The Manufacturers’ profitability puzzle

Developing and implementing strategies to increase profitability is a fundamental challenge which faces many manufacturing businesses.

In order to crack this puzzle, companies must carefully plan their strategy and apply resources that identify the investments which will have the most impact.

With the Manufacturing PMI falling and much Brexit uncertainty, the intuitive reaction to increase profitability may be to reduce investment that doesn’t directly or immediately improve a company’s revenue-generating activities. However, areas like Research & Development, sales, marketing, staffing and recruitment are an essential investment for the future. If companies follow their instincts and cut back, it creates considerable risks for profitability in the long run.

Investing for the long term

It is important that companies focus their resources where the full potential has not yet been realised, and there’s real prospect of generating competitive advantages.

Companies should remain forward-looking by focusing their investment on four key areas:

Opportunities to recruit highly-skilled technicians and engineers and integrate them into the company, as the agents for future long-term growth, must not be neglected. Incentivisation through investment in pension provisions for example can have longn term, positive performance implications, helping to retain your best people.

Maximising Available Tax Reliefs

The industrial strategy released by the UK government in 2018 cited R&D as a key foundation for productivity, targeting an increase in R&D investment from 1.7% to 2.4% of the GDP by 2027. To support this, the rate of R&D tax credit was increased from 11% to 12%. At a glance, the figures looked promising, with £1.3bn of R&D tax relief being claimed by UK SMEs. Our conversations with manufacturers however show that they are not aware of all the reliefs available to them and may be missing out.

HMRC estimates the manufacturing sector accounts for 28% of R&D claims, with a total tax relief value of over £900m. In addition, loss-making companies can obtain cash tax refunds of an effective rate of 33% of the R&D spend, while tax-paying companies can claim £19 back for every £100 invested in R&D through corporation tax, as well as a further £24 through the R&D tax credit system.

One of the latest government initiatives developed in line with this strategy is an increase in the Annual Investment Allowance (AIA) to £1m – a considerable boost from the former £200,000 limit.

This is a temporary increase due to end in December 2020, and Manufacturing companies face a big challenge in balancing short term profitability with long term growth. They must therefore make the most of the opportunity as soon as possible.

This article featured in issue 5 of our Manufacturing and Engineering newsletter series.

For further advice please get in touch with a member of our manufacturing team on 01903 234094.