Moira Creedon
Moira Creedon is an associate faculty member on the IMI Diploma in Management.
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Financial Management: at the Heart of Dealing with Brexit Risks
With Brexit looming, it is easy to forget the thousands of companies all over Ireland who are increasingly worried about their long-term future.
As the daily performance in Westminster moves from Punch and Judy to the surrealism of an episode of Black Mirror, it is easy to forget the thousands of companies all over Ireland who are increasingly worried about their long-term future.
The Valentines Day S&P report painted a rosy future for the Irish services sector predicting that hiring into financial, IT and other services would accelerate in a no deal scenario. But the outlook for indigenous exporting companies is not so bright. The UK is still Ireland’s largest trading partner, and many Irish companies are at significant risk.
In my work advising Irish CEOs on preparing for Brexit I have met incredibly agile companies who have already managed to completely reposition their export sales to mainland European, Middle Eastern, US and Asian markets and are fully Brexit proof.
Many other companies have taken a wait-and-see approach. With tight resources it is incredibly difficult to invest significant money to mitigate against an outcome where deep down it is hard to believe this crazy scenario will ever materialise.
For smaller companies, where it is unrealistic to have a full-time person dedicated to leading the Brexit preparation charge, it is hard to know where to even start.
Questions, not answers
The single most urgent thing a businesses should do is address the simple questions – How would a hard Brexit impact my business? Would my business survive?
This conversation usually triggers immediate action. For some companies Brexit demands root and branch strategic change. For other companies this can kickstart a general upgrade in financial and operational management to drive better profitability and reduce risk.
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This is always a good idea: we should never waste a good crisis.
There are many 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.
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 mainly in £, negative movements in Sterling can easily erode profit margins. In a tight margin business this can quickly trigger catastrophic losses.
Keep it simple if possible
There are several ways of addressing this. Start, if possible, with the simplest strategy – invoice your UK clients in Euro. Not all UK clients will accept this, but many will be exporting to Europe and may need to increase their percentage of euro costs, in which case they will be more than happy to oblige.
Pass it on to your customer – increase price to the UK market to cover the drop in sterling
Irish 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 dynamics of your 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 £ will increase with a weak £.
Keep a tight eye on your competition sourcing footprint and how this impacts their pricing.
Natural Hedge
Natural hedging means getting the percentage of your Sterling costs in line with the percentage of your 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.
I worked recently with a company with 90% of their revenues in the UK and no currency hedging in place, which initially looks extremely worrying. However, with roughly 90% of their cost base is in UK pounds, they are automatically naturally hedged. Their margin will be reasonably stable regardless of the currency movements.
Hedging – Forwards and Options
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 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.
Options are the “cake and eat it” version. These are like forwards 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.
Talk to your bank and also the many Irish financial services companies created recently to offer specialist currency risk management products suitable for Irish SMEs. Explain your exposures and see what they can offer but remember you may need to strengthen your finance team to fully avail of these tools.
Long term competitiveness – the impact of a slide in sterling
Financial contract-based hedging is only ever a short-term insurance policy: If the competitiveness of your product is being eroded in the long run by a slide in sterling, hedging alone is not going to save you.
For some companies market diversification is a critical element of the Brexit mix. You will need a clearly differentiated offering and a well planned and funded marketing campaign to reach your target segment.
Businesses must forecast the full financial impact of their chosen Brexit strategy to make sure it adds up and that support is available from all stakeholders and funders.
Moira Creedon is an associate faculty member on the IMI Diploma in Management. Moira works with a wide range of Irish businesses in Food, Technology sectors and Life Sciences to address and prepare for Brexit risks.
