UK manufacturers in cash scramble as Covid and Brexit dents profits
UK manufacturers are suffering a triple whammy of lower sales, declining profits and a “painful cash squeeze”, according to new Insider Pro research.
Insider Pro has analysed the accounts of almost 1,500 small and medium-sized manufacturers, which is around a quarter of the industry’s UK workforce.
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Lower sales
Even before the pandemic stuck and Brexit settled in, sales growth stalled across all major sectors in 2019/20.
The picture was worsened since, despite recovering some lost ground from its low point during the first national lockdown.
According to Insider Pro, Britain’s departure from the EU customs union and Single Market will hit sales by a tenth in the year up to March 2021.
Its research suggests this will knock £21.5bn off small and medium manufacturers.
Tighter margins
Collectively, UK manufacturers secured £12.6bn in operating profit in 2019/20 before the pandemic impact was felt, which was £200m lower than 2014/15.
This means that the £38bn of additional sales generated no extra profit.
Across almost every sector, smaller manufacturers performed worse than their larger counterparts.
Machinery, metals, and textile were among the divisions that experienced the greatest margin squeeze, while food, tobacco and petrol held their own.
‘Worst profit slump in a decade’
Insider Pro expects operating profits to at least halve this year, falling by £6.3bn. Pre-tax profits are set to drop by £7bn to £6.5bn.
Jeremy Bowley, managing director at Insider Pro, said that British manufacturers are facing the worst profit slump for more than a decade.
“Right now, they are struggling to control stock levels thanks to such unpredictable demand and such uncertain supplies,” he said.
“Added to this are the problems both exporting to Europe and sourcing from abroad. All this sucks cash from the business.”
Cash squeeze
The cash squeeze issue is triggered through stock, raw materials and components, which are growing unsustainably faster than sales.
In 2019/20, manufacturers held inventories worth two months of production, a full week more than five years before.
Every sector except textiles held more stock than can be justified by rising sales.
Elsewhere in the cash cycle, companies are collecting payments from customers more quickly, but they are paying suppliers sooner too, meaning more working capital is being tied up.
Insider Pro’s analysis shows the problem has worsened in 2020/21, estimating that manufacturers have had to find an additional £2.5bn in working capital, even as their sales and profits fall. This is equivalent to £1.7m per company.
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