in inventory reduces firms’ financial flexibility, limiting their ability to quickly deploy resources to capitalise on growth opportunities or weather unforeseen shocks.
As they increase the size of their inventories, manufacturers should ensure that they effectively manage their working capital to unlock the financial headroom they need to navigate an uncertain trading environment.
There are a broad range of operational steps – and financial tools – available to help.
Reviewing current practices
Any steps taken to manage working capital more tightly should begin with a review of cash management processes, practices and systems.
This will help firms understand where pressure points lie within their operations, and where improvements can be made.
To support this process, we have developed the Lloyds Bank Working Capital Management Tool, which can help manufacturers assess their current position and benchmark them against their peers.
Once businesses have developed a comprehensive understanding of their working capital position, they can then look to put an effective improvement strategy in place.
As working capital affects every area of a manufacturer’s operations, plans should involve all parts of a business and include clear targets to ensure that each department is focused towards the same overall goal.
As we already know, many manufacturers have made a strategic decision to stockpile goods.
Where this is the case and a business also wants to boost its liquidity, asset-based lending could prove useful in helping to unlock financial resources when needed.
Asset-based lending is a financial tool that helps to free-up cash by allowing manufacturers to use physical assets on their balance sheets – such as stock – as security for lending.
This makes it ideal for businesses that are currently increasing their inventory levels. The larger the inventory, the more cash could potentially be released to support investment for growth.
Achieving growth ambitions
In the current environment, tightly managing working capital is more important than ever.
Manufacturers should consider how their decision to stockpile affects their cashflow position and, by extension, their organisation’s financial flexibility and overall agility.
By deploying the most appropriate financial tools – and with the right partner by their side – UK manufacturers can ensure they’re in the best possible position to manage whatever lies ahead.
*Images courtesy of Depositphotos