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Financial factors affecting manufacturing

Posted by: Katherine Garratt 1 Nov 17 - 2:24PM  | Recruitment
Despite confidence being dampened by this year’s snap general election and Brexit fallout, manufacturers are continuing to thrive, with output, orders, exports, employment and investment at historically high levels (EEF).

While market conditions remain quietly confident, Matthew Wainwright, senior consultant for accountancy, finance and risk at Jonathan Lee Recruitment, outlines the key financial factors affecting manufacturing and engineering businesses going into the next 12 months.
 
Mattew wainwright - Accountancy Finance Risk recruitment
Matthew Wainwright
matthew.wainwright@jonlee.co.uk

The falling pound


GBP to EUR Chart for the last 2 years
GBP to EUR, November 2015 - November 2017, source: xe.com

During 2017, we have seen the pound steadily fall against the Euro. While the referendum result may have triggered the fluctuation of the pound back in June 2016, it is the strength of the euro and wider global economy that has exacerbated the weak sterling. Namely, Emmanuel Macron’s victory in the French general election and the anticipation that the European Central Bank will start cutting back on its Quantitative Easing programme has boosted confidence in the eurozone and strengthened the euro (BBC).

Of course, there are winners and losers to a weak pound. For manufacturers, exporting has never been more attractive. Output has picked up in export supply chains and UK manufacturers are increasingly producing goods that were previously imported.

The Financial Times reports that export market conditions have encouraged some manufacturers to invest more both to improve efficiency and expand capacity, while plans for investment remain strong over the coming months.

On the flip side, businesses that rely on importing raw materials are facing tougher times. Manufacturers confront a large rise in costs, particularly if they have no alternative but to import. These businesses have been faced with either reducing their profit margin or increasing the cost of their produce.


Is the weak pound set to continue?


Since Brexit, the rising cost of imports – particularly in fuel, food and clothing, has pushed UK inflation to amongst the highest in the world (Guardian), making exporting the winning formula in the short-term.

Whether the weak pound will continue over the next 12 months is the big question for manufacturers and will affect long-term negotiations for companies that import.

The pound could rise on the back of an interest rate hike (PSF), but this is by no means guaranteed. While inflation this year peaked at 2.8% in October (ONS), there is debate as to whether a rise of 0.25% to 0.5% could take place during November 2017 (Financial Times) or if GDP growth is too weak to warrant higher rates at all (BBC).

Most recently the pound has been rising against all other currencies as investors take notice of the possibility of the Bank of England raising interest rates this week, however, with Brexit looming, there remains much uncertainty (PSF).


Brexit scenarios


A ‘no-deal’ Brexit could see the pound fall to parity with the euro for the first time ever and slump as much as 17 per cent against the dollar; further increasing the likelihood of inflation and forcing the Bank of England to adjust base rate back down to restore confidence (Independent).

A hard Brexit scenario, meaning a no transition deal, would see the UK relying on World Trade Organisation Rules to buy from and sell to the EU. This could result in a sharp drop in exports, business investment and confidence and the UK flirting with recession (Independent).

On the flip side, there are some that have not ruled out a soft Brexit, with the UK potentially joining the European Free Trade Association (EFTA) and taking Norway’s model, even if it is only during a two to four-year transitional period (Guardian). This solution would create less waves. However, whether this would be possible remains up for debate, particularly if the EU loses patience with the UK and decides to cut Britain loose.

What can we take from this? The only certainty is that Brexit will weigh down long-term spending plans for manufacturers, whist future trading relationships are negotiated.


Financial planning for the next 12 months


There are a number of unanswerable questions over the UK economy, and for that reason, it is advisable that manufacturing and engineering businesses review their treasury accounting policy and financial, planning and analysis (FP&A) activities.

In an increasingly complex and volatile economic environment, a clear strategy for the treasury department is required in order to operate and respond timely to market changes. The strategy must be founded at board level/management level in order to ensure an efficient operation model that includes cashflow, forex hedging and resource management.


Mergers and acquisitions


If the economy slumps, the sector could witness an increase in mergers and acquisitions. Larger corporations could take advantage of the tough market to acquire SMEs, as they have the capital and supply chains in place to weather the current conditions, whereas smaller businesses will continue to struggle.

Mergers and acquisitions could be an attractive proposition under such circumstances and is a way of diversifying product offerings into promising new avenues. For example, a major food manufacturer wanting to move into developing food sectors could target the acquisition of health-foods and food-to-go markets.


Get in touch

Matthew Wainwright
matthew.wainwright@jonlee.co.uk
01384 446158

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