Conquer the crunch

Things may be getting tougher for UK manufacturing, but you can survive if you keep your eye on the ball and focus on five key principles, says Tom Lawton

Recent surveys indicate that UK manufacturing expects the credit crunch to weaken worldwide consumer and corporate demand — which could mean a tough year ahead.

This country’s manufacturing has weathered similar storms before and is well placed to deal with most issues arising from this latest crisis. But senior management willl need to keep a strong and consistent focus on the financial fundamentals if their business is to survive.

Five key principles will help manufacturers ensure their finances are in the right shape to withstand any problems arising from a more volatile economic climate.

First, stay alert and respond quickly to early warning signs. Maintain constant contact with customers, suppliers and advisers, and make sure that you respond to warning signals coming from your customer and key suppliers — and understand what those signals might mean.

Businesses may need to ask themselves a few questions. Are prompt-paying customers becoming late payers? Are suppliers requesting advances in payment terms? Are there rumours that a customer or supplier has business or contract problems? Are credit rating agencies sending worrying messages? These unusual trends might indicate problems, and understanding these issues will help develop appropriate responses and contingency plans. Panic is not required — but a strategy might be.

Second, the focus should be on improving working capital management. Most companies believe they are on top of their working capital, but significant improvements can normally be made and are fairly easy to find. Take fast action on cutting or deferring non-business critical expenditure. In an environment where the main providers of funds have been badly damaged and are feeling nervous, companies that improve their cash balances/reduce borrowings and show an ability to manage their funding will be in a much better position with funders.

Third is cost reduction. This may not have as immediate an impact as improving capital management, but it can be used to drive out relatively short-term improvements in cashflows. It has the added advantage of improving profits. The key is to cut the costs that add minimal or no value to your core operations.

UK manufacturing has achieved its success in recent years by focusing on service, quality and innovation, so these are not areasthat should be cut. They may appear discretionary but they are not. There are usually surplus costs that can be relatively easily removed in most manufacturing companies. The added advantage of a planned cost-cutting exercise is that you can develop it into a more formalised lean management review exercise — which could lead to further savings (albeit over the medium term).

Fourth, in addition to reducing costs, focus on monitoring cashflow and profits. Forecasts for both of these should be up to date and reflect the current economic conditions/expectations for sales and costs. As well as being kept up to date, they should roll for at least 12 months ahead in some detail. This enables manufacturers to understand the performance and cashflows of the business and will help identify any funding pressure points.

If businesses foresee funding issues, they should develop a response strategy as far in advance as possible. In this nervous market funders and other stakeholders do not like surprises, so they should be avoided at all costs.

Finally, understand and optimise funding arrangements. Although these may have built up over time, they may not reflect the current optimum structure for the business. Some might consider moving ‘excess’ short-term higher risk funding to longer-term loan arrangements.

Businesses should also understand their security and covenant arrangements andbuild these into their cashflow and profit assessments. If covenants are under pressure, take advice sooner rather than later. Also do not forget the impact that credit rating agencies can have on your business.

The main to remember is: keep your eyeon the ball. Even when the economy is prosperous, it is vital for the industry to remain forward-looking and be responsive. It is even more essential when the economy faces uncertainty, but by following these simple suggestions, most manufacturers should stand a good chance of riding it out.

Tom Lawton is head of manufacturingat BDO Stoy Hayward