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Keep Calm and Carry On Selling

by | May 30, 2020 | Brexit

Despite the understandable concern on Irish shores about the UK’s decision to leave the EU, our nearest neighbour will remain a natural first market for Irish exporters. Enterprise Ireland’s manager for the UK and Northern Europe, Marina Donohoe outlines the opportunities.

 

Enterprise Ireland manager for UK and Northern Euurope, Marina DonohoeThe UK economy will still be the fifth largest in the world by nominal GDP, with a population of around 65 million— some 14 times the size of Ireland’s. It will still be our closest trading partner by geography— sharing a language and a similar business culture— and it will still have that openness to goods and services from Ireland borne of our strong cultural relationship.

While strategies to offset whatever consequences arise from the UK vote are advisable, businesses in Ireland would be missing a trick if they discounted the UK market.

In fact, Enterprise Ireland has identified seven key opportunities for Irish companies based on UK government initiatives and evidence of sectoral growth:

 

  1. The National Infrastructure Delivery Plan
  2. The Northern Powerhouse Agenda
  3. Scottish Government Investment Plan
  4. National Health Service’s ‘Five Year Forward View’
  5. Water market
  6. Financial services/Fintech
  7. Aerospace

 

National Infrastructure Delivery Plan (NIDP)

The NIDP envisages £503 billion of investment in 339 infrastructure projects across all sectors in the UK to 2021 and beyond. Irish companies are operating in these sectors already and there are huge opportunities such as:

 

Northern Powerhouse

The Northern Powerhouse is an initiative to address a constellation of issues surrounding economic growth and productivity in the North of England.

The UK government intends to spend £134 billion, 32% of which will be spent in Northern England. The goal is to rebalance the country’s economy and establish the North as a global powerhouse.

Cities include Liverpool, Leeds, Sheffield, Newcastle and Hull, as well as regions such as Cumbria, Lancashire, Cheshire, North Yorkshire and the Tees Valley.

The opportunity for Ireland lies in supporting initiatives in road, rail, freight, aerospace and skills development. Key deliverables include improving freight capacity, and road and rail infrastructure. For example, the HS2 high speed train network alone will cost £55.7 billion.

 

Scottish Government Investment Plan

Enterprise Ireland continues to have a strong geographical focus within the Scottish market. Holyrood has highlighted the strategic, large-scale investments it intends to take forward across a number of key sectors over the next 10 to 20 years. Key areas of investment which will provide opportunity for Enterprise Ireland clients include energy, water and housing.

 

National Health Service (NHS)

Despite the political and economic uncertainty the healthcare sector has remained strong over the last 12 months. An ageing population, improved diagnosis and an ever-changing world of assistive and diagnostic technologies have all ensured the sector’s appeal to client companies.

The NHS is rife with opportunities as the funding gap is set to widen to £30 billion by 2021. The NHS needs to deliver £22 billion in efficiency savings to try and offset this figure, with a lot of this being driven by a focus on digitising as much of the landscape. Our Digital Health and Health IT webinar provides expert insights into procurement pathways and winning business with the NHS, watch it here. Although the private healthcare market is also growing (currently around £4.5 billion) it pales in comparison to the £107 billion NHS budget.

 

Water market opportunity

UK water utilities are planning a total expenditure of £41 billion between 2015 and 2020. Enterprise Ireland is working with UK and global buyers who have access to this opportunity and could also prove to be a stepping stone to international projects. Our podcast on the impact of Covid-19 on the water sector and the emerging opportunities for supply chain companies is available here.

 

Financial services/Fintech

With over 250 foreign banks; expertise across retail banking; insurance; capital markets; bonds; equities; currency; payments; regulation; and sector-specific advisory, legal and professional services, the breadth of the UK financial services sector is huge. The sector employs 2.2 million people in the UK. It is a truly global centre of expertise and one that will continue to offer opportunity for Irish fintech companies after the UK exits the EU.

Opportunities will emerge as the negotiations get under way, particularly for legal, advisory, professional services and IT solutions providers, as UK firms may seek new structures around regulation, compliance, currency handling, money laundering and data handling.

This is a sector Enterprise Ireland has been working in for many years and, as new opportunities unfold, we are well placed with high level contacts to introduce our clients to key decision makers.

 

Aerospace

UK Aerospace industry captures 17% of the global market and is considered the largest player in Europe and second globally after the US. Aerospace is vastly outperforming the wider UK economy with productivity up 30% over the past five years, compared with the national average of 2%. Though heavily impacted as a result of Covid-19, the Aerospace Growth Partnership (AGP), industry and government are working together to ensure the UK is well placed for future growth opportunities. Investment in skills, technology and the competitiveness of the UK supply base is supporting this.

 

Internet of Things (IoT)

Enterprise Ireland is reacting to opportunities emerging outside of these seven key sectors too. In particular, we are responding to the growth of IoT technologies. The UK has some of the best equipment (mobiles, tablets, computers) usage rate projections in the world. The main growth areas are artificial intelligence, big data, smart cities, connected homes, transportation, health, manufacturing and smart grid for electricity.

IoT is clearly a massive growth market and as a result a source of business opportunities for Irish companies.

 

For latest news on UK opportunities visit Evolve UK.

Customs Valuation

by | Oct 22, 2019 | Brexit, Customs and Logistics

Determining the customs value of your products

The application of import duty is based on the customs value of the goods involved, and this is calculated by combining the invoice price with all freight, insurance and certain other costs incurred up to the point of import. This is called the Transaction Value method.

The costs that must be included are commissions and brokerage, except buying commissions; packing and container costs and charges; assists such as tools and dies and graphics and artwork used in the production that has taken place outside the EU; royalties and licence fees payable to any company as part of the sale; the cost of transport, insurance and related charges up to the point of importation.

This means that the transport of goods incurred for moving goods from one EU member to another following import is not included in the value for customs purposes.

 

Example using the Transaction Value method:
Irish Importers Ltd is importing 20 pallets of plastic bottle caps from China.
Irish Importers Ltd is responsible for all charges including duty.
Invoice Value: €60,500.00
Cost of Freight to the point of import into EU: €3,400.00
Cost of Insurance to the point of import into the EU: €550.00
Value = Invoice Value + Cost of Freight + Cost of Insurance
= €60,500 + €3,400 + €550
= €64,450

 

Alternative Methods of Valuation

There are cases where there is no invoice price, however, and a number of alternative methods have been developed for calculating the value of goods in these circumstances. This may arise where goods are being shipped from a subsidiary located outside the EU or which have been manufactured by an outsourcing partner outside the EU for subsequent sale in the EU.

Even if invoices exist in these cases, the transaction may not necessarily have taken place on an arm’s length basis and if the invoice price is not an arm’s length price, it will not be accepted as the basis for valuation for customs purposes.

The first alternative method of valuation is the Transaction Value of Identical Goods. This is obtained by finding the value of identical goods which have been declared recently.

If it is not possible to find identical goods, it is acceptable to use the Transaction Value of Similar Goods – not exactly the same, but similar enough to offer a good benchmark.

The next method is known as Deductive Value and, as the name suggests, involves taking the sale price of the goods in the EU and deducting the transport and other costs incurred within the EU post-import.

 

The Computed Value

The next method is possibly the most complex. It is known as Computed Value and determines the customs value on the basis of the cost of production of the goods being valued, plus an amount for profit and general expenses usually reflected in sales from the country of export to the country of import of goods of the same class or kind. In other words, it requires research into the cost of production of similar goods in the country of origin and the application of overheads associated with exports from that country.

 

 

The Derivative Method

Should all these methods fail, the Derivative Method is used. This sees the customs authority in the country of import determine a value “using reasonable means consistent with the principles and general provisions of the Agreement and of Article VII of GATT, and on the basis of data available in the country of import”. The valuation is usually based on previous experience of similar cases.

In the very rare cases that none of these methods work, the World Trade Organization (WTO) provides other ways of calculating a valuation.

Getting Your Valuation Right

Clearly, the most straightforward way of calculating valuation is the first method – the price on the invoice and all of the costs involved in getting the goods to the EU. There can be some confusion in relation to this method, however, and importers should ensure that they include all insurance and transport costs.

For example, there can be a mistaken belief that because insurance continues within the EU following import, the cost should not apply – this is not the case. There can also be issues relating to e-commerce, where the full postage or freight costs are not included in the value of the goods ordered from outside the EU. These issues can result in surcharges and costly and frustrating delays, and importers should do their best to avoid them.

Please note that the customs value can never be zero.

 

If you would like to learn more about valuation, register for the Customs Insights Course. Further information can also be found on Revenue or the European Commission websites.

 

Brexit and managing currency risk

by | Oct 18, 2018 | Brexit, Financial Planning and Currency Management

Sterling and euro volatility remains a key concern and challenge for Irish businesses

 

Enterprise Ireland is supporting companies to better understand the financial implications of currency fluctuations on their business and take the necessary actions to mitigate against this risk. The following questions cover the key issues related to the management of currency risk and are addressed by John Finn of Treasury Solutions.

 

I’m an Irish company exporting to the UK. How can I analyse the impact of movements in sterling/euro on my business?

For Irish companies exporting to the UK, the Enterprise Ireland Currency Impact Calculator can help you understand the effect of movements in the sterling/euro exchange rate on your business. This online tool is freely available and demonstrates what an adverse change in exchange rates would have on your business profitability.

 

Will my bank permit me to hedge my foreign currency exposures?

For an exporter to hedge its currency risk, in the first instance, it must first have a foreign exchange line of credit from the bank. This must be formally sought in advance prior to its use and, from the bank’s perspective, it is the equivalent of making a loan application i.e. it requires credit approval.

 

What instruments will the bank permit me to use to manage foreign currency risk?

For the most part, this is restricted to either spot or forward transactions. The former implies selling sterling at the current market rate.

As a general rule, spot deals settle in two days’ time ie agree a rate on Monday with funds transferring on Wednesday. In the case of forward foreign exchange contracts, a rate can be agreed today to apply to receipts on a future date.

The advantage of this instrument is that an exporter can bring certainty to the amount of euro that it will receive in return for a specified amount of sterling at this stated future date.

The primary disadvantage is that there is no opportunity to share in any upside in any currency movement.

In order to achieve that objective, it is possible to purchase an instrument known as a foreign exchange option. However caution is urged; it is an extremely useful instrument to utilise in managing foreign exchange risk, but it needs to be constructed appropriately. In essence, it is an insurance product for which the purchaser pays a premium and which protects it against a worst possible (defined) outcome whilst permitting full participation in the upside should it arise.

Some banks sell a combination of an option and forward contract called a participating forward. This allows participation in a fixed percentage of the upside. However it does have a cost. Again, these should not be purchased without full knowledge and understanding of what is involved.

 

How far forward can I hedge?

Most banks will have a maximum time period for which they will sell forward contracts to their customers. This needs to be ascertained now. In general, most banks will not provide forward contracts for periods beyond 12 months.

 

What terms and conditions apply?

In some cases, the banks may require security to be provided in the form of charges over assets or guarantees. If the exporter is already a borrower, it is probable that the bank would simply extend any security that it already had over the foreign exchange line. It may also monitor the extent to which the currency contracts are showing a “profit” or “loss” at a point in time and either limit this or seek some collateral, which may include cash, if the loss – although only theoretical – extends beyond the defined amount.

Finally, some banks may require the completion of what is known as an ISDA agreement. This is quite a complex document to complete for the first time, and proper advice should be taken in its construction and prior to signing it.

One final point to note in hedging foreign currency risk is that there are non-bank providers of such services who tend to be less prescriptive in their dealings. However, many borrowing agreements now specify that the borrower may only conduct foreign currency transactions with the lender.

 

What are the wider financial implications associated with currency risk?

The obvious effect of weakening sterling is adverse consequences for both profitability and cash flow. Immediate actions that could be taken include:

  • Calculation of the exchange rate at which UK sales are no longer profitable
  • Rerunning financial forecasts at current exchange rates and assessing the projected outcomes
  • Where financial covenants are part of your borrowing agreement, ensure that adverse foreign exchange moves do not materially and negatively impact on compliance with them

Please note that where companies with material amounts of UK exports intend to refinance their banking facilities in the coming months, a significant amount of sensitivity analysis will be required in any financial projections provided to banks. I would strongly urge paying close attention to the terms and conditions attaching to any new borrowing agreements.

People Manangement

by | Mar 28, 2017 | Prepare for Brexit

Building effective leadership and management capability within Irish companies has never been more important given the likely challenges arising from Brexit

 

One of the areas the leadership team has to assess in light of Brexit is whether the company has the right mix of talent and skills to support future growth. Some restructuring might be necessary, for example, creating new senior roles such as heads of innovation or marketing.

Companies will need to look at the locations where staff are currently based and decide if any changes need to be made. If a market diversification strategy is being pursued in response to Brexit, for example, they may have to appoint people on the ground in new markets or set up new offices.

A flexible and adaptable workforce will be increasingly important and people will need to be prepared to travel more often to meet customers and upskill to keep pace with technological advances and market developments.

 

Potential Challenges

 

Movement of people

The various EU Treaties which provide for the free movement of EU nationals between the Member States will cease to apply to the UK once they leave the EU. After that time Irish businesses could be looking at, firstly, restrictions on temporary transfer of non-EU staff to the UK (and Northern Ireland) to deliver services and, secondly, restrictions on the employment of current and new non-UK staff in the UK.

The war for talent

There are already skills shortages in a number of areas in Ireland such as ICT and advanced manufacturing. Irish companies will need to place even greater emphasis on attracting top talent because of Brexit. It has brought about an increased need for differentiation, strategic thinking and enhanced competitiveness, which can only be delivered by having the best people in place.

In addition, Brexit may result in Irish companies facing difficulties in terms of recruiting new staff in the UK. It is advisable to be proactive in recruiting from the UK now if you have open positions.

Employment contracts

Legislation emanating from the EU has strongly influenced UK employee protection legislation over the past 20 years or so. But this may change somewhat if the UK Government decides to do away with laws which are viewed as unnecessary red tape. Brexit may result in complications in employment contracts for people working in the UK.

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Finance

by | Mar 28, 2017 | Prepare for Brexit

John Power and Barry Doyle, Directors of Strategic Growth Leaders finance consultancy

How to manage financial risk through Brexit uncertainty

 

Barry Doyle and John Power, Directors of Strategic Growth Leaders (SGL) finance consultancy, outline the key considerations Irish SMEs should consider to respond to the challenges posed by Brexit.

The uncertainty generated by Brexit has highlighted important finance considerations for Irish businesses. Issues that impact SMEs in areas including managing multi-currency budgets, cash flow and projection, cash, currency and treasury management, optimising their capital structure and ensuring that appropriate types of funding are utilised, are heightened by the present and potential impacts of Brexit.

Too often, the finance function has been regarded as a cost, focused on historical reporting and compliance, rather than acting as a strategic, commercially-minded arm of the business. Brexit has created an impetus for companies to better structure and integrate their finance function, so that it acts as a strategic member of the management team, rather than a back office operation.

From the work SGL has done with Enterprise Ireland clients concerned about Brexit, it is clear that those who combine finance capability, resources, and a financial model that quantifies exposure, with a documented policy that explicitly states how each is to be managed, are better prepared to address any challenges that may arise. Enterprise Ireland’s Be Prepared grant can be used to access financial and currency expertise and is a great resource for Irish SMEs eager to limit Brexit exposure. 

 

To help your business minimise the financial risks posed by Brexit take these six practical steps:

Quantify exposure to currency volatility

Although volatility is one of the most immediate concerns raised by Brexit, currency fluctuation is not new. Before Brexit, the narrow trading band of EUR/GBP was manageable. But volatility in exchange rates is now such that Irish businesses are experiencing significant margin erosion. With volatility expected to continue, the realisation has emerged that Irish companies must measure and manage exposure, establishing protective mechanisms to minimise uncertainty.

Analysing and quantifying exposure should be a prerequisite for every company, to enable a clear understanding of critical factors including cost base, market/product breakdown and margin, pricing strategy, cash to cash cycles, and currency breakeven FX rates. When a business can accurately quantify the financial risks of trading in foreign markets, risks that might relate to cost, currency or working capital, they can mitigate against them, over a duration that enables them to stay competitive.

 

Implement a treasury policy

Every company, from micro companies to large corporates, should design a currency and cash management policy, also known as a treasury policy. Essentially, that means documenting how your company manages finance. The document does not need to be complicated but should detail how the company manages all monies and transactions, including currency risk. The policy should also describe the relationships the finance function must have with other internal departments, as well as with external providers, such as banks. The policy should ideally be approved by the company’s Board of Directors and clearly identify the person(s) responsible for implementing and managing its component elements.

 

Use multi-currency cash flow forecasts

Determining your company’s foreign currency exchange risk can only be done by determining net receipts and payments of each currency in which it does business. Recognising that “Cash is King” for every business, cash flow forecasting is critical to ensuring active management of funds flow. It is particularly important for identifying net currency exposures. Forecasting monthly surpluses or foreign currency required, is the starting point for mitigating the impact of foreign currency fluctuations on business margin. Identifying receipts and payments that can be converted to domestic currency through negotiation with customers and suppliers to create a natural hedge position, is a crucial first step. Depending on the outcome of this exercise, it may be advisable to enter into FX contracts with a financial institution to buy or sell exposed amounts. Ultimately, it is important to bring certainty to the value or cost of your foreign currency exposure and avoid ‘playing’ the exchange rate market.

 

Conduct break-even analysis

Break-even (B/E) measures the level of sales required to cover fixed costs. In its basic form, it is defined as the point at which your income equals your costs, and profit is zero.  As foreign exchange movements can directly impact on each component of sales receipts, cost of sales (including things like materials and tariffs) and overheads denominated in foreign currencies, modelling future B/E sales levels at different exchange rates provides management with essential information for deciding if and when price increases may be required to protect margin and ensure profitability. B/E analysis of different business units or sales territories provides management with a simple but effective comparison measure.

 

Understand cash cycle

Determining the working capital for each territory or market your business operates in is critical to ensuring effective cash management. Tracking timelines involved in your business of payments for overheads (labour or indirect costs), supply of materials, and conversion of sales to cash, is critical to understanding the additional permanent working capital needed as your business grows. Brexit may add significant requirements for investment in stockholding, new costs such as tariffs, reintroduction of VAT at point of entry, delayed payment terms with UK customers due to banking arrangements, and accelerated payment terms for suppliers. Understanding current cash cycles and modelling potential, or likely future cycle, will help identify the level of funding needed to maintain or grow your business in the UK. Businesses can fund additional investment required by lengthening the cash cycle through a combination of methods:

  • Renegotiate terms at both ends of the cash cycle, with suppliers and customers
  • Review in-house procedures for managing debtor collections and supplier payments
  • Use alternative financing methods such as supplier finance or invoice discounting
  • Scaling businesses should consider it as part of fund raising
  • Loan finance from traditional lenders and new entrants

More and more options are available to help businesses to reduce cash cycle timelines or fund additional requirements through a funding mechanism.

While the uncertainties generated by Brexit will only become clear in time, companies can create a solid business and financial plan to mitigate against known, and as yet unknown, risks. There is no doubt that Brexit is real and can create challenges for businesses buying or selling in the UK. But Brexit is not a strategic problem.

Continue to drive your strategic plan and determine the modifications needed to stay on track. Also consider:

  • Accelerating a diversification plan
  • Implementing a strategic procurement approach to protecting critical supply and protecting margin
  • Prioritising resources to a digital channel.

Once you’ve established a strategic plan, establish and measure the critical success factors and key performance indicators that will ensure you stay you on a strategic path.

A version of this article was originally published on Silicon Republic.

 

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