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How novel finance solutions can help firms cope with cash-flow pressure

Image credit: Siemens Financial

Innovative ways of handling customer payments can help manufacturing companies weather an uncertain business environment that has only been exacerbated by the Covid-19 pandemic.

Even prior to the coronavirus pandemic, the manufacturing industry faced a number of specific challenges, many of which have the potential to impact cash flow.

One of the most significant is the talent deficit. A shortage of skilled workers is an issue currently affecting sectors across the industry. One study from EngineeringUK estimates a yearly shortage of 20,000 engineers, while another from Transport for London suggests the infrastructure industry needs to recruit an additional 55,000 more people by 2020. Research by the British Chamber of Commerce found that 81 per cent of 6,000 UK manufacturing businesses surveyed found it difficult to hire employees with the right qualifications and experience.

Uncertainty surrounding freedom of movement means fewer skilled EU workers in the UK, putting more pressure on such businesses seeking to fill niche skills gaps. Further, a lack of expertise has the potential to impact competitiveness particularly in the global manufacturing market, meaning investment in staff and training is more important than ever.

On top of this, there’s the challenge of deciding what technology to invest in. As well as meeting regular operational costs, manufacturers are investing in digital technology solutions which are increasing competitiveness. Automated systems that reliably perform repetitive, standardised tasks continue to enable manufacturers to operate with greater efficiency. This is evidenced not only by speedier production rates but also reduced factory lead times, more efficient use of materials, and increased control over product quality and consistency. Manufacturers need to balance the value delivered by Industry 4.0 equipment and technology with the associated costs and possible impact on cash flow.

Late payments from companies using their services can also have a significant impact on manufacturers’ ability to pay bills or wages. Our research shows that SMEs tend to suffer from slow and/or late payments disproportionately due to their position typically towards the end of the supply chain. Businesses – including manufacturers - with an annual turnover of under £1 million wait on average 72 days for invoices to be paid.  This is significantly longer than the largest businesses, which typically wait 48 days. 

On top of that, research shows that more than half of UK manufacturers have fallen victim to cyber crime. Such a high proportion indicates acute vulnerability in the industry and a need for swift strategic change. Manufacturers may defer investment in new digital technologies for fear of increased exposure to cyber attacks, but protective technologies available that can help to mitigate threats are an essential investment for businesses ready to face the challenge head on. These fears shouldn’t stop manufacturers investing in Industry 4.0, as deferring investment could see businesses left behind by forward-thinking competitors.

All of these challenges contribute to increased pressure on SMEs’ finances, as they decide where investment is best directed and how it can be funded. Nevertheless, there are solutions to help them manage their cash flow.

Invoice finance, for example, can enable manufacturers to leverage unpaid invoices to unlock funding. By using invoice finance, when a company invoices their customer, up to 90 per cent of the approved invoice total is immediately advanced by the finance provider, with the remaining 10 per cent paid once their customer settles the balance. This provides the company with essential working capital so it can pay its bills and wages on time.

Access to more working capital can ease the pressure on SMEs in the manufacturing sector and potentially allow them to increase investment in areas such as entering new markets or hiring new staff, for example. Rather than focusing on making payments month to month, businesses can improve productivity and maximise competitiveness, ensuring they are prepared to take on new projects and seize new opportunities. In this way, manufacturers can go from ‘treading water’ to embarking on business expansion.

Simon Penn is head of invoice finance in the UK at Siemens Financial Services

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