by Philip Middleton - Solicitor, Restructuring and Insolvency
The manufacturing sector is under pressure.
Brexit and the pandemic have contributed to a range of issues, each of which alone would create headaches for businesses – from the end of the furlough scheme to the increase in energy prices, supply chain shortages and delays (such as the shortage of micro-processors and the shortage of haulage drivers in the UK) and the return of a creditor’s ability to present a Winding Up Petition (subject to the satisfaction of certain requirements). All the while, Covid-19 remains a concern for all employers, with the infection rate not decreasing.
An increase in costs presents all businesses - and particularly manufacturers - with a dilemma. Do they absorb the price rises or do they pass them in whole or in part to their customers?
The challenge which could arise with the first option is that this could quickly deplete any reserves that your business has, putting pressure on its own cash position and cash flow.
The challenge with the second option is that this could result in the manufactured goods being more expensive than those sold by competitors and result in a reduction in orders, once again impacting adversely on its cash position. It is a narrow path to tread.
All of these factors can and have had a negative impact on manufacturers’ cash flow and profitability. Data suggests an increase in manufacturing sector insolvencies of 23% year-on-year in the three months to July 2021 (Cork Gully, Sep. '21).
Taking advice at the first signs of financial distress rather than putting this off in the hope that the situation improves can be critical for those businesses who are struggling now or can see headwinds on the horizon. It gives an opportunity to consider different options that could allow for your business to continue trading and safeguard jobs. Such options include an operational or financial restructuring including obtaining alternative sources of finance.
Seeking advice early will also assist directors who are leading manufacturing businesses during this difficult period. The importance of directors seeking advice, both in terms of their duties and the risks of courses of action that they are proposing to take whilst cash is still available, cannot be understated.
At Irwin Mitchell we regularly advise businesses facing potential short term cash issues or financial distress, along with businesses that are facing the prospect of insolvency due to supply chain disruption leaving them unable to complete production or meet requirements. It is vitally important that expert advice is sought as soon as any concerns arise advises Andrew Walker, Irwin Mitchell’s National Head of Restructuring and Insolvency.
“We have seen that where businesses recognise that difficulties may be on the horizon, they are far more likely to survive if they take advice early. We are able to support businesses with our specialist advisory teams and a number of products to give them a range of options to continue and preserve jobs in the manufacturing sector. Our teams work collectively together to give advice on the holistic business including employment, property, restructuring, finance and contractual issues.”
If you or your business require expert advice and support, our team are here to help:
Philip Middleton is a Solicitor in our Restructuring and Insolvency team, and sits on our Manufacturing working group.
Andrew Walker is a Partner and National Head of our Restructuring and Insolvency team, and specialises in turnaround and insolvency matters.
Chronic shortages of materials caused by supply chains buckling under the weight of a resurgence in global demand are intensifying the spectre of “stagflation” looming over the UK economy. A sharp slowdown in growth in Britain’s manufacturing industry has prompted Rob Dobson, director at IHS Markit, a producer of a closely watched economic survey, to warn “the UK [is] descending towards a bout of ‘stagflation’.”