A specialist ICAEW working party has warned that branding many manufacturing companies as 'zombies' unable to generate cash or attract capital ignores the cyclical nature of this sector and risks undermining future prospects by making it harder to access finance.
In a report entitled Audit Insights: Manufacturing, a group of external audit experts from ten large and medium-sized audit firms says the 'zombie' label is 'particularly unfair and unhelpful' when applied to manufacturing companies, and 'will lead to prejudicial and demoralising behaviour and wasted opportunities. It does not help them secure funding for growth, it discourages turnaround activity and investment and it makes it more difficult to attract good staff.'
The audit group points out that manufacturing differs from other sectors because of the significant amounts of money required to keep up with changes in technology, demand, the need to constantly innovate, management of complex supply chains and difficulty in costing products and contracts.
Bob Neate, member of the ICAEW working party and a partner at Mazars, said: 'More than in any other sector, manufacturing businesses and their financiers have to have nerves of steel; they must be prepared to ride out the less good times in the economic cycle to reap the long-term rewards. If people don't understand the cyclical nature of the sector and its requirement for investment before the returns are realised, the sector's growth potential is at serious risk and the rebalancing of the UK economy towards manufacturing would become impossible'.
The report highlights four red flags for the sector which auditors need to take into account when assessing the health of a particular company. These are the roller-coaster nature of the sector; funding; skills; and IT and management systems.
It raises a growing concern among auditors about challenges linked to the costing of fixed-price contracts, where having appropriate data/IT systems are a critical prerequisite, and the growing trend to issue longer-term product warranties, as it is difficult to anticipate the financial impact of such warranties and the risk they represent to the business, particularly where there is no track record.
The report also states the need for more to be done to ensure manufacturers are able to secure appropriate finance.
Neate said: 'The government needs to become much better at sharing information on available capital grants and schemes, while the manufacturers have to improve their communication with all finance providers and other important stakeholders about the sector's cyclicality.'
This is the second sector-specific report prepared by ICAEW's audit and assurance faculty, the first of which focused on the retail sector.
