Brexit – It’s Time for Businesses to Act

With Brexit fast approaching, CEO of Enterprise Ireland, Julie Sinnamon outlines why the time for planning has given way to the need for action

 

The good news is that many businesses have already taken action. Over 2000 companies have been supported, Enterprise Ireland has made over €125m available to Brexit exposed companies over the past two years.

For those that haven’t yet acted, there are a number of steps you need to take immediately.

 

Financial Management

First is financial management. It is vital that all businesses assess their exposure to sterling, not least because whatever decision emerges in the weeks ahead could give rise to exchange rate volatility.

Those most at risk are those whose margins are thinnest. As we saw in the immediate aftermath of the Brexit vote, an exchange rate swing in the wrong direction can have a negative impact, so take advice and develop a currency risk management strategy to protect yourself.

Stress test your cash flow projections. We are seeing client companies being required by their UK customers to increase their UK stockholdings, particularly for shorter shelf life products.

This puts pressure on cash flow so put adequate working capital solutions in place.

The SBCI’s Euro 300 million Brexit Loan Scheme, available through the pillar banks, can be used by qualifying businesses to fund working capital requirements.

 

Enterprise Ireland supports

Get to grips with customs. Enterprise Ireland’s Customs Insights is a free, 45-minute online course that includes key actions to prepare for customs, as well as the options from Revenue that are available to make the customs process more efficient.

Enterprise Ireland has a suite of wider solutions too, including our Market Discovery Fund, designed to support research into new markets.

Our Agile Innovation Fund is a fast track tool to help you redesign products or packaging for international markets while our new Operational Excellence Offer builds on our highly-successful Lean transformation programme.

 

Supply Chain

Assess your supply chain. Know clearly what you sell into the UK, what you source from the UK and what goods come to you via the UK. Understand the supply flow of goods.

In some cases, where goods come to Ireland from Europe via the UK – and therefore go from Euro to Sterling and back again – we are seeing clients source materials direct from Europe. In doing so, they remove the cost of the middle man plus two sets of exchange rates, becoming more competitive as a result.

 

Brexit Planning

Our client companies are increasingly being asked about their Brexit contingency plan by their UK customers. If you haven’t got one, get one.

Equally, if you haven’t already done so, talk to your UK suppliers about what they are doing in relation to Brexit. Some of our client companies are switching from UK to Eurozone suppliers. Others are bringing more of their supply chain back to Ireland. Whatever it takes, build resilience into your supply base.

Engage with your UK customers and suppliers. Have those conversations. Understand the implications and plan accordingly.

In the short term the most pressing issues relate to funding, currency, customs, supply and logistics. It’s vital that these concerns are addressed quickly, so that businesses can get on with their longer term strategies for post-Brexit success.

Since the Brexit vote, Enterprise Ireland has been delivering the same message in this respect – that Irish businesses should hope for the best but prepare for the worst.

In addition to the immediate actions needed for Brexit on the pressing issues, our advice is also to concentrate on innovation, competitiveness and diversification. Improving each of these is something no business will regret, regardless of Brexit.

That our client companies have heeded this advice was clearly demonstrated when more than 350 of them attended our major Eurozone Summit, which took place at Dublin’s Convention Centre.

They were there to hear from, and talk to, Irish businesses and senior European leaders about how best to take advantage of trade opportunities in the Eurozone.

These events and our resources play a vital role in increasing your knowledge base and capacity to prepare for Brexit. Start with the Brexit SME Scorecard which in a matter of minutes will help you identify your vulnerabilities, enabling you to prioritise the issues facing you in the short term and start dealing with them one by one.

 

Evidence of exporting strengths

The good news is that at Enterprise Ireland we see first-hand how strong the exporting base is. When we first developed our Irish Advantage export promotion campaign, for example, which is designed to promote Irish suppliers to international buyers, we talked to existing buyers all around the world about why they were buying from Ireland and Irish companies in the first place.

The recurring response was that it was because of Irish business’s innovation, client focus and commitment to delivering results. We are bringing the Irish Advantage to business partners across the globe and despite the challenges we need to ensure that we don’t let Brexit interrupt the key strengths we are recognised for internationally.

Happily too, I can categorically state that Enterprise Ireland has never dealt with as strong a client company portfolio as it currently has. Irish companies are achieving international global sales at record levels.

The quality of innovation we bring around the world to trade missions and events is simply outstanding.

 

Diversification

Rest assured Enterprise Ireland is innovating too; opening new overseas offices, introducing new supports and increasing staff numbers to support Irish businesses expand internationally.

Significantly one of our new overseas offices has opened in Manchester. This is because the UK, which is currently worth Euro 7.6 billion, is and will remain the number one market for Irish goods.

But with no currency volatility, total regulatory alignment, zero customs headaches and a market of 340 million people, it’s little wonder that diversifying into the Eurozone is now a priority for many of our client companies.

Our role is to facilitate them.

Our PrepareForBrexit.ie website, which was cited by the European Commission as an exemplar of advanced Brexit contingency planning by a Member State, has provided insight and guidance to thousands of companies.

More than 7000 SMEs have completed our Brexit Scorecard, while our Irishadvantage.com campaign, which showcases Ireland’s supply capability to a global audience, is live in 17 markets, actively promoting Irish companies across 14 sectors to international buyers.

Over 1400 companies are live on the website in a campaign that has already reached an international business audience of over one million people – and counting.

In the long term innovation is of course what will determine success and is something Irish businesses have a strong track record in. We just have to make sure we can deal with the implications of any potential Brexit induced customs, logistics, currency and funding challenges.

That is why the time for planning has given way to the need for action.

The supports you need are available and I would urge all companies to have a No Regrets approach to Brexit .While we don’t know what the outcome of the negotiations will be, if you become more competitive, more innovative and more diversified, irrespective of where the Brexit negotiations end up, your business will be in a stronger position for the years ahead.

 

This article was originally published in the Sunday Business Post.

 

 

 

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.

 

 

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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