Manufacturers' optimism is up but so are late payments

Two reports out today offer rather different views of the state of the UK manufacturing sector.

According to the latest edition of the Manufacturing Optimism Index from accountants BDO Stoy Hayward, optimism and output levels are both at a seven month high. However, an annual late payments report from Barclays Bank said small and medium-sized manufacturers are owed more than £1 billion on any given day, and have had to write off almost £500 million in bad debts over the last twelve months.

BDO said that its optimism index, which it claimed is a strong predictor of economic growth two quarters ahead, rose in both April and May, after hitting a 12 year low in March. It added that May's output levels, which calculate order book strength and short run turnover expectations, saw the biggest monthly increase since December 2007.

"It's still too early to call the bottom of the market, but these are certainly some positive results and could suggest that things are beginning to look up. Anecdotally we're now hearing that UK manufacturers are looking to re-stock, and believe that they could be looking at the bottom of the cycle," said Tom Lawton, the accountancy firm's head of manufacturing.

That is assuming they don't get hit by late payments though, with Barclays reporting that 54 per cent of manufacturers think that the problem of late payments will definitely get worse over the next 12 months. Manufacturing businesses spend on average 1.6 hours a day chasing late payments, and 61 per cent of them have had to take out loans or overdrafts to improve cash flow as a result of being paid late, the bank said.

"Despite some recent positive economic signs, it's concerning that late payments are on the rise," said John Davis, the marketing director for Barclays Local Business, the arm of the bank which deals with businesses with up to £1 million in turnover.

"This is a serious issue for the manufacturers we talked to," he added. "Around two-fifths - 41 per cent - say it threatens their day-to-day survival, and firms typically have to wait over a fortnight (14.5 days) after the invoice due date before they get paid."

Davis said that, on a typical day in the manufacturing and production sector, small and medium-sized businesses are £3,287 out of pocket on average, due to suppliers or customers failing to pay within 30 days. This has resulted in the sector losing nearly £479 million over the last twelve months, which is an average of £1,459 per business.

The problem of late payments is making credit-checking services more popular than ever, he said, adding: "The businesses that will survive and thrive during the downturn are taking late payments seriously. We've seen a massive take-up of our in-house credit management service - last year we began providing the service free to all small businesses, not just our own customers, and we've been overwhelmed with its popularity. It's clear manufacturers are reacting to the downturn by keeping an even closer eye on their money."

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