Yahoo Finance UK manufacturing faces up to painful cash squeeze as profits projected to halve
Manufacturers are suffering a triple whammy of lower sales, sharply lower profits, and a painful cash squeeze which has meant their profits are due to more than halve this year.
According to a new UK Manufacturing Barometer from consultants at Insider Pro, the data suggests that operating profits will fall by at least £6.3bn ($8.8bn) in 2020/21.
Alongside this, pre-tax profits are set to drop by £7bn to £6.5bn.
Insider Pro has analysed the accounts of 1,457 small and medium-sized manufacturers employing 2.7 million makers, around a quarter of Britain’s manufacturing workforce. The research shows several years of good revenue growth until 2018/19, driven by a combination of higher volumes and gently rising prices.
It also found that even before the pandemic struck and Brexit began to bite, sales growth in 2019/20 stalled across all major sectors. Companies made sales of £214.8bn, unchanged year-on-year.
The picture has worsened markedly since. Despite recovering some lost ground from its low point during the UK's first national lockdown, industrial production is still well below trend.
Insider Pro calculated that disruption caused by the pandemic and, more recently by Britain’s departure from the EU customs union and Single Market, will hit sales by a tenth in the year to March 2021, knocking a staggering £21.5bn off small and medium manufacturer top lines.
Another issue facing manufacturing was the fact that higher sales did not translate into rising profits. Collectively, the UK’s small and medium-sized manufacturers booked £12.6bn in operating profit in 2019/20 (before the impact of the pandemic was felt), £200m lower than in 2014/15.
This means that all the £38bn of additional sales generated no additional profit. Most of the pressure came from smaller manufacturers, which have suffered a sustained margin squeeze. Across almost every sector, smaller manufacturers performed more poorly than their larger counterparts.
READ MORE: Over 17,500 UK chain stores shuttered in 2020 with more shocks on horizon
Machinery, metals, and textile manufacturers were among those that experienced the greatest margin squeeze, while food & tobacco and chemicals & petroleum held their own.
Jeremy Bowley, managing director at Insider Pro said: “Looking ahead, the economy will take off as lockdowns end and companies are likely to see sales rebound. They could see their working capital needs spiral really quickly when this happens.
"Companies can only grow sustainably, or weather downturns, if they have a firm focus on cash flow. This is much more important than profit in the short term.
"Companies should tie up as little cash in their business as they can keep consistent with a smooth production and sales process. Running out of cash can sink an otherwise sound business and that’s even more important today."
This forecast comes alongside other key indicators from manufacturing trade body Make UK and business advisory firm BDO released on Monday, which upgraded the manufacturing growth forecast in 2021 to 3.9% from 2.7%.
Despite the upgrade, Make UK said that this shows that it will take some time to recover the fall in output seen last year. The brutal impact of the coronavirus pandemic has also been laid bare, with the sector seeing a 10% fall in output in 2020.
Watch: 10 ways to Brexit-proof your finances
