Posted: 14 Mar, 2019
According to Paul Davies of accountancy firm, Menzies LLP, a combination of longer lead times on imported goods, increased red tape and additional costs incurred due to increased stock holdings could see manufacturers facing significant cash-flow difficulties in the event of a no-deal Brexit.
To avoid this, could they be doing more now to improve their financial management, bolster their supply chains and future-proof their cash position?
With a prevailing lack of certainty around the UK’s post-Brexit trading position, the number of UK manufacturers undertaking stockpiling activity continues to grow and, without the right planning, such a strategy could have a significant impact on their cash-flow. Failing to put in place some key measures now may cause the business to experience financial distress.
In the automotive industry, where manufacturers typically operate just-in-time manufacturing processes and rely heavily on parts imported from the EU, stockpiling is likely to be an effective risk mitigation strategy; allowing businesses to protect against the impact of potential supply shortages. However, it’s important to bear in mind that this could involve investing in surplus inventory and storing it at their own cost. With UK warehouse space currently at a premium, prices are on the rise and manufacturers considering whether stockpiling is right for them should make this a factor in their decision-making process.
Another potential source of cash-flow problems in the event of a hard Brexit is longer lead times on goods, although this will depend on the particular nature of the supplier relationship and the payment terms in place. For example, businesses paying on a pro forma basis or when their goods leave the factory, may experience pressure on cash-flow for a longer period.
Taking a proactive approach to forecasting their cash position, based on a number of Brexit scenarios, can help manufacturers to maintain a healthy cash-flow and avoid potential business disruption. Three-way forecasting, which involves combining financial data for a business’ cash-flow, profit and loss, and balance sheet, effectively allows manufacturers to predict the impact of future trading conditions.
By building in information for different ‘what if’ scenarios, such as stockpiling and increased lead times on goods, manufacturers can identify potential financial pressure points ahead of time, before they impact business performance. By conducting cash-flow forecasts for the next 13 weeks, owner managers will be able to consider their cash-flow cycle, taking into account any pressure points which could arise over the coming quarter - for example, end-of-month supplier payments.
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Paul Davies is a director at accountancy firm, Menzies LLP.
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