Financing the Manufacturing Industry
The UK’s manufacturing industry is colossal. According to the ONS’ most recent 2019 data, the total value of product sales made by UK manufacturers amounted to £396.6 billion. There are a lot of different sectors contributing to this figure, with the largest including Food & Drink, Transport, and Pharmaceuticals – which collectively make up over 40% of GVA (Gross Value Added).
Manufacturing is also a key player in this industry, and given the complexity and scale of your typical manufacturing operation, it’s unsurprising that a lot of suppliers utilise business finance products in order to purchase materials, quickly react to unexpected orders, and manage overhead. In fact, over 20,000 SME loans and overdrafts were granted to UK manufacturing businesses in the 2019-2020 financial year alone.
In this article we’re going to explore the relationship between external finance and manufacturing, while taking a look at some of the key operational challenges faced by manufacturers and how solutions can be funded.
What challenges do manufacturers face?
There are a lot of different types of businesses in this sector, each of which have different outputs. Some are considered ‘Tier 3’ and essentially produce and refine raw materials, whereas ‘Tier 1’ manufacturers may create more complete products such as engines or parts for vehicles, for example.
Regardless, the fundamental costs these manufacturers face are broadly similar. These include:
Even in manufacturing plants that rely heavily on automation, there’s inevitably a human labour element whereby people must maintain and operate machinery. Properly managing staffing costs is essential to any successful business and having a healthy cash flow will ensure manufacturers are able to pay their employees’ wages.
The cost of materials
Independent of their specialism, all manufacturing businesses source raw goods from suppliers. Some factors, such as the availability of raw materials, may be out of a manufacturer’s control at times, but ensuring the right financial plan is in place to ensure these materials can be bought is typically a control factor.
A manufacturer’s ability to source materials determines whether or not it can generate revenue.
Electricity and gas are amongst some of the largest costs a manufacturer will face. Many plants operating 24/7 will burn through a tremendous amount of power and resources in order to bring products to life.
What’s more, the intensity of this activity inevitably has an impact on the facilities themselves. Wear and tear can become an important cost challenge that must be overcome, as external contractors may need to be brought in to fix equipment.
And finally, let’s not forget the cost of rent if neither the plant nor the land upon which the plant resides isn’t owned by the manufacturer. An accountant will record all of the different costs we’ve mentioned as inventoriable costs, and freight may also need to be included if raw materials are being sourced from another location.
So, there are quite a few different cost challenges that could surprise businesses in this industry – what can businesses do to prepare for these?
How to properly finance manufacturing operations
Here are our quick tips.
1. Produce a proper cash flow forecast
Only with a true understanding of your financial projections can you say with confidence that you’re taking all the steps needed to prepare your business for the weeks and months ahead.
The easiest and most effective way of reaching this point is to create a cash flow forecast that takes into account your current revenue, profit, credit, costs and the likes - then factors in seasonal and market trends you’re anticipating to project your revenue over the coming months.
2. Understand the business finance options available to you
The lending landscape can at times be confusing. We simply don’t live in an age whereby the traditional business loan or overdraft is the only viable finance product.
Instead, technology has reshaped the external finance market, and you’ll now have access to sophisticated products that use algorithms and machine learning to improve your borrowing experience – like our own product at NatWest Rapid Cash.
Gaining an idea of the size of the manufacturing cost you’re anticipating should be the starting point in your journey. If you don’t know a secured loan from an unsecured loan, or invoice financing from factoring, then you may do well to spend some time getting to understand the lending landscape of today. Alternatively, a broker could support you with this knowledge for a fee.
3. Develop a proactive and a reactive financing strategy
Cash flow forecasting is an incredibly powerful tool that can help you plan more effectively than your competitors. It isn’t, however, always helpful if you’re hit with sudden and unexpected costs.
When this happens, having a finance facility available to you that enables you to react quickly is key. You’ll want to find a financial arrangement that enables you to:
- Gain access to funds quickly.
- Rely upon a large facility limit if your costs are high.
We’ve produced some handy guides that can help you get to grips with some of the best-known products that can support with this reactive financing, including business overdrafts and invoice financing.
To be eligible for Rapid Cash you must be trading for more than 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, FreeAgent and Netsuite.
Security and guarantee required. Product fees may apply.
Business Overdrafts - Security may be required. Product fees may apply. Subject to status.