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Top three liquidity risks for manufacturers in 2024

Leading manufacturing companies are seeing opportunities on the horizon through streamlining their supply chains, diversifying their product portfolios, and investing in new ways to improve their future sustainability.

15/07/2024 · 5 minute read

Despite the challenges that the manufacturing sector has experienced over the last few years, especially those brought on by the pandemic which caused instability in supply chains and significantly drove up costs, leading manufacturing companies are seeing opportunities on the horizon through streamlining their supply chains, diversifying their product portfolios, and investing in new ways to improve their future sustainability. While the outlook is positive, building on this and driving growth means maintaining stability. For this, liquidity is fundamental.

The following three key risks have been heightened by recent years; tackling these areas will be essential for a manufacturing business to maintain resilience and continue driving growth.

Access to stable supply chain

In the early stages of the COVID-19 crisis, businesses were closed for several months, and so were borders. The challenges this presented become all the more evident when we consider that more than 70% of the global manufacturing industry has been supported by China. This caused severe disruption to global supply chains as backlogs of raw materials mounted.

Without raw materials, and with a depleting supply of finished goods, it was nearly impossible for manufacturing firms to remain competitive in their marketplaces, and the threat to liquidity became all the more acute. The recent pandemic and subsequent challenges have demonstrated the need for manufacturing companies to streamline their supply chains including sourcing and securing raw materials.

Maintaining a stable cash flow

Manufacturing companies have always needed to have a firm grip on their cash flows and liquidity requirements, as they have a number of areas to look after such as fixed overheads, machinery maintenance, labour cost, vendor payments, and other debt obligations. In order to maintain a constant source of liquidity, their customer payment side of the cycle needs to be stable. This has been challenged significantly in the last few years, with lockdowns which affected the entire supply chain and also stretched payments from customers due to variety of reasons. In the Middle East region, we saw average collection periods going up by 60-90 days, driving manufacturing companies to either negotiate payment terms with vendors, restructuring/enhancement of bank facilities or even letting go a few large customer relationships due to liquidity strain.

Ability to meet debt obligations to financial institutions

Manufacturing companies require large set-ups, often with significant capital investments on infrastructure and asset base. These asset bases are financed by banks, particularly where a company is in its growth phase. As such, they will often have an associated payment, whether that be for principal or interest. If manufacturing companies are facing a liquidity crunch, whether due to delayed customer payments, or not being able to work in full capacity or any market dynamics or industry shifts, they will not be able to meet their debt obligations to banks. If this continues, banks will have to look at either restructuring of the facility or may even lead to confiscation of company assets.

How COVID-19 and recent political tensions have impacted liquidity 

As well as understanding current key risks to liquidity, it is important to take stock of how and where COVID-19 and more recent political events have amplified costs. One of the clearest cost increases has been that of raw materials - this has been dictated by limited supply or interruption of supply and rising demand.

To combat this, manfacturers have looked to develop alternative or contingent sources of raw materials, either from the local market place (to avoid impact by global or regional distruption) or to enter into supply contracts to source directly from the supplying country. This has been prominent in the case of the metals sector where manufactures are investing into foreign bauxite mines in order to guarantee future supplies or in the case of the auto sector where manufacturers ae looking to invest in lithium mining operations predominetly in Africa and South America in order to guarantee future supply.

Another area to consider is the valuation of machinery. A lot of insured’s in the manufacturing space have historically been declaring purchase cost of machinery; however following technological advancements & inflation, values being provided for policy issuance tend to be massively understated which eventually results in underinsurance/reduced claim settlements. It is ideal for manufacturing organization to undertake a reinstatement valuation exercise of atleast their crucial assets once every 5-7 years.

Managing Liquidity Risks Effectively

The risks and challenges faced by the manufacturing sector have no doubt been detrimental for many in this sector and have indeed led to closure in some instances. Those firms that have been managing their liquidity effectively and have maintained good relationships with their supplier, banks and financial institutions have been able to show resilience and continue.

Both traditional and alternative sources of cash provide liquidity options that may support a company’s financial stability. Manufacturers can benefit from working with an insurance and risk adviser to have a better understanding on how to protect their bottom line and understand their total cost of risk to their business. This understanding can help you make informed decisions on how much risk to take on your balance sheet and what risks you should mitigate against.

Speak to our Marsh experts today on how we can help you protect your business.

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