Balance sheet and working capital for a manufacturing business

After depreciation, fixed assets grew by 13.4% in financial year 2016, but this rate of investment slowed in 2017 to 5.2% and further reduced to 2.9% in 2018.

The increase in revenue and continued profitability demonstrated in the data is reflected by the growth in net assets. This has risen from £9.97bn in 2017 to £10.49bn in 2018. From this we can draw that companies are growing revenue by increasing utilisation of their existing assets and making them work harder.

 Inventory levels were fairly well controlled in 2016 and 2017, with an increase in inventory levels and a reduction in the Cost of Goods Sold (COGS)/Inventory and Revenue/ Inventory ratios in 2018, as demonstrated in the table (above). The increase in 2018 being noticeably ahead of the previous years, double the percentage increase of the previous year, 2016 £2.43bn, 2017 £2.66bn (increase of 9.5%) and £3.15bn (increase of 18.42%) in 2018.

There is certainly evidence that companies raised inventory in 2019 due to Brexit uncertainty. Our clients surveyed commented that there was growing uncertainty in the supply chain as we approch Brexit, reflected by an increase in the levels of inventory businesses are holding.

Debtors days have fallen in the period alongside an improvement in working capital and the cash to borrowings ratio. Throughout the four-year period, borrowings have exceeded cash levels, although since 2017, the deficit has reduced at a much quicker rate than previously. In 2016 the deficit was 0.28 reducing by 42%, 2017 it was 0.19 with a reduction of 32% and in 2018 the deficit was 0.8 reducing by 58% on the previous year. Businesses are increasingly protecting cash, controlling debtors and either reducing the dependency on loans [or the availability of loans is reducing]. This is further supported by an improvement in the Current Ratio.

Overall, revenue is increasing, but due to a tightening of margins and reducing profitability, businesses appear to be less likely to invest.

Thoughts from the experts

Restrained investment due to market uncertainty is a clear theme. This is a concern as investment in state of the art technology drives productivity and performance in addition to creating capacity.

The UK already lags behind international peers in manufacturing technology investment and in times of tighter global competition the need for investment is ever more pressing. This needn’t always be in large capital assets to create new capacity, but could be in digital and automation technologies that improve the performance and yield from an existing asset base.

Sam Turner
High Value Manufacturing, Catapult (HMV)

There is certainly evidence that companies raised inventory in 2019 due to Brexit uncertainty. There was a pick up before each of the planned Brexit dates as companies prepared for the possibility of ‘no deal’ and then some rundown afterwards when Brexit was delayed. There is no real indication of a marked Brexit impact on inventory prior to 2019. However, it is possible that companies were caught out by the extent of the slowdown in 2018 and so found themselves with unwanted stocks.

Rhys Herbert
Lloyds Bank Commercial Banking

Case study: Flexible Machining Systems (FMS)

FMS is a precision engineering company, hoping to expand its business outside of the UK within the next couple of years. It has a loyal customer base owing to its excellent reputation for quality. However, it had lacked investment over several years until recently, when FMS and its sister company, Horsham Sheet Metal (HSM) (who were both part of a larger business group), were purchased. FMS’ new owner is now investing in new machines, equipment, people and processes. Its new robust production planning and project management processes have had a positive impact on the business, making sure orders and special projects are executed on time. This has been aided by the addition of six new people, including three apprentices, a quality/continuous improvement manager and production engineers. Russell Levell, FMS and HSM managing director, believes the Government should promote the Manufacturing industry as an exciting career choice more effectively, as many school leavers have the perception that it’s a ‘dirty’ job.

This article comes from our latest Manufacturing & Engineering Survey Report, now in its eighth year, is a go-to report when it comes to understanding the sector, its opportunities and challenges. We benchmark SMEs across the UK to paint a national picture of the Manufacturing and Engineering sector.

Click here to read a copy of the full report.