Mind the cash gap as production re-starts

3 mins read

By Caroline Milton, advisory partner and manufacturing sector specialist at accountancy firm, Menzies LLP.

As SME manufacturers look forward to bouncing back from a period of uncertainty, careful cash-flow management is vital. For a confident re-start, business owners in the sector must balance the need to invest in innovation and new equipment, with the importance of meeting overhead payments as Government support packages are withdrawn.

When the lockdown restrictions were introduced, many manufacturers experienced a sudden drop in demand, forcing them to shut down completely, significantly reduce production or diversify to serve other markets. The speed of events at the onset of the pandemic meant that some were left holding stock that they simply couldn’t shift or raw materials that they couldn’t process. As well as paying for additional warehousing, they still had to meet fixed overhead costs, such as machinery and property-related costs.

Since the height of lockdown restrictions, many SME manufacturers have been planning their route to recovery, in some cases at the same time as producing much-needed medical and other equipment for the NHS. This planning has involved modifying processes to allow for social distancing on the factory floor and introducing new shift patterns, or working in split groups, to ensure fewer staff are onsite at any one time. Depending on the nature of production processes, some have invested in automation technologies to support their re-start operations. All of this has been taking place at a time when predicting levels of demand, and the rate at which they might start to increase, has become more difficult.

When planning to re-start production, it is important to bear in mind that the business will effectively be back at the start of the working capital cycle. It will have to start again with investing in raw materials, producing and shipping goods and then waiting for payment. During this re-start phase, there will be extra pressure on cash-flow and the business will need to plan with this in mind. If investment is needed to develop a new product, or improve operational efficiency, this will also need to be factored into the business’ working capital management plan.

Staying cash positive is bound to be challenging, but using three-way forecasting can help business owners to take the right decisions at the right time, based on a number of different trading scenarios. With a robust forecasting model in place, it is possible to run a variety of scenarios, so decision makers can see the impact that different levels of trading activity or different working patterns could have on the cash position of the business over time. In most cases, businesses should aim to plan conservatively for now in order to avoid overtrading and the credit risks that come with it.

As work in progress picks up, the business may be able to consider growing more quickly. Communicating with customers, suppliers and staff throughout is also absolutely essential. By understanding likely orders levels and supply chain pressures, as well as staff sentiment, will help to minimise the risk of disruption and ensuring there is an element of goodwill.

Depending on the growth trajectory of the businesses in the early days, manufacturers may need to raise additional funds to support them through this critical phase in the working capital cycle. To facilitate this, it makes sense to apply for a CBILS or Bounce Back Loan beforehand, so the money can be accessed quickly if needed.

While Bounce Back Loans are capped at £50,000, they shouldn’t be overlooked. The low rate of interest and the 12 month capital repayment holiday offered makes them an attractive funding opportunity. The relative ease of applying for these loans has also contributed to their popularity, and nearly one million businesses have already received a loan under this scheme.

Introduced on 23 March, CBILS has been in place longer but the application process is more demanding. The main points to bear in mind are that businesses must demonstrate hardship caused by Covid-19 and that they have a funding requirement. The business making the application must also evidence that it could afford to repay the loan, based on its trading performance to December 2019.

As manufacturers prepare to re-start operations, there is much they can do to de-risk the process. Developing a robust three-way forecasting model will give them the cash-flow visibility and agility needed to respond to unpredictable market demand. Taking advantage of low-cost loans early could also ensure they are ready to scale when the opportunity arises.