Manufacturers plan for uncertain cash flow in 2020
... but 30% of SME survey respondents had challenges with managing cash flow.
The Canadian economy expanded 1.7% in 2019 and analysts expect similar growth over the next two years, according to a Conference Board of Canada report. According to 2019 reports by the Canadian Chamber of Commerce, 98% of the businesses in Canada are classified as small businesses. These companies account for 70% of the workforce (90% of private sector employment) and 97% of exports, contributing a full 33% of GDP.
Twelve per cent of Canadian small business employment is comprised of small and mid-sized manufacturers with 1.4 million employees in December, 2019.
What makes some companies better at exporting than others? What are the expectations of Canadian manufacturers? What do they anticipate as the top risks? What will manufacturers need to expand their markets?
These are just a few of the questions asked in the 2019 Bibby Financial Services Canadian Business Monitor Report that surveyed 151 Canadian small businesses about their results for the year and their outlook for 2020. Fifty-two per cent of the manufacturers surveyed export and/or import goods as part of their business.
The Canadian economy is growing. Growth in employment has slowed since 2018, close to 1.6% compared to 2% last year. Despite this, employment rates are strong, regardless of a bad month in November. Increasing business inventories also indicate possible economic challenges beyond the workers’ dispute which has caused exports of wheat and aluminum via rail systems to largely come to a halt.
Some of the 2019 economic growth was due to temporarily increased government spending, suggesting an economic downturn may be on the horizon if that spending is reduced. That concern is further worsened as payment terms seem to be a growing issue for the manufacturers surveyed. When asked what was most problematic with managing cash flow, the most common answer was ‘getting paid on time’ at 44%.
The challenges faced in the Canadian manufacturing industry are a good indicator of small business and labor trends across Canada. Manufacturers export more than any industry in Canada, other than oil and gas services, with 52% of all manufacturers surveyed reporting they export, import, or both. Out of those, 54% derive more than a third of their revenue from exports, making manufacturers uniquely sensitive to the global economy and demand.
A consistent challenge for manufacturers is access to funds and managing foreign exchange rate fluctuations. The Canadian Business Monitor survey showed 56% of Canadian manufacturers indicated rising costs are one of the greatest challenges to business, while 41% saw currency fluctuations as one of the greatest challenges. Thirty per cent of the manufacturers surveyed had challenges with managing cash flow.
According to the Canadian Business Monitor survey, 36% of general manufacturers that export expressed that access to finance would allow their businesses to expand into new markets. Forty-six per cent of all manufacturers surveyed reported that access to finance would be the key component to allow them to expand their overseas trade.
Canadian exports are primarily to the US, with the UK and China as the second and third largest components. Marketing to the EU separately from the UK is a necessity with Brexit now slated to culminate this year. This also provides a new target market for manufacturers to adapt to. Substantial growth in demand in South America makes it another compelling target for manufacturers looking to expand their markets.
By expanding the clients they service and vendors they purchase from, manufacturers have the most options available to them should an unstable business environment arise. If a manufacturer’s primary vendor suddenly has very low supply, a diverse vendor pool ensures that they will have other vendors to buy from, enabling their business to continue seamlessly.
There is a stark difference in the way different Canadian manufacturing industries use external finance and funding partners. Apparel manufacturers have historically faced more volatility in raw materials cost and in the demand for their goods than other sectors. Because of this volatility, apparel companies have learned to be more agile, keep less inventory on hand, and employ partners that can help with cash flow needs or when hedging foreign payments.
To illustrate this, 40% of apparel manufacturers surveyed in the Canadian Business Monitor currently use external finance while only 26% of the other types of manufacturers in Canada do. One-half of the apparel manufacturers who don’t use external finance plan to apply for funding in 2020 – only 5% of general manufacturers plan to apply for funding in 2020.
Kash Ahmad is managing director of Bibby Financial Services Canada based in Mississauga, Ont., a provider of funding for for small and mid-sized businesses.