Companies facing tipping point to business models from cost increases

Key findings:

• Two thirds of companies saying pandemic has hampered their growth plans, almost half saying they struggled to fulfil orders
• Almost half of companies holding higher debt, 6 in 10 planning to take on more
• Half of companies say 20% cost increase would threaten their business model, PPI already at 13%
• Third of companies worried about viability in next two years due to debt liabilities
• 4 in 10 companies have used/or intend to use restructuring, turnaround or insolvency professionals
• Government urged to consider payment holidays on business loans

Britain's manufacturing industry is facing an unprecedented combination of a post Covid credit, cash and costs crunch according to a major survey released today by Make UK and RSM.

Already facing the burden of repaying debts incurred in the battle to weather the impact of the pandemic, manufacturers are now grappling with the demands of an economic recovery hampered by disrupted supply chains and mounting skills shortages.

This is sparking a sharp inflationary spiral which threatens to reach a level that would provide a tipping point for the business model of many, while companies are also facing a liquidity squeeze as customers and suppliers cling to cash or change their payment terms.

As a result, for almost half of companies their cash position is worse now than at any point since the pandemic began, with the prospect of having to take on yet more debt to maintain normal operations or provide growth capital. In response, Make UK is urging Government to consider payment holidays for the loans that companies took out as a precautionary measure to provide them with vital breathing space.

Furthermore, the uncertain trading environment and level of risk is forcing companies to use restructuring, insolvency or turnaround professionals as a precaution.

Commenting, James Brougham, Senior Economist at Make UK, said:

“Industry is facing the perfect storm with a raft of rapidly escalating costs combined with significant levels of debt which many companies took on as a precautionary measure just to stay afloat. Given the inflationary spiral shows every sign of continuing to climb, many companies fear a tipping point that could make their business models unviable.”

Mike Thornton, head of manufacturing at RSM UK added:

“Manufacturers are facing a variety of headwinds from staff shortages, supply chain disruption, soaring energy prices and an increased debt burden post-Covid. This backdrop has elevated the risk profile for many UK manufacturers. Considering the position today, rapidly implementing plans to address underperformance is going to be crucial to ensure manufacturers emerge post-pandemic in a strong viable position.”

According to the survey over a third of companies (37.4%) said their cash position was worse than pre-pandemic, with half of those saying the worst period was either in the latter stages of the pandemic (Q2 2021) or now. As a result, two thirds of companies (65%) said a lack of cash has hampered their growth plans, while almost half (48%) said they had trouble fulfilling orders.

In order to try and deal with the threat to their cashflow almost half of companies (46%) used the various Government liquidity schemes as a precaution, in particular those in the automotive and aerospace sectors, or took advantage of HMRC deferrals, a policy used by 40% of companies.

As well as using Government schemes to maintain cashflow, almost half of companies (46%) have changed their payment terms in the last year with larger companies being more likely to have done so. One third of companies have also blocked customers who are falling foul of their payment terms.

The survey also shows that far from easing as the worse period of the pandemic has passed, companies debt levels are continuing to increase with almost half of companies (45%) saying their debt levels are greater than at the start of 2020. Such is the level of debt a third of companies are worried about their viability in the next two years.

Despite this, six in ten companies say they are planning to take on further debt, with a third of those saying it is essential for running normal business operations. More encouragingly, however, a quarter say they are taking on debt to fund investment and growth.

Furthermore, manufacturers’ liquidity is now being hampered by escalating inflation which is running far higher in the sector than official data would suggest. The survey suggests that a 20% increase in input costs would have an immediate impact on cashflow for 90% of companies, while for half (51%) such a scenario would have a ‘catastrophic’ impact. This implies that for many, their business model would not be able to cope.

Given the latest Producer Prices Index showed a 13% increase in input costs for manufacturers a 20% rise is now very much plausible, especially with the combination of increases in taxation, raw material, shipping and energy costs.

In response to the exceptionally uncertain trading conditions and increased risk, almost four in ten companies (38%) have used or, intend to use, restructuring, turnaround or insolvency professionals.

James Brougham added:

“While there is little if anything Government can do to ease these costs pressures which are a global phenomenon, it can take a softer approach to helping companies by looking again at the payment periods for their loans or, introduce payment holidays. This could provide the vital breathing space which would enable companies to ride out the current storm into calmer waters.”