Gary Thompson, Siemens Industries and Markets, Siemens Financial Services (UK) examines the cash flow pressures faced by SME food & beverage manufacturers and how invoice finance can help
Food and beverage is the single largest manufacturing sector in the UK with a turnover of £96 billion, which is more than the vehicle production and aerospace manufacturing sectors combined.[1] SMEs make up a significant proportion of the food and beverage manufacturing industry; there are 6,400 food and drink manufacturing SMEs, with a combined turnover of
nearly £22bn and 124,000 employees.[2]
Industry data suggests that food manufacturers are facing a number of challenges. In January 2017, a survey by the British Chambers of Commerce (BCC) found that 52% of manufacturers surveyed planned to increase their prices due to rising material costs as result of the weak pound. Firms reported that margins were being squeezed and this had the potential to weaken future investment.[3] More recently, a report by the Confederation of British Industry (CBI) found that despite food manufacturers’ seeing a rise in orders, profit margins have been hit.[4]
Manufacturers, along with other companies in the food and beverage industry, are also coming under pressure to reduce the use of plastic packaging.[5] MPs have written to supermarkets, urging them to eliminate plastic packaging by 2023.[6] Food manufacturers have also been affected, with some already pledging to tackle the problem. Cranswick plc, UK food producer and supplier for example, has said that all packaging will be 100% recyclable and sustainably sourced and, additionally they will look to reduce their plastic use by 50% by 2025.[7] Whilst the long-term benefits of reduced plastic usage for the environment can’t be denied, food manufacturers are faced with assessing how they can modify their processes to accommodate new packaging methods.
Industry 4.0, or the new industrial revolution, brings opportunities for manufacturers in the sector to revolutionise not just packaging but other processes too. Smart sensor
tags and labels are able to detect leaks or breaches to packaging to reduce wastage.[8]Electronic traceability allows producers to track items from delivery to the supermarket shelf in order to support joint systems and more efficient demand and production planning.[9] More broadly, Industry 4.0 technology can enable efficient, interactive and flexible ‘smart factories’. A more flexible, fully automated ‘lights out’ manufacturing system will enable the production of new products.[10] Similarly, electronic traceability is improving shelf-life by connecting engineering to production to IT, allowing for more efficient planning.[11] Other benefits of Industry 4.0 include supply chain integration. Manufacturers can take their products to market more quickly by connecting the supply chain to the production facility. Patterns in collected data also allow them to anticipate customer demand and refine their processes.[12]
Capitalising on Industry 4.0 is dependent on investment, which can be particularly challenging for SMEs.
Research from Siemens Financial Services[13] shows that SMEs tend to suffer disproportionately from slow and/or late payments due to their position typically towards the end of the supply chain. Businesses with an annual turnover of under £1 million wait on average 72 days for invoices to be paid.[14] Businesses with an annual turnover of between £1 million and £10 million wait on average 53-54 days. [15] This is significantly longer than the largest businesses, which typically wait 48 days.[16] UK SME food manufacturers recently saw a sudden increase in the amount of time they wait for payment from their customers, with average waits jumping from 44 days to 47 days. Concerns have recently been raised over supermarkets forcing their suppliers to accept lengthened payments terms, as retailers respond to the growth of discount supermarkets.[17] There is also some evidence of supermarkets waiting until they have sold goods before ‘starting the clock’ on payment terms. So the longer goods remain on shelves, the longer suppliers will wait to be paid.
In short, along with multiple investment pressures, SMEs in this sector are also facing late payments from companies further down the supply chain.
All of these challenges contribute to increased pressure on food manufacturers’ 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. With invoice finance when a company invoices its customer, up to 90% of the approved invoice total is directly advanced by the finance provider, with the remaining 10% paid once their customer settles the balance. Invoice finance provides the company with essential working capital so it can invest in expanding its business without having to wait for bills to be paid.
Invoice finance companies now provide more funding than ever to SMEs, with funds used across the UK exceeding £20billion for the first time in 2016.[18] Access to more working capital can ease the pressure on SMEs in the food manufacturing sector and potentially allow them to invest in new technology. This not only can help improve productivity, but has the potential to lead to growth opportunities with new products and markets.
The financial pressures facing SME manufacturers in the food and beverage sector are negatively impacting their cash flow. Invoice finance can help, unlocking unpaid invoices and stimulating business growth.
[1]IGD (Institute of Grocery Distribution), ‘The UK’s Food and Grocery Industry’, 2017 https://www.igd.com/Portals/0/Downloads/Media/UK_food_and_grocery_industry_booklet.pdf
[2]Ibid
[3] Independent, ‘Brexit: Record number of UK businesses say weak pound will force them to raise prices within months ‘, 5 January 2017, http://www.independent.co.uk/news/business/news/brexit-latest-news-uk-businesses-record-number-weak-pound-sterling-force-price-rises-british-a7510516.html
[4] FoodManufacture.co.uk, ‘CBI: Weak pound hits manufacturers’ profits as exports rise’, 24 January 2018, https://www.foodmanufacture.co.uk/Article/2018/01/24/CBI-Weak-pound-hits-manufacturers-profits-as-exports-rise
[5] See for example: BBC News, ‘What are supermarkets doing to fight plastic?’, 14 January 2018, http://www.bbc.co.uk/news/science-environment-42652937
[6] Food Management Today, ‘MPs call on supermarkets to eliminate plastic packaging’, 19 Janury 2018, https://www.foodmanagement.today/mps-call-on-supermarkets-to-eliminate-plastic-packaging/
[7] CIWM Journal, ‘British Food Manufacturer Pledges 50% Plastic Use Reduction By 2025’ , 18 January 2018, https://ciwm-journal.co.uk/british-food-manufacturer-pledges-50-plastic-use-reduction-2025/
[8] Wrap, ‘Food futures’, 2016 http://www.wrap.org.uk/sites/files/wrap/Food_Futures_%20report_0.pdf
[9] FoodManufacture.co.uk, ‘Food Manufacturers advised to plan for Industry 4.0’, 15 June 2016 http://www.foodmanufacture.co.uk/Manufacturing/Food-manufacturers-should-prepare-for-Industry-4.0
[10] The Telegraph, ‘Food Manufacturing 4.0’, 10 September 2015
[11] FoodManufacture.co.uk, ‘Food Manufacturers advised to plan for Industry 4.0’, 15 June 2016 http://www.foodmanufacture.co.uk/Manufacturing/Food-manufacturers-should-prepare-for-Industry-4.0
[12] Ibid
[13] Siemens Financial Services, ‘Mind the Payment Gap’, 2017 https://www.siemens.com/uk/en/home/products/financing/working-capital-finance/invoice-discounting.html
[14] Asset Based Finance Association (AFBA), Smallest businesses waiting longer than ever for payment, 13 July 2015, http://www.abfa.org.uk/news/97/Smallest-businesses-waiting-longer-than-ever-for-payment
[15] ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/Late-Payment:-An-analysis-by-sector
[16] ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/Late-Payment:-An-analysis-by-sector
[17] ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/Late-Payment:-An-analysis-by-sector
[18] ABFA, UK businesses secure record amount through invoice finance – breaks GBP 20bn barrier for first time, 05 September 2016, http://www.abfa.org.uk/news/125/UK-businesses-secure-record-amount-through-invoice-finance-breaks-GBP-20bn-barrier-for-first-time#sthash.csJjUmHO.dpuf
