Services sector post Brexit

Much of the discussion around Brexit has focused on importing and exporting physical goods to/from the United Kingdom, while failing to address the service sectors that comprise a significant proportion of the Irish economy. In service sectors, the value of the product often lies in the expertise and quality of the service offered by firms to their customers.

Below, the Brexit Unit in Enterprise Ireland explores some of the issues that may affect the service sector as a result of Brexit.

 

Intellectual Property

The value of a business is increasingly linked to its Intellectual Property (IP). IP includes patents, trademarks, copyrights and trade secrets. Presently EU trademarks, for example, are protected within the EU but not in third countries. Brexit will affect the protection afforded in the UK for those who have registered European Union Trademarks (EUTMs) or designs, the future trading agreement will determine what protections remain.

According to Joe Doyle, IP Manager at Enterprise Ireland, in a ‘no-deal’ scenario it is almost certain that EUTMs and designs will eventually cease to have effect in the UK. Companies are advised to conduct an IP audit, assessing their dependence on IP protection in the UK and the associated risks of losing such protection. Firms should subsequently speak with legal and IP advisors to ensure their IP Strategies are Brexit-proof.

 

Contracts/Legal

Service sector businesses with exposure to the UK market will need to start planning for the legal changes that are likely to arise post Brexit. Contractual and legal challenges could emerge with cross-border service level agreements (SLAs), product licences, insurance policies and data transfers, which may not be legally protected or recognised after the UK leaves the EU. Companies should take steps to review their existing contracts and trading arrangements, reviewing their most strategic contracts and employing caution when entering new contracts with UK based parties.

 

Data

Data has a fundamental role in today’s business with many companies outsourcing services such as payroll, promotional marketing and the storage of IP addresses to third countries.

The EU has developed high data protection standards and after Brexit the UK will no longer fall within the remit of these standards, becoming a third country. Consequently, there will be greater risk associated with the transfer of data between the EU and the UK after Brexit. Irish companies that intend to transfer personal data to the UK will need to act by putting safeguards in place to protect the data in the context of its transfer and subsequent processing. One such way is the use of Standard Contractual Clauses (SCCs)  which is likely to be relevant to most Irish businesses that transfer personal data to the UK.

The Data Protection Commission has published guidelines for firms seeking to learn about data transfers post-Brexit. You can also learn more from this webinar where Data Commissioner Nicola Coogan outlined the impact Brexit is likely to have on data flows between Ireland and the UK.

 

People

To continue working in the UK after Brexit, EU citizens are required to apply to the UK government for settled status, living in the UK for more than 5 years, or pre-settled status, residing in the UK for less than 5 years. When the UK leaves the EU, Ireland and the UK will automatically revert to the common travel area (CTA) and Irish citizens will be automatically viewed as ‘settled’ on arrival in the UK. This will be the case with or without a Brexit deal.

The rights of UK citizens living and working in the EU after Brexit will be far more complex given the fact that individual states have control over the status of individuals who choose to reside and work within their territory. It’s crucial that individuals, as well as Irish firms employing UK citizens in EU states, check the terms of residency and employment within the given jurisdiction(s) where one resides as they will need to make an application to stay within that respective country.

This Brexit webinar provides more detail on how Brexit will impact the movement of people.

 

Regulation

Regulation varies greatly between different service sector industries and it tends to be most stringent in the areas of finance, aviation and healthcare.

The UK may choose regulatory alignment with the EU in many sectors, especially given the importance of the services sector in the UK which benefits largely from trade within the EU. The UK will, however, lose the ‘passporting’ rights that apply to many service sector industries that operate throughout the EU as a single market.

Companies operating in sectors that are highly regulated should assess the impact that Brexit will have on their operations. It’s important that such companies speak to their relevant regulator to ensure they are taking the right steps to mitigate the impact that Brexit will have on their operations.

The financial services sector is particularly exposed to Brexit and the Central Bank has issued Brexit guidance for financial service firms which can be accessed here.

 

Foreign Exchange and Currency

The uncertainty of Brexit has added to the challenge faced by businesses when trading between the UK and Ireland, especially in relation to currency volatility where fluctuations in Euro-Sterling rates may have a significant adverse impact on company profitability.

Companies should measure and manage exposure to such currency fluctuations, establish protective mechanisms to minimise risk and uncertainty and continue to monitor any potential risks that may emerge. In the Brexit Webinar series John Power, Director of SGL, outlines the impact of Brexit on Currency and Foreign Exchange.

The Enterprise Ireland Currency Impact Calculator can help you understand the effect of movements in the sterling/euro exchange rate on your business.

Service sector companies can use the Be Prepared Grant to determine how the company could respond to the threats and opportunities of Brexit.

 

Finance

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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