Financial management and Brexit

Director of Artemis Consulting Moira Creedon is working with Enterprise Ireland advising companies on financial management and Brexit.

 

“Irish businesses need to assess how Brexit could impact their business and how bad that impact might be if there is no free trade agreement between the EU and the UK at the end of the transition period. That conversation usually triggers immediate action though responses range widely depending on the degree of exposure. For some companies this conversation kickstarts a general upgrade in financial and operational management to drive better profitability and reduce risk, which is always a good idea. For other companies Brexit demands root and branch strategic change”.

 

Currency fluctuations

The most obvious Brexit exposure where financial management can help is currency volatility. For a company with a cost base primarily in euro, and revenues primarily in £, negative movements in Sterling will quickly erode profit margins.  In a tight margin business this can easily trigger losses.

Use the Currency Impact Calculator to estimate the impact an adverse change in exchange rates would have on your business profitability.

 

Use a simple strategy if possible

There are several ways of addressing this. Moira advises starting, if possible, with the simplest strategy – invoicing clients in Euro. Not all UK clients will accept this, but many will be exporting to Europe and may even need to increase their percentage of euro costs, in which case they will be more than happy to oblige.

 

Is it possible to increase price to the UK market to cover the drop in sterling?

Companies are often afraid to raise this with UK clients on the assumption that they will end up uncompetitive compared to UK competitors. Whether this can work or not depends on the sector. In many sectors such as food and construction materials, your UK competition are buying the raw materials in a global market place and their costs in £ have increased.

Keep a tight eye on your sector dynamics, you may find your UK competition are also forced to increase price.

 

Natural Hedge

Natural hedging means getting the percentage of Sterling costs in line with the percentage of Sterling revenues by purchasing more in the UK, for example outsourcing manufacturing to the UK, paying UK based staff in sterling or buying materials in the UK.

Moira worked recently with a company with 90% of their revenues in the UK: “Initially, I was naturally concerned, but then realised that roughly 90% of their cost base is in UK pounds. So they are automatically, naturally hedged. If the pound crashes, their costs and revenues crash so the margin is maintained. Equally any increase in sterling will increase the cost base but will be compensated by the revenue increase”.

 

Hedging – Forwards and Options

Hedging using financial contracts is basically an insurance policy so your business will not be adversely impacted by a collapse in Sterling.

Banks and other specialist FX risk management companies offer forward contracts so you get a guaranteed exchange rate now for sterling inflows in the future. These contracts are relatively simple and cheap, so apart from the initial set up paperwork, the main downside is that if the UK £ shoots up you are locked in at the agreed rate.

This creates a market demand for ‘options’. These contracts are similar in that you agree an exchange rate in advance but very different in that if currency values move in your favour you can tear up the contract. So you can “have your cake and eat it” – you are covered against a drop in Sterling but you can still benefit if sterling shoots up. But of course there is no free lunch, these contracts are more expensive. Talk to your bank  – explain your exposures and see what they can offer.

It is important to understand that setting up good hedging cover means you have to have accurate forecasting in place so you can see what is coming in and going out by currency – so you may need to improve your financial forecasting processes.

Application processes and deposits required to set up hedging cover can be onerous. It is well worth approaching one of the Foreign Exchange risk management  services companies, for example Irish providers gaining traction in this space include AssureHedge, Fexco, Transfermate and CurrencyFair.

 

Long term competitiveness and the impact of a drop in sterling

Financial contract based hedging is only a short-term insurance policy: “If the competitiveness of your product is being eroded in the long run, hedging alone is not going to save you”.

For example Moira is working with an ROI based client near the border in the hospitality sector who is experiencing a collapse in cross border guest trade from Northern Ireland. Weaker sterling means overnight ROI hotel prices in euro seem very high so guests are staying put in Northern Ireland. No hedging contract can help in this scenario. Market diversification is critical, you need to offer a clearly differentiated offering and get out to reach your target market segment in other markets.

 

Wider financial risks

There are many other financial Brexit exposures facing Irish companies, from tariff imposition, cashflow impacts from border VAT, border delays and the need to stockpile, regulatory impacts facilitating cheaper competition in UK, sourcing exposures and the sheer cost of the paperwork required to get goods through customs. Dealing with these may often require a full rethink on strategy, for example opening new markets outside of the UK, transferring manufacturing facilities to or from the UK.

Moira advises that no matter what changes a company makes in response to Brexit it is critical that it improves its overall financial management for example to get better visibility on which products are delivering profits. Businesses should also forecast the full financial impact of their chosen Brexit strategy to make sure it adds up and that support is available from all stakeholders.

 

Enterprise Ireland support

Enterprise Ireland has developed a range of supports to assist companies in their preparations for Brexit.

Before meeting with a company, Enterprise Ireland experts will request information in advance to make the engagement more worthwhile and to have a better idea of what to discuss with the business. Moira says: “We ask for information in advance and this gives us a pretty clear handle on to what extent the company’s revenue is exposed to the UK”.

Learn more about the Brexit: Act On Initiative and how Enterprise Ireland can support your business to strengthen its capabilities and best prepare for Brexit.

 

 

How will Brexit impact the Irish life sciences sector?

With its global and highly regulated nature and highly complex supply chains, the Irish life sciences sector will face considerable challenges as a result of Brexit, regardless of the eventual outcome of the process.

The sector encompasses a vibrant pharmaceutical industry which is responsible for exports of almost €70 billion annually. In addition, it employs around 30,000 people directly and almost the same again indirectly. The medical devices sector employs a further 38,000 people and accounted for €12.6 billion in exports in 2016, making Ireland the second largest exporter of medtech products in Europe.

Irish-owned life sciences businesses include manufacturers, laboratory service providers, research operations, wholesalers and distributors, and Brexit presents a number of issues for them, most notably the creation of new customs barriers between the EU and the UK, and the impact of the UK’s departure from the EU regulatory system.

 

Know your supply chain

At a recent Brexit Stakeholder Event hosted by the Health Products Regulatory Authority (HPRA), more than 400 industry representatives were given a detailed briefing on the preparations being made to mitigate the impacts of Brexit and ensure continuity of supply of potentially life-saving medicines and medical devices to Irish patients.

Aoife Farrell, Health Products Distribution Manager with the HPRA, advised companies to ensure that they had detailed knowledge of their supply chains, and posed a number of questions. “I can’t stress enough the importance of mapping out your supply chain in detail – all the way from the raw materials needed to manufacture to the end product reaching the patient. Do you know where the active substance comes from; do you know how it gets here; does it transit the UK, or does it come from a UK manufacturing or storage facility; and what new regulatory and customs requirements do you need to be familiar with?”

 

Pharmaceuticals

From a regulatory point of view, when the UK becomes a third country products will have to be tested and certified at the point of import into the EU. The EU authorisation system for pharmaceutical products has a number of layers to it and these will have to be dealt with following Brexit. HPRA emphasised that it will work with stakeholders in managing their pathway to regulatory compliance in the event of a “no deal” Brexit.

The situation was eased somewhat as the UK Government announced that EU Community Marketing Authorisations will be converted to UK Marketing Authorisations following the UK’s departure from the EU.

 

Medical Devices

The role for HPRA for medical devices is quite different as they do not authorise medical devices. These products are certified by more than 50 notified bodies across the EU. However, it is estimated that up to 40 per cent of medical device products sold in Europe are certified by UK bodies.

Niall MacAleenan, Head of the Medical Devices Department, HPRA, explained that the European Commission announced some time ago that certificates issued by UK bodies will become invalid in the event of no deal being reached on withdrawal. This requires Irish manufacturers to explore alternative certification arranges and distributors and importers to engage with their suppliers to encourage them to secure alternative certification, or to find alternative products which are certified by notified bodies within the EU-27.

A number of UK notified bodies are already making arrangements to establish a presence in the EU, and this will alleviate the situation for many Irish companies. Irish manufacturers which currently have their products certified by UK bodies may also have to make alternative arrangements in order to continue to export to EU markets.

 

Dealing with Customs

Regardless of the final complexion of any future relationship, once the UK leaves the EU and its Customs Union it will become a third country, and customs will be a mandatory requirement for goods passing between Ireland and the UK. While there are no specific requirements applying to medicines and medical devices, Aoife Farrell had a warning in relation to mixed loads.

“If your goods are being transported in a mixed load that also contains goods like food, some of which require a mandatory customs check, there will be delays,” she warned. “If your products are subject to a short shelf life, or require particular storage conditions, it would be wise to attempt to avoid this situation.”

She added that there are special customs procedures in place for goods originating in one EU country and transiting through the UK before arriving in Ireland. “The HPRA will not regard these products as having been exported to a third country and re-imported from it.”

Carol-Ann O’Keeffe, Assistant Principal with Revenue Corporate Affairs and Customs noted that goods destined from the UK, coming in from the UK, or transiting through it will require customs declarations. “These declarations are submitted electronically and processed in milliseconds. We carry out a risk analysis and that guides us as to which consignments are checked. In general, the vast majority will be green routed with no check. At present, the reality is that 92 per cent of goods coming in from third countries are green routed.”

 

Key steps for exporters

And she had some advice for exporters. “If you are selling goods into the UK, you will need to supply certain key data in advance. These include the tariff codes for the products; the origin of the products; the consigner; the consignee; and the value. The UK is in the process of passing new legislation requiring customs formalities for imports to the UK to be completed before goods can even be loaded onto the ship. You will need to make sure that your customer has all the information needed in order to complete the formalities; otherwise, the shipment cannot go ahead.”

She advised companies with doubts in relation to customs arrangements post-Brexit to use the online customs training module available from Enterprise Ireland. “That’s a really valuable tool to access,” she added.