OPENING SHOTS
WHAT SMEs NEED TO DO TO BE BREXIT-READY
number of practical considerations that companies should review and implement - particularly those that are exposed to the Eurozone market.
THE ANDREA REYNOLDS COLUMN
The key questions to ask about leaving the European Union
S
ince the referendum, and as we get ever closer to the EU withdrawal agreement, the attention has been
on the impact Brexit will have on big business. But what about SMEs? What should we be considering in terms of Brexit readiness when it comes to trade and financial management? Whether it’s a hard Brexit, a soft Brexit or, as we’ve heard in recent weeks, “the softest of hard Brexits” - we should be prepared. Business owners operating entirely within the UK may be tempted to feel somewhat protected from exposure, but do you know for example where your supplier's supply chain is located? If it is within the Eurozone this could have a knockon effect on your own purchase costs. Without a clear, definitive picture of
what Brexit will look like, it can perhaps feel a little counter intuitive to set out a comprehensive plan of action based on speculation, but it is worthwhile dedicating time to assess the potential opportunities (e.g. growth of Brand Britain) and threats that the process will bring. With this in mind, there are a
12 SME
Draſt and implement a currency and cash management policy AKA a treasury policy A treasury policy is a MUST for every company, big or small. Essentially, this means documenting how you manage your finance. It doesn’t need to be complicated, but should detail how all monies and transactions are managed by the company, including how currency risk is managed. It should also describe the relationships required between the finance function and other internal departments in the company, as well as with external providers. It is ideally approved by the board of directors and clearly identifies the person (or persons) responsible for managing and applying the component elements.
Multi-currency cash flow forecast Understanding your company’s foreign currency exchange risk can only be done by determining net receipts and payments for each currency in which you do business. Cash flow forecasting is critical to ensuring that there is active management of funds flow, something that becomes particularly important when identifying net currency exposures. Forecasting monthly surplus or required
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foreign currency is the starting point for mitigating the impact of foreign currency movements 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 another of the crucial first steps. 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.
Break-even analysis In its basic form, B/E is defined as the point at which your income equals your costs (ie your profit is zero). As foreign exchange movements can directly impact on each of the component elements of the sales receipts, cost of sales (materials, tariffs etc) and overheads denominated in foreign currencies, modelling future B/E sales levels at different exchange rates will provide key management information for deciding if and when price increases may be required to protect business margin and ensure business profitability. Additionally, B/E analysis of different business units or sales territories will provide management with a simple but effective comparison measure to work from.
UNDERSTANDING CURRENT CASH CYCLES AND MODELLING POTENTIAL OR LIKELY FUTURE CYCLES WILL IDENTIFY FUNDING NEEDED TO MAINTAIN OR GROW YOUR BUSINESS IN THE UK
Understanding cash cycle Determining the working capital for each territory or market your business is operating in is a fundamental step in ensuring effective cash management. Tracking timelines for payments of overheads, supply of materials and conversion of sales to cash is critical to understanding the additional permanent working capital needed as a 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
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