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Every business trying to grow their enterprise value needs to grow sales, increase margins but, all whilst using scarce working capital efficiently.

Sustainable growth is only possible if you have a firm handle on cash. Running out of cash can sink an otherwise successful business.

Working capital levers include managing inventory levels, customer debt and the money you owe your suppliers. It is important to get working capital as low as possible and make sure it does not grow faster than sales.

In our recent original research in the UK Manufacturing Barometer, which analyses the UK manufacturing sector, we can see that despite companies enjoying solid revenue growth over the last 5 years, those sales did not translate into higher profits. We concluded there are 3 main cash-control challenges which are shown below in an excerpt from the report.

Challenge 1 – getting paid

First there is the collection of customer debts. Companies must do this as swiftly as possible. During the interval between supplying goods to customers and collecting the cash, the manufacturer is effectively financing his customer, allowing him to sell on the goods or add further value before actually paying for them. Manufacturers have managed these trade debtors reasonably well, especially over the last three years, with the value of unpaid bills rising more slowly than sales. In 2019/20 companies collected all their debts in an average of 43.6 days, down from 46.0 days in 2016/17. Most sectors have improved collections, as have larger and smaller manufacturers, but bigger players are consistently significantly more effective than their smaller counterparts. Those with sales under £200m give their customers an extra week to pay on average (47.3 days compared to 39.7 days for larger producers). For almost the same value of sales in 2019/20 the smaller companies in our sample provided their customers with £2.6bn more credit than bigger firms. On average customers owed each smaller company £12.2m in 2019/20 at any given moment, compared to outstanding invoices of £38.5m for larger firms.

Challenge 2 – staving off creditors

The second challenge is to delay paying suppliers as long as possible. A manufacturer must strive to complete as much of the production and sales process as possible before he has to pay his supplier. In other words, suppliers are helping finance a producer’s working capital. On this measure companies have not done as well. In 2019/20, they paid their trade creditors 1.4 days more quickly than in 2016/17, with almost all sectors unable to extend their credit terms. This created an unnecessary additional £652m working capital need (ie after adjusting for higher sales). What’s more, two thirds of this burden fell on smaller manufacturers. Suppliers have clearly successfully pressured manufacturers to pay their bills more quickly.

Overall, manufacturers are subject to tighter payment terms from their suppliers than they extract from their customers, paying their bills on average almost six days more quickly than their customers settle their accounts. The average company in our sample was owed £5.6m more by customers than it owed suppliers at any given moment in 2019/20, up from £4.9m in 2015/16. Even if debts were collected and creditors paid at the same time, the difference between the two would always grow if sales are increasing, because a manufacturer is adding value in his production process – selling products for more than the cost of raw materials. This means constant vigilance is essential to keep the working capital need to a minimum.

Challenge 3 – stock control is crucial

The final challenge relates to inventory (also called stock) management. This can be especially difficult. Manufacturers need enough raw materials to keep production going, but having too much not only adds cost in terms of warehousing and can lead to spoilage in some industries, but this also absorbs huge amounts of cash. Equally companies do not want capital tied up in goods mid-production, nor in finished goods sitting waiting for customers to buy them.

Unfortunately, producers have not managed inventories well in recent years, seeing them rise consistently faster than sales. In 2019/20, they held inventories worth two months (61 days) of production, an increase of four days since 2016/17 and almost a week over the last five years. Inventories have swollen by £5.9bn in three years – two thirds of this can be explained by higher sales, but the rest, £1.9bn, is down to less efficient inventory management. Chemicals and building materials firms have seen disproportionately large increases in inventories, but every sector except textiles is holding more stock than can be justified by sales growth. Smaller manufacturers have allowed the situation to deteriorate more than their larger counterparts, accounting for three fifths of the increase. The average manufacturer in our sample held £19.3m of stock at any given moment in 2019/20, £4.2m more than in 2016/17, an increase of 28%.

As the UK economy gets back on its feet, most companies will experience rapid growth this year to get back to the revenue levels they were at in 2019. Many will exceed previous levels as pent-up customer demand, whether B2C or B2B, rises. Growth is of course, positive but it will take careful cash management for increased the revenues to transfer into increased profits.   Rigorous cash management is critical for survival and how you manage your supply chain will have a huge impact on your results at the end of 2021. Companies typically spend up to 70% of the value of revenues with external third-party suppliers. Yet, so many companies and their CFOs fail to realise this value and underestimate the potential by at least 50%.

We all know instinctively that better information leads to better decisions. It’s always easier to navigate in the day, rather than at night. Despite this, too many decisions continue to be made on gut feel and anecdote, despite the risk that a bad decision could leave the company floundering on the rocks.

Almost every route to higher revenues depends on a reliable and predictable supply chain. When asked about whether their supply chains meet these standards, most company executives answer “no”. Whether you are the CEO, CFO or the Supply Chain Director, knowing that your supply chain weaknesses could suddenly derail this quarter’s numbers, keeps you awake at night! If 2020/21 has taught us anything it is that managing long term risk, sustainability considerations and the financial impact of an inefficient supply chain, can make the difference between enterprise success and failure.

There are few things more consistent in business than the rule that companies need cash to grow. Cash is far more important than profit in the short term so working capital deserves special attention. Pretty much all businesses who have survived the pandemic now meet the definition of “growth business” and are now caught in the cash paradox. Whether 2020/21 was a historic year because Covid boosted sales or you saw a big dip below previous levels from which a rebound is expected – the story of 2021-22 will centre around growth.

The pandemic and Brexit together represent a shock of unprecedented proportions that have transformed the economy and changed priorities. I’ve begun to run out of superlatives to describe the scale of the upheaval we have all experienced in the last year. Manufacturing and construction have certainly fared better than some parts of the economy like retail and hospitality, but we are beginning to see the shoots of recovery everywhere. Now is the time to take a hard look at your supply chain and to create value. In my long experience, most companies underestimate this opportunity by as much as 50%. And the value can be delivered in as little as 90 days!  Our new research featured in UK Manufacturing Barometer clearly demonstrates some of the issues you need to face into.

The team at Insider Pro have researched 1,500 UK manufacturers and found a worrying pre Brexit, pre-Covid picture. Although in the last 5 years UK manufacturers grew sales by 21%, they failed to grow profits.

In the same time frame;

• Collection of debts improved by 3 days
• They failed to secure longer credit terms from suppliers
• Stock bloated from 55 days to 61!

As the effects of Brexit wash through, and companies try to reboot volumes in 2021, there is trouble on the horizon. Profits are set to halve and cash is under pressure like never before! But there is also good news. The winners in the next 18/24 months will be those who win the battle for cash. With strong cash controls, companies can build a war chest which will help them win market share and invest where their competitors can't. Supported by a robust, agile supply chain, the winners may well take it all. The stage is set for disruption and change.

As we edge towards re-igniting the economy, CFOs of large, medium and small enterprises, need to focus on the basics.  The old mantra "Cash is king" has never been more important if companies are to recover and take advantage of the new normal.

If 2020 has taught us one thing, it's the importance of team spirit.  And Insider Pro demonstrated this clearly at our Christmas jumper charity event last week.  Since March, everyone has been forced into a position of uncertainty and isolation and being part of a team has become even more important.  It was critical to decide quickly on the best ways to hold the team together, communicate, connect and maintain important relationships. 

On 5th December 2018, we published a blog  https://blog.insiderpro.co.uk/7-things-to-do-now-to-prepare-your-supply-chain-for-brexit

It's time to re-visit and assess whether those 7 things are still relevant today.  Now, exactly two years on, UK and European businesses await final the Brexit terms, amidst dramatic newspaper headlines which talk about a deal "hanging in the balance" and threat of "catastrophe at the borders". Meanwhile, professionals in industry continue to assess the potential impact on their supply chains across the continent.