While Brexit deal talks gather pace, the countdown clock continues to tick on and British exporters are still none the wiser as to what will happen following the UK’s withdrawal from the single market and customs union in March next year.
UK Prime Minister Theresa May released the first draft of her Brexit deal today. Rumoured to be 600 pages long, it’s unlikely to give businesses the certainty they have been seeking for the past two and a half years just yet.
Business can, however, take some comfort from other recent developments: last week May formed five new business councils to provide high-level advice on critical issues to help companies invest, grow and succeed in the UK once it leaves the European Union. And in the chancellor’s autumn budget it was announced that UK Export Finance, the country’s export credit agency, will have its direct lending capacity increased by £2bn, from its current capacity of £3bn, to support UK exports in the years after Brexit.
As the market awaits details of a final deal, John Bugeja, trade finance specialist and managing director of Trade Advisory Network, suggests three crucial steps firms can take to get ready for Brexit:
Step 1: Focus on the business fundamentals
Tempting though it is to immediately start thinking about all the factors that may or may not change following the UK’s withdrawal from the single market and customs union, a company should start by taking a long, hard look at their current business proposition and operating model and zone in on the elements that create sustainable competitive advantage. That way, their underlying commercial viability can be optimised, and they can be better prepared to deal with the probable, possible and unforeseeable impacts of Brexit.
The place to start is the product or service that they deliver to their buyers. They should challenge their existing assumptions regarding the competitiveness of their offering in terms of features, benefits and customer experience. This analysis should extend to a review of their competitive positioning, pricing, terms of trade and payment terms.
- Are they doing everything they can to make their product as attractive and well-suited to the markets in which they operate?
- Have they become too ‘comfortable’ dealing with primarily EU markets and should they now seriously look at other markets for their products?
- Are their marketing and selling processes fully effective and fit for purpose to support expansion into new markets?
- Are their credit control policies and practices suitable for more difficult markets?
- Is their working capital management in good shape with ‘headroom’ for contingencies and unforeseen events/changes?
- Are their sources of finance well-structured and is their relationship with their finance providers sufficiently open and supportive to survive a significant downturn in their trading environment?
Most UK companies, whether they export or not, are also involved in importing either directly or indirectly by sourcing from UK-based importers. The focus on business fundamentals should, therefore, include a critical review of their sourcing strategy.
Step 2: Do some scenario planning
No-one can predict exactly what Brexit will look like or what the impacts will be in the short, medium and longer term. The two responses least likely to be effective are – ‘do nothing’ and ‘make knee-jerk changes’ on the basis that doing something is better than doing nothing.
Instead, a company should identify the characteristics of the single market and customs union that impact their current operating model most. This will inevitably shine a spotlight on their products and services, their physical supply chain(s) and their resourcing model. The aim is to try to envisage the best-case and worst-case scenarios in respect of each characteristic following Brexit and to assess the likely impact on their business.
Products and services
- Identify all of the licences or authorities embodied in EU legislation which they rely on to sell in EU markets.
- Consider the price sensitivity of the products they sell to EU buyers. How might their competitive positioning be impacted by the imposition of tariffs on UK exports to the EU?
- Consider the potential impact on sourcing costs. How might their profitability be impacted by the imposition of tariffs on imports from the EU into the UK?
Physical supply chain
- Consider the impact of delays in transit across EU/UK borders. What would be the impact on inventory levels, just-in-time delivery commitments and shelf-life?
- Quantify the financial implications. Longer transit times and increased inventory levels have a direct bearing on working capital requirements. Will the resulting pressure on working capital require increased finance facilities?
- To what extent will access to EU-sourced labour be impacted?
In respect of each of the above best and worst-case scenarios, a company should think about some of the possible remedies. What action could they take to address or offset the negative impacts? Is there actually an opportunity here that they could exploit to their advantage?
Step 3: Prioritise action
Based on the output of the first two steps (focus on the business fundamentals and scenario planning), there are three levels of action that a company might consider:
Actions that are good for the business irrespective of Brexit outcome
There may well be actions that a company can take which will improve their business in all scenarios. For example:
- If their credit control policies and practices are no longer fit for purpose, then updating them will stand them in good stead irrespective of the Brexit outcome.
- If their inventory management systems are dated and ineffective, then investing in new technology will improve supply chain management in all Brexit scenarios.
- If their production processes are too labour-intensive, then investing in robotics and AI technology might improve their competitiveness in the longer term in markets where they might operate in the future.
Actions that will mitigate the most probable and significant negative impacts
This is a ‘damage limitation’ approach. There is a cost which the business will have to bear, and it is possible that the expenditure might prove to have been unnecessary should the worst-case scenario not come to pass. Nevertheless, such expenditure is worthwhile if the feared negative impact is business-threatening. This is effectively a form of business continuity insurance.
Actions that are prohibitively expensive
Unless the potential business impact is genuinely business-threatening, it is usually best to defer taking these actions until it is absolutely clear that they are necessary.