Is stockpiling really the best strategy for manufacturing businesses to weather Brexit uncertainty?

Political stalemate surrounding Brexit has spelt uncertainty for businesses across the UK. Many manufacturers have taken to stockpiling to create a buffer against doubt about the future. But is it the best response?

Uncertainty has taken a real toll on positivity about the future sector-wide. Research by the CBI shows that 31% of the 270 manufacturers it polled are feeling less optimistic about the general outlook at the moment, while only 18% feel more optimistic. On top of that, demand uncertainty was pointed to as one of the factors most likely to limit investment plans (cited by 61%) and concerns over labour shortages rose to the record high of 27%.

With these worries, many businesses are turning to stockpiling as a solution. Stocks have risen at the fastest rate in 60 years – stockpiling of raw materials were up 39%, works in progress by 21% and finished goods by 25%.

CBI’s Chief Economist Rain Newton-Smith says: “The unprecedented pace of stockpiling suggests that Brexit contingency planning stayed at the forefront of manufacturers’ minds.”

The stockpiling trend is prevalent across many industries in the sector. Large car manufacturers, food & beverage manufacturers and aerospace manufacturers have all reported they are increasing supplies of materials and products. Whereas plenty of smaller manufacturers have said they are having to build up extra stock in case of problems at the border.

But, while stockpiling is an understandable coping strategy – and it’s good news that UK businesses are taking steps to prepare for Brexit – it comes with some significant drawbacks. Notably, the big gap it creates in a business’s working capital cycle; the cost it takes to stockpile will only be recovered once the stock is sold on.

Dean Barnes, Regional Director of Economic Growth Solutions of the UK SME Manufacturing Barometer explains:

“Stockpiling creates its own issues, for example if the business can’t finance this activity or because suppliers’ stock levels are running low. While stockpiling is a popular strategy to try to head off Brexit uncertainty, it could be high-risk as it ties up a company’s cash reserves which are needed for running costs and to pay employees.”

Stockpiling can also bring additional expenses. 38% of food manufacturing businesses reported incurring extra costs to store the additional produce. These logistical and storage requirements are only made more burdensome when dealing with frozen foods or those with a limited shelf life.

Releasing the pressure

One way to alleviate the strangle on cash flow that stockpiling can create is to find a flexible source of working capital.

Many manufacturers’ invoice finance arrangements will struggle to serve this purpose, as if materials are being stockpiled rather than serving client orders, there won’t be the invoices to lend against.

Similarly, business overdrafts from the bank are becoming increasingly hard to come by. This is a problem felt particularly hard by areas that have traditionally been the manufacturing heartlands of the UK. Cities such as Birmingham, Oldham and Sheffield saw a drop of 8%, 7% and 6% in SME lending over the last year, respectively.

This is one of the reasons we developed GrowthLine. At Growth Street, we’ve transformed the business overdraft to provide a flexible source of capital to SMEs. Notably, alongside invoices and work-in-progress, we can lend against 35% of a company’s stock, meaning you could unlock some of that cash tied up in stock reserves.

Rob Kelly, Head of Sales for the South at Growth Street, said: “It’s of course great news that businesses are taking action to prepare themselves for what’s to come once Britain has left the EU. However, stockpiling materials or other goods can leave a business vulnerable by reducing the cash reserves they have available to tackle any other unforeseen circumstances that could arise.”

“I’m working closely with many manufacturing firms that are struggling with this exact problem. Luckily for them, Growth Street can help unlock cash tied up in their stockpiled materials, giving the peace of mind they need to get on with business.” While there’s only so much a firm can do to prepare for the uncertainties created by Brexit, stockpiling businesses need to make sure they’re not caught short when it comes to cash flow.

To find out how GrowthLine could help your business, visit growthstreet.co.uk/growthline or call 0808 123 1231.

Written on in Business Insights Borrowing