Quantify your Brexit risk. There's still time – in association with KPMG

Date: 09-05-2019

Tagged as: EU ReferendumBrexitEU

 

Tracey Perera, Brexit Programme Director, KPMG, details six steps to increase your financial security ahead of Brexit and to manage your business’ risk during uncertainty.

Most businesses view Brexit as a risk to be managed. But how many businesses have quantified that risk? Even the most diligent will find it extremely difficult in the uncertain times that Brexit brings to understand the full financial implications. Fortunately with the recently agreed extension, businesses now have a window in which to gain that understanding and take remedial action to secure their finances, if they have not done so already.

Even with the extension, it may be too late to begin a whole range of mitigation activities such as finding alternative sources of supply, establishing European bases or gaining regulatory approval.

But there is still time for businesses – which might already have set budgets on the presumption of a steady-state transition – to assess how a no-deal shock could impact their revenue, cost, working capital and cash flow … and therefore the extra financial headroom they may need.

Business decision makers should be focusing on this issue incredibly closely. It could – in extreme cases – decide the difference between survival and failure. Most business failures come not because they are unprofitable but because they run out of cash. Not since the financial crash of 2008-2009 has cash been more important as our Head of Restructuring Blair Nimmo pointed out on episode 4 of our podcast, The business of Brexit.

The Brexit risk to working capital and cash flow comes from three pressure points:

  1. Increased costs: You should have identified the obvious and immediate cost pressures at this point: known costs like extra tariffs on imports if there's no-deal, or the cost of work permits for employees travelling to EU27 countries (for third countries that could cost up to £2,000 per employee).

    Consider also your ‘known unknowns': the things that could become more expensive like labour if we see shortages deepen or costlier imports if sterling depreciates further.

    Then there are the ‘unknown unknowns': the leftfield factors that are extremely difficult to identify with the uncertainty ahead – let alone quantify – such as a supplier buried deep in your supply chain going bust or a major EU-based customer deciding to pull its business. By definition, gaining this kind of foresight requires more time, more effort and more imagination.

  2. A demand shock: We are already seeing the effect Brexit is having on consumption and investment in the British economy. Issues like a stalling high street, reduced consumer confidence and a tepid house market – a negative outcome would exacerbate the impact of these at a company level.
  3. A liquidity squeeze: These sorts of cost and demand pressures could ripple through the economy, leading customers to delay payments to their creditors and those businesses then delaying payments to their own suppliers in order to maintain cash.

    Now that an extension has been agreed, companies that have already stockpiled to mitigate a no-deal Brexit may need to deal with further stress on their working capital position.

How do you quantify the risk?

To build the necessary financial firepower to deal with the risk, you'll first need to gather the relevant data as fast as possible. Your existing MI might be enough. But even the best-run enterprises won't have it all. Brexit is unprecedented. Companies have to source information they haven't needed in decades, if ever. For instance:

  • Which of your suppliers source products and services from EU27 states?
  • What are the tariffs and tariff-free quotas for particular goods coming from the EU (the tariff schedule was published on 13 March)?
  • Where do you rely on private data flows from EU27 states into the UK, and is data used in the UK hosted in the EU?
  • Which members of staff are EU nationals? Who needs to travel to the EU27 for work longer term?
  • What value of contracts do you have with EU-based customers that rely on UK staff (staff whose professional qualifications might not be recognised in EU27 countries)?

Building a targeted set of questions for all functions including for example Finance, Ops, HR, Customer Services and others is often the fastest way to identify any blind spots – in effect a company-wide data gathering and ‘getting to know you' exercise. The ongoing need for this data may warrant investing time and resources to build it into your systems and processes to capture it as business as usual.

It's still not too late to run these exercises. The information they yield, and the risk mitigation that you put in place as a result, could stop a Brexit risk becoming an existential risk to your company.

Here are six steps you could take to help increase your financial security of your company ahead of Brexit

1Review your Brexit scenario financial assessment, paying particular attention to the worst case no-deal scenario.
2Seek priority information from your business units and department heads as soon as possible. If that does not give you sufficient granularity, use targeted questions to retrieve (or generate) the data you need.
3Increase your focus on cash flow management if you haven't already. Cash is king.
4Keep a close eye on regulatory developments and emerging legislation so you stay compliant. Analyse what changes in this area – for example new immigration rules, customs charges or data regulations - could mean in terms of costs or lost business.
5Armed with information gathered in steps 1 to 4, speak to your banks and other sources of funding to make sure you can draw down extra funds if need be.
6Make sure senior decision makers are on hand at key inflexion points in the Brexit process. Consider establishing a ‘situation room' with the key decision makers, key management as well as those responsible for communicating to all stakeholders: staff, suppliers, customers, investors, banks, regulators and shareholders. Agility and the ability to act swiftly are essential in the event of unprecedented and unpredictable disruption.

Disclaimers

Lloyds Bank

While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by Lloyds Bank for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances. Specific advice should always be sought in each instance.

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