Case Study: How a Small-to-medium sized U.K. Chemical Firm is Coping with the Economic Downturn

Below is an unedited letter from a the head of a small-to-medium sized chemical company based in the U.K. detailing the firm's operational difficulties experienced during the past few months.
 

I am the Managing Director of a UK Chemical Company and wrote this case study on 25th February 2009. It is intended to provide a real life example of what many companies in the UK are facing as they battle to survive the recession and take advantage of a newly emerging global market place where China is no longer cheap and the UK is suddenly competitive.

We are an SME chemical manufacturing company based in the U.K.

We export over 80% of our products.

We have no debt and an existing £500K ($704,000) overdraft facility.

In October last year we were profitable.

In November and December the order book collapsed as companies around the world de-stocked and in the space of 8 weeks we had lost £500K from our cash reserves.  

In response we closed for an extra week over Christmas and the entire company took a voluntary 20% pay cut in January and February.

In January and February the order book recovered sufficiently that, combined with the 20% reduction in salaries, we were able to break even.

With no cash reserves, breaking even is not acceptable. We must therefore re-organise to ensure we achieve a suitable level of profit to replenish our cash reserves.

Our Bank will not extend our £500K overdraft facility and will instead insist on an invoice discounting system which releases funding on the back of individual orders and will incur £100K additional banking charges and increased internal admin.

Our Bank will not implement the Enterprise Loan Scheme as it makes them more money to run the invoice discounting system.

We will need up to £300K to reorganise.

We can not afford to re-organise without incurring the possibility of entering into invoice discounting which is expensive, time consuming and very difficult to recover from without the possibility of a windfall.

The future for a manufacturing company in the UK that exports 80% of its products is very positive. With the collapse in the £/$ and £/€ exchange rates we are more competitive now than we have been for 15 years. To illustrate this we are now able to sell a U.K. manufactured product into China, duty and freight paid, for less than the same product manufactured in China. Six months ago I was looking to move production of this product to China we are now keeping it in the U.K.

We are exactly the sort of company that the U.K. needs to support as it rebuilds its economy from a heavily service-based bias to value creating manufacturing, mineral extraction and agriculture. 

It is vital that companies such as ours find immediate access to credit on reasonable and manageable terms. Without it, a large number of perfectly sound, successful and promising companies will be forced to close leading to an adverse impact to the U.K. economy from which it would take decades to recover.