Triple whammy means UK manufacturers profits to halve in 2021, report finds

UK manufacturers are suffering a triple whammy of lower sales, sharply declined profits, and a painful cash squeeze, according to the new UK Manufacturing Barometer from specialist consultancy Insider Pro, which helps companies build effective and resilient supply chains.

Insider Pro analysed the accounts of 1,457 small and medium-sized manufacturers employing 2.7 million people - around a quarter of Britain’s manufacturing workforce. Its research reveals several years of good revenue growth until 2018/19, driven by a combination of higher volumes and gently rising prices.

But even before the pandemic struck and Brexit began to bite, sales growth in 2019/20 stalled across all major sectors. Companies made sales of £214.8 billion (€250.8 billion), unchanged year-on-year.

The Barometer reveals a picture that has worsened markedly since then. Despite recovering some lost ground from its low point during the first lockdown, industrial production is still well below trend.

Read more: Sizeable negative impact of Brexit on manufacturing & UK economy

According to Insider Pro's calculations, the disruption caused by the pandemic and, more recently by Brexit, will hit sales by a tenth in the year to March 2021, knocking around £21.5 billion (€25.1 billion) off small and medium manufacturer top lines.

Even before the 2019/20 slowdown and the effects of the pandemic in 2020/21, higher sales were not translating into rising profits. Collectively, UK SMEs booked £12.6 billion (€14.7 billion) in operating profit in 2019/20 (before the impact of the pandemic was felt), £200 million (€233.45 million) lower than in 2014/15.

Insider Pro points out in its report that this means all the £38 billion (€44.35 billion) of additional sales generated no additional profit. The consultancy said that most of the pressure came from smaller manufacturers, which suffered a sustained margin squeeze.

Across almost every sector, smaller manufacturers performed more poorly than their larger counterparts. Machinery, metals, and textile manufacturers were among those that experienced the greatest margin squeeze, while food & tobacco and chemicals & petroleum held their own. 

Read more: UK manufacturing "limped through" end of 2019

It is expected that profits will at least halve in 2021, falling by £6.3 billion (€7.35 billion).

In addition to lower sales and much tighter margins, companies are also suffering a cash squeeze. The big problem is on stock, raw materials and components, which are growing unsustainably faster than sales. In 2019/20, manufacturers held inventories worth two months (61 days) of production, a full week more than five years before.

Every sector except textiles held more stock than can be justified by rising sales, said Insider Pro. The average manufacturer held £19.3 million (€22.5 million) of stock at any given moment in 2019/20, £4.2 million (€4.9 million) more than 2016/17, an increase of 28%.

Elsewhere in the cash cycle, companies are collecting payment from customers more quickly, but they are paying suppliers sooner too – this means more working capital is being tied up here also.  Smaller firms are offering more generous terms than larger ones.

Insider Pro’s analysis shows the problem has worsened further in 2020/21, estimating that manufacturers have had to find an additional £2.5 billion (€2.92 billion) in working capital, even as their sales and profits have fallen. The impact is disproportionately larger for smaller companies, the consultancy said.

Jeremy Bowley, Managing Director at Insider Pro commented: “British manufacturers are facing the worst profit slump since at least 2008/9. But even before the shock caused by the pandemic and Brexit, the companies we have looked at had seen their returns on capital fall by five percentage points. The picture will be much worse now.

“Right now, they are struggling to control stock levels thanks to such unpredictable demand and such uncertain supplies. Customers will have attempted to slow payment and suppliers may be demanding faster settlement of debts. Added to this are the problems both exporting to Europe and sourcing from abroad. All this sucks cash from the business.

Also read: UK economy sees biggest drop in 300 years

“Looking ahead, the economy will take off as lockdowns end and companies are likely to see sales rebound. They could see their working capital needs spiral really quickly when this happens. Companies can only grow sustainably, or weather downturns, if they have a firm focus on cash flow. This is much more important than profit in the short term. Companies should tie up as little cash in their business as they can keep consistent with a smooth production and sales process. Running out of cash can sink an otherwise sound business and that’s even more important today.

“Surviving, thriving and building enterprise value depend on fine-tuning all the dials on your metaphorical dashboard. Doing this right doesn’t just add incremental value but is truly transformative.”

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