Starting out in manufacturing

Starting any business and making a success of it takes hard work and commitment. Setting up a manufacturing business in the current climate can create even more challenges; this feature highlights some of the pitfalls start-up manufacturers need to bear in mind.

Sadly a third of all businesses fail in the first year, and only a quarter will achieve long-term profits. Manufacturers face additional problems because of the depressed market, and the higher initial capital requirement.

New businesses fail for many reasons. Many are unsuccessful because the entrepreneur is not up to the task. Running your own business requires a great deal of self-discipline. A great innovator may not necessarily be the right person to run the business.

It is vital to recognise your own weaknesses: if you cannot do it all yourself, find somebody else better equipped to manage people and finances. Sometimes, of course, the product does not catch on. This may be a result of failing to market the product properly, or carrying out inadequate independent market research.

Importance of planning

Before a product can be sold, the idea will need to be sold to investors, normally the bank. To facilitate this, a business plan will need to be prepared. A good business plan will address issues including pricing policy and competition, as well as detailing the management team.

The key area will be the financial projections. As these projections will have to be based on certain assumptions, these will have to be explained. Again, it is vital that the appropriate level of research and independent advice is taken. A poor business plan will completely undermine your credibility.

Funding

Manufacturing businesses usually have a larger capital requirement, to fund the purchase of office and factory premises, vehicles, development costs and working capital. Lenders will need to see that the profits are sufficient to cover the interest and capital repayments, but will also require other forms of security. This is likely to be a personal guarantee, supported by the entrepreneur's personal assets.

Making a profit

Although, in the long term, profits should equate to cash, this is not the case year on year. In early years especially, even very profitable businesses can fail if the cash is not managed correctly. If profits are reinvested in the business, in the form of working capital such as stock or debtors, a creditor can have the company wound up, if it is unable to pay its debts as they fall due.

To effectively manage the business, monthly management accounts should be prepared. A sophisticated accounting system, and the appropriate personnel will therefore be required. Close contact should also be maintained with the bank manager, and future cash requirements should be established almost continually.

Manufacturers are still facing a squeeze on margins. Latest figures as detailed in the Times this month show that prices for goods leaving factories rose 0.1% in November 2003, while input costs were up 1.3%. However, manufacturing leapt by 1% in October alone, pushing the annual growth of the sector to 2.4%, raising the hopes of a sustained recovery.

In the recent Pre-Budget report, the Chancellor predicted 2% growth for the next three years, and has introduced further incentives to help the sector. These include a review of the effectiveness of the Small Firms Loan Guarantee, to make funds more readily available for small businesses.

There will also be a widening of the Research and Development tax credits and an increase of the SME threshold, which means that more small businesses are eligible for first year allowances, therefore making it more tax efficient in their first year of business. Manufacturers and firms with turnovers up to £22 million pounds will benefit from 40 % capital allowances. These measures will effectively make it more tax efficient to invest in assets, and as this is such a key issue for manufacturers, such tax breaks are welcome.

Working capital

In terms of profit reporting, assets represent probably the largest item of expenditure, but only the extent to which they are depreciated affects the profits of the company. Profits are not enough - you need cash in the bank to pay your creditors! The business plan should address this issue, and asset financing should be carefully considered.

Every penny tied up in stock or debtors cannot be used to pay creditors, potentially missing the opportunity to claim early payment discounts, or to reduce the overdraft, hence increasing the interest overhead. There is no point having stock on the shelf and no cash in the bank!