17 Jul 2019

Grappling with Investment Decisions

Manufacturing-Adobe Stock_45968027

It is difficult to ignore the uncertainty that is Brexit but the positive climate for making bold investment decisions is hard to deny.

Reduction in corporation tax rates to 17% from April 2020, increased Annual Investment Allowance to £1m until December 2020, and the improved availability of cash from the banks, all provide a healthy environment for manufacturing and engineering companies to make key decisions about investment, structure and acquisitions and productivity. With additional cash resources, investment can be made to expanding existing manufacturing capacity, improve operational productivity through technology and grasping the digital world, or capture new market opportunities.

Manufacturing in the UK is going through a rough patch now, particularly in the automotive sector with the closure of the Honda plant in Swindon and the Ford engine plant in Bridgend. Time will tell how these regions cope with the flood of labour on to the market place, and the cascades down into the supply chain will provide a stern test of will and determination, but for manufacturing and engineering businesses in these areas, there have to be opportunities with a skilled workforce becoming available as production ramps down, and new businesses opportunities emerging to replace those that are no longer required.

All this creates an environment where key decision makers in a business are faced with difficult choices about how to respond. Is a focus on modernising equipment, updating IT infrastructure and shifting into more digital manufacturing and supply chain management the right one, or is investing in the workforce to fill the skill gaps that exist priority number one? Nipping at the heels of these are: looking at expansion through acquisition or merger; or returning wealth to shareholders.

Whatever is chosen needs to be well thought through and strategic, and it is unlikely that any one choice will be successful if made in isolation. Business owners, managing directors, finance directors and operations directors all have overlapping considerations that need to be aligned with strategic longer-term objectives:

  • Has the increase in available cash from lower tax rates and investment allowances been quantified?
  • What is the ability of the business to raise new finance for investment?
  • How should capital investment be prioritised, accelerated or increased?
  • Are suppliers, competitors and customers already making moves?
  • Is the acquisition of a competitor or supplier now making more commercial sense or is there an opportunity to diversify?
  • What are the expectations of the business owners and investors?

Key decisions, made or indeed avoided now, will have a significant impact on what the next five years will look like, and the ability of manufacturing and engineering businesses to compete going forward in the post Brexit environment. Critical appraisal or re-appraisal of strategy is required, to ensure that the best advantage is being taken of the favourable tax and investment backdrop that exists now, to maximise the benefits going forward.