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The manufacturing sector is like “a coiled spring”

Author: ICAEW Insights

Published: 23 Nov 2021

Survival over the next year is crucial to UK manufacturers because “if you don’t get the short-term right, there won’t be a long-term,” says David Webb, vice chair of ICAEW’s Manufacturing Community.

Following a dip in business confidence within the manufacturing sector - as revealed in ICAEW’s UK Business Confidence Monitor (BCM) Q4 2021 – ICAEW Insights spoke with David Webb, vice chair of the Institute’s Manufacturing Community

Out of 1,000 chartered accountants surveyed, the BCM found optimism in the manufacturing sector at 29.1 out of 100. This landed the sector on the lower end of the confidence scale when compared to more confident sectors such as IT and communications, which recorded 45.

Despite the dip in overall confidence Webb, who is also the director of Edwards Chartered Accountants, believes the manufacturing sector is ‘like a coiled spring’, and next year when supply chains pick up he believes the sector will bounce back. Right now though, it’s about keeping that spring loaded for when the time comes.

“Once we get past quarter one next year, I think a lot of the barriers currently in place, many of which have to do with supply chains, will have been hopefully healed up,” said Webb. “The biggest problem at the moment is people have got orders they can't follow through with because of supply chain issues. And certainly in the past six months, we’ve seen some inflation issues within raw materials.

“It's the opposite way round to what you'd expect. You've got sales, but you can't make the sales because you haven't got the various constituent parts to put together to make that sale work.”

Stop-start manufacturing

This problem is dubbed ‘stop-start manufacturing’, where businesses are receiving orders but can’t fulfil them. Companies are also giving customers timescales which they then have to build into their own plans. This is making “everything slow motion at the moment,” said Webb. “And because of that, a lot of companies are having to keep more stock when they get it just to make sure they've got supplies, which of course is then affecting cashflow. For that reason, cashflow is, and will be, the biggest issue in my view in the next six months within manufacturing”.

To help companies within the manufacturing sector survive the short-term, Webb said he would like to see more government support, whether it be an overdraft or some form of additional loan. While this would result in more debt, it would also provide a greater safety net for companies to ride out the post-COVID supply chain problems.

“The downside is a lot of companies have already got a lot of debt because of the pandemic and have taken on COVID loans which are starting to fall due. It would also help if there's some sort of delay on the repayments of these COVID loans,” he said.

Government support aside, Webb’s advice is for businesses to approach their banks with a business plan that shows the company’s cashflow issues as a result of stock and supply chain issues, outlining how they’ll be resolved within the next 12 months once everything picks up pace. 

“Currently we’re in a short-term problem, but if you don’t get the short-term right, there won’t be a long-term,” he added.

Keeping that spring coiled

Webb said the key thing is for businesses to have a flexible plan so they can see things happening before they affect the business too much. So that can change and flex what they need to do - ‘that's what I'm encouraging my clients to do’.

“With stop-start production, you still got your fixed costs, you’ve still got your labour, but if you're not making anything then all you’re doing is effectively wasting cash. You need to get your units and capacity together, otherwise when we do actually get supplies and your customers want their good, it all flows through, and you haven’t got the capacity to make anything.”

Webb continued: “it's a difficult one. You could make people redundant and take more on later when the work picks back up. My view is this: if you’ve got skilled people, then you need those skilled people to fulfil the orders you've got, and you've got to try and retain them, even though they're not working at full capacity. But eventually all the cogs will start to move and as a business you want to be ready for when that day comes.”

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