Why consider...the Manufacturing sector?

Setting up a manufacturing business can require a particularly high level of investment. You may need to pay for essentials such as equipment, premises and raw materials before you can start trading. However, entrepreneurs continue to be drawn to the manufacturing sector and there are several reasons why you might consider it yourself.

For example, you may have developed a new product. You could license the manufacturing and sale of this product to a third party but retain control of the process by producing it yourself. You may want to bring a certain type of product to the market more quickly or cost-efficiently than competitors. You may also see a gap in the market for a certain kind of product and believe that manufacturing it yourself is the best way to get it to the customer.

There are different methods of starting up and not all require opening a new factory unit. Some entrepreneurs have their ideas created by other companies and concentrate instead on marketing and selling their products. Others license out their inventions and allow others to profit from them in return for a fee. Some entrepreneurs form partnerships with existing businesses and split the proceeds. It is worth considering every option and understanding how each can be achieved before launching into a new venture.

In brief

• The pros and cons
• The statistics
• Money matters
• Business models
• Sources of funding
• Common pitfalls
• The moneysense top five: managing your money
• How I did it: Manufacturing
• Useful contacts

As with any business venture, the positives and negatives will depend on personal as well as business matters. Here are a few points to consider if you’re thinking of launching in the manufacturing sector.

Pros

• Control over product quality By manufacturing yourself you can ensure that the goods are made to the high standards you require
• Control over specifications By manufacturing yourself you can refine your product as you wish, allowing you to respond directly to customer needs
• Control over how you bring your product to market By having all your business under one roof you can plan your business more holistically, ensuring that your marketing and manufacturing are perfectly in sync
• Greater sense of satisfaction You will be able to follow a line of production from research and development through to prototype development and eventually full-scale manufacture

Cons

• High start-up costs You will need to rent space, hire staff, purchase materials, buy fuel and many other expenses before you can go to market
• Threat of competition Manufacturers in the UK face being undercut by competitors who outsource overseas or by businesses that operate in cheaper territories
• Less time to spend dealing with customers and selling Running a factory or workshop can be time-consuming and you might find it hard to spend as much time with customers as you’d like to

Despite negative headlines regarding the state of British manufacturing, the UK remains the world’s sixth largest manufacturer in terms of output.

In the UK today there are around 170,000 manufacturing companies employing more than three million people. And yet the number of jobs in UK manufacturing has declined over the past few decades. Many large heavy industry companies, in areas such as steel or automotives, have moved their operations to regions where labour and raw materials are much cheaper, such as China or India. However, there remain many opportunities for UK manufacturers with innovative ideas, strong skill-sets or those who have embraced new technologies. Manufacturing is a diverse and constantly evolving sector. It ranges from traditional, craft-based industries, such as woodworking, glass-making and ceramics, to the latest high-tech industries, such as green energy, biotechnology and nanotechnology.

Indeed, the manufacturing sector remains a key part of Britain's economy. According to figures from the Confederation of British Industry (CBI), manufacturing accounts for 13% of GDP, 10% of employment and half of all UK exports. The importance of manufacturing to those who seek to create a “knowledge-based economy” is also clear, as 75% of business research and development stems from efforts made in this industry.

Like most businesses, manufacturers have had a difficult time during the recession. The process and manufacturing sector saw a 25% decline in sales in 2009. However, there is evidence to suggest that things are picking up. The weaker pound has helped some companies to increase export, while statistics from the manufacturing organisation Proskills UK suggest that manufacturing is growing faster now than at any time in the last 15 years. Other evidence from EEF, the manufacturers’ organisation, suggest that confidence in the sector is growing. Manufacturers might also take heart from the ‘Ingenious Britain’ report written by Sir James Dyson, which urges statesmen to invest heavily in science and technology and to take greater advantage of the UK’s ability to invent and innovate.

Cashflow is a big issue for small businesses.

If you have followed the advice above then you will already have an idea of your start-up costs. Now you need to get more in-depth information on how much it will cost to run the business, as well as determine your cashflow requirements. For this, you need to map out your running costs – such as rent, salaries, tax, National Insurance, transport, rental and leases, raw materials and utilities – and factor in when you have to pay for them. You also need to consider how and when customers are going to pay you, and ensure there is enough money in the company account to make payments when they are due. Accounting software is useful and before long you will probably need to employ an accountant. If you discover a cashflow or finance-related problem, there are many solutions on the market that can help, such as invoice financing and loans.

Invoice finance
Factoring or invoice discounting is useful for businesses that trade with other businesses. It allows you to get cash upfront through your invoices (typically 75-90% of the full invoice value), which you can pay back once you have collected the debt.

Asset-based finance
Financiers can lend you money secured on items with high sell-on values, such as stock, machinery or premises. This can be of particular use to manufacturers, who often require – or perhaps own – heavy machinery or tools. In some cases, it may be beneficial for you to lease, rather than buy, some of the equipment you need for your business.

Equity investment
If you have an attractive business plan then you may be able to persuade an individual or institution to invest money in your company in return for a stake in the business. This can certainly generate large amounts of money, but once equity has been sold it can only be bought back, and the investor will want a good return on his or her money.

Grants
Seek out your local Regional Development Agency (RDA) or contact Business Link to find out about grants and support services in your area. Manufacturers are often eligible for grants. In particular, you should look into the Grant for Business Investment (GBI), for which most manufacturers are eligible to apply. You will, however, have to satisfy the awarding body that you are worthy of public funds. Sometimes granting institutions ask for ‘match funding’, where the company must put in an equal amount of money before the application is approved. Also, grants are usually for future projects and are not usually made until after completion.

The Enterprise Finance Guarantee scheme
In January 2009, the Enterprise Finance Guarantee (EFG) scheme replaced the Small Firm Loans Guarantee (SFLG) as the Government’s main way of encouraging bank finance for business. By underwriting bank loans to business, the EFG scheme offers loans of up to £1 million to firms with turnovers as high as £25 million. Discuss the EFG scheme with your bank manager if you believe that a loan is the right option for your business.

By manufacturing in-house you will arguably have a greater level of control and understanding of your business.

By choosing the right business model, you can ensure that your business can grow effectively and that your finances will be more manageable. The main choice you have to make is whether to manufacture your goods yourself, or whether to outsource and concentrate instead on sales and marketing.

Manufacturing in-house
This appeals to some businesses who, as ‘makers’, may feel they can assert greater independence. With in-house manufacturing, you can adapt your offering and take advantage of new developments in your field.

However, running a factory or workshop is a big responsibility, as well as being hard work. There will be many challenges, and you may feel you are spending more time dealing with problems than you are doing business. You will have to keep tight control over your costs, as you will pay the price if things don’t go according to plan.

Outsourcing
Outsourcing your manufacturing allows you to focus solely on sales and marketing. This means you can take advantage of a global market and get the best value for your customers. You are also relatively shielded from financial risk, as your payments are fixed at the start of the deal.

The negative side to outsourcing is that you aren’t in full control of what is being produced or how it is made, which could lead to sub-standard goods and your having to make an embarrassing apology to the customer. You may also feel you are too heavily dependent on suppliers, as handling them can become a lengthy job in itself.

If you’re just starting out in retail, you’ll be looking at sources of finance available to all new businesses. These include:

• Personal investment drawn from savings, redundancy money or remortgaging property.
• Friends and family investment. That is, money from people you know, either in the form of repayable loans or an equity investment in which the backer buys shares that can be resold back to you at a later date.
• Bank loan.
• Angel investment. For retailers, this is probably the least likely source of funding. Angel investors are wealthy individuals who back businesses with the aim of selling shares at a profit. Such investors typically seek businesses that will grow quickly to increase the value of those shares. If you’re hoping to attract an angel, you’ll have to have a pretty convincing growth plan.
• Partnership. Quite simply, going into business with someone else, allowing you to share the costs between you.
• Grants. Some grants are available for small businesses. You can find out more about these through your local Business Link: www.businesslink.gov.uk

Every business has its challenges and manufacturing businesses are no exception. However, knowing what the common pitfalls are will help you avoid them.

• Lack of working capital Don’t underestimate the cash required to launch your business.
• Lack of cashflow A common killer of small businesses. Make sure your invoices are up to date and that you have a stringent debt-chasing process in place.
• Not enough liquidity Some manufacturers keep too much money tied down in non-liquid assets, such as premises and machinery, which leaves them struggling for cash with which to trade.

1. Before you start, formulate a thorough business plan that takes account of start-up costs, overheads and cashflow requirements.

2. Work with your accountant to understand how your cash position changes on a daily, weekly and monthly basis and be sure to get a real grip on your finances.

3. Don’t expand before you can afford it. Make sure you understand what it means to your business as a whole when you take on new contracts or staff, or increase capacity. For example, is your insurance up to date and has everyone been properly trained?

4. Keep a tight rein on costs (salaries, fuel, raw materials, administration, new tools and machines). The key to managing your cashflow is to keep up-to-date records on your company. Negotiate with suppliers, but also seek ‘win-win’ situations, where both parties can benefit from a new arrangement.

5. Monitor your inventory and don’t fall foul of overstocking. Only experience can teach you exactly how many materials to buy. In the meantime, keep accurate records. Of course, if there are profitable options to reducing overstock, such as resale, then this could be a good idea.

Additives manufacturer: 'How toll manufacturing helped widen my customer base'
"I felt there was a lack of innovation in the plastics marketplace," says Paul Morris, Managing Director of Addmaster. "The market was commodity-based and dominated by large multinational companies that did not have the flexibility to create products to meet specific customer needs." Addmaster produces additives that can be combined with plastic and oil-based products to give them a specific use. The company’s flagship product, Biomaster, is added to products that people touch – such as keyboards, hand cream or chopping boards – to make those products more resistant to germs.

Addmaster employs toll manufacturers in the UK, who produce raw materials according to the company’s exact requirements. Paul says that employing third parties in this way gives him greater flexibility and means he can spend more time with customers. "We do not have to keep a line busy with work and this allows us to spend more time on customer service, product development and marketing."

Addmaster was founded in 2000 when Paul’s grandmother gave him a £5,000 loan, which he used to finance his first order. "I paid her back after the very first sale," he says. Starting work from an office in the Staffordshire Business Innovations Centre, the company quickly set about contacting customers. "As the Addmaster business model was new to the industry and had never been tried, the first year was spent communicating the services available to customers," says Paul. "We’re surprised how quickly the customer understood our offering." Addmaster has since grown year-on-year and currently employs five full time office-based staff while selling its products through agents to customers worldwide.

Event services: 'How we adapt to customer demand'
Gary Martin has been running Zap Events for 19 years, offering event services to corporate clients and large parties. A few years ago he started to produce decorative table centres, which he and his team make in the company’s workshop. Zap Events has a number of designs for its table centres, which it advertises on its website. However, Gary’s customers have specific ideas on what they want, which is why he employs a business model that enables him to adapt as necessary.

"I have a good understanding of what customers want," says Gary. "Usually, it’s something tall and elegant, and which doesn’t restrict the view from the table. I do a sketch of how I think it should be, the guys then programme the machines and we make one. We then photograph this and if a client wants to hire some we make a batch. Sometimes we have to tweak them a bit. For instance, they might want logos added."

Gary and his team are closely involved in what they make. He feels this is essential due to the nature of his business, even if the UK isn’t the cheapest country in the world for manufacturing. "We get a lot of last-minute orders," he says. "So I wouldn’t want to deal with China or somewhere abroad, because I need to respond quickly to customer demand. Also, fashions and tastes change, so I like to respond to these things as and when they arise."

My advice to any new business is to be careful about how you’re being paid.

His business has about £80,000-worth of stock in-house. The table centres, usually made from acrylic or wood are expensive to produce, so Gary has to ensure he doesn’t run into cashflow problems. "The client tends to pay 50% upfront, which is useful for cashflow purposes, as it covers most of the manufacturing costs. Once you’re established, it’s easier to reject business if they won’t adhere to your payment plans."

Zap Events had a tough 2009, but Gary refocused the business on the growing demand for table centres and now feels this is beginning to take-off. Turnover is in the region of £450,000, and demand is growing.

Mobility apparatus: 'The advantages of in-house manufacturing'
Evac+Chair produces an innovative product that enables mobility-challenged people to exit via a building’s stairwell during an emergency. All production takes place in three main factories in the West Midlands (Tyseley, West Bromwich and Telford) and the company offers clients a 'full service' approach. The company was founded in 1987 by Managing Director Barry Scholes, who bought the rights from American inventor John Egan. Egan created the Evac+Chair after he had to carry his wife down a flight of stairs in a hotel during an evacuation. The chair has wheels for the floor and skis for the stairs.

Evac+Chair retains tight control over its production and also provides servicing as part of the contract with clients. "We manufacture the chair here in Birmingham," says Marketing Director Paul Colder. "We’re not just an assembly plant, we produce all the main parts so we have complete quality control." Another advantage of in-house manufacturing , Paul says, is that the company can respond more directly to customer feedback and advance the product as the market requires. "As our founder says 'you cannot remain at the forefront by resting on your laurels' and therefore we focused hard on innovation," he says.

MoneySense for Business is about helping you understand and manage your business finances. If you're thinking of starting out on your own, or already have a small business, MoneySense for Business provides helpful guides and information on managing the financial side of your business, plus useful links and tips to give you the guidance you need.

Links: Manufacturing
EEF, the Manufacturers' Organisation
Health and Safety Executive, the Manufacturing Sector/
The Business Standards Institute
Zap Events
Evac+Chair

Links: Business
Business Link 
Department for Business, Innovation & Skills
Office for National Statistics
SkillsActive
Grant for Business Investment guidelines (840KB, pdf)
The Enterprise Finance Guarantee scheme
Addmaster

Sources
Confederation of British Industries
Proskills UK
Ingenious Britain, Making the UK the leading high tech exporter in Europe, A Report by James Dyson, March 2010 (660KB, pdf)
England's Regional Development Agencies

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