Mark Kennedy, managing partner of Mazars Dublin, explains the six things FDs need to analyse across their business to prepare for Brexit.
“I am not hearing any whistling, just a clock ticking.” Michael Barnier’s pithy response to Boris Johnson’s parliamentary sound bite was worthy of Johnson himself. However, he also made an important point: the Government’s chosen date for Brexit, 30 March 2019, is fast approaching.
Two years may seem a long time to complete even a most complex international treaty. In business terms, however, we are rapidly approaching the point where decisions need to be made and actions taken.
It would be prudent to assume that the present high uncertainty looks likely to continue, which makes it difficult for businesses to plot a course of action.
Currently, it looks likely that businesses will find themselves in one of two scenarios when negotiations are over. The first is ‘no deal’ on 30 March 2019. Britain will be free to agree trade deals and other arrangements outside the EU, but will abruptly exit the single market and customs union.
The second possibility is a ‘deal of sorts’. It doesn’t seem possible to negotiate all aspects in the limited period available so it’s likely that this latter scenario will include some sort of transition period. In this case, both sides will concede some things, but importantly, there will be an extension of existing trading arrangements. It is speculation, but if this happens, it may be that the EU will concede a form of customs union during the transition, in return for UK agreement to honour budget commitments, free movement of EU citizens for a defined period and a deferred exit from the EU Legal system.
In either scenario, companies need to analyse their business across six headings.
Financial directors need to asses who the business sells to in the EU, and what will happens if there is no deal. Will the business be able to compete in a WTO world and what will happen to pricing – can certain costs be passed on? If this is the case, consideration needs to be given to whether this will be passed on to clients, some may be able to bear it, while others will be extremely price sensitive.
Now is also the time to think about what other markets the business can trade and assess the businesses competitive position in those market. Distribution model, cost base, cash flow and profitability will all need mapping out
2. Supply chain
Go over all the suppliers you buy from in the EU and consider what will happen after Brexit. Input costs might increase and have a negative impact on profits, so now is the time to consider substituting suppliers from the UK. It may also impact the product/service quality, stock patterns, credit terms and throughput.
If there is no deal, it will likely change the legal framework in which the business operates. This might include new industry/product standards if your business is to enter new markets. There will also be the time-consuming tasks of understanding and implementing different commercial and contractual legal frameworks, while new insurance may be needed because of changes to markets or suppliers.
4. Labour force
If the organisation’s workforce is drawn from non-UK citizens, leaving the EU may create gaps in particular areas of expertise and reduce the labour force available. FDs need to consider other ways to access those areas of talent and labour.
An organization that currently relies on EU-based funding for EU-related activities will need to consider if this will still be required and accessible. Institutions may change their operating model or base in a no deal scenarios.
As a separate thought, it is notable that a number of banks are beginning to ask their clients to perform Brexit scenario analysis, as a precondition for funding decisions, so now may be a time to discussed this with your bank.
6. Tariffs/Customs and Excise rules
A separate mention of the customs regime which will exist in the event of no deal, needs to be mentioned. For a business, the tariff regime means very significant challenges on two fronts: first, tariff inclusive prices often render products uncompetitive, unless underlying cost can be reduced to compensate; second administration costs associated with operating in a tariff regime can be significant.
The European Commission website includes a section on Trade which sets out the current tariff regime agreed with non-EU countries. It is advisable that FDs consult it to get a sense of the range of price adjustments and complexities inherent in operating in this type of regime.
For a scenario where there is a transition deal, the same issues will need to be considered, but there will be more time to adapt. It is prudent for businesses that trade with EU partners to prepare a strategy to deal with the range of likely outcomes.
Each of these analyses will throw up many practical questions which are both operational and financial in nature. Some will also raise more fundamental strategic questions.
Part of the challenge is that it is unclear whether or not a deal will be made, and with what conditions. Nonetheless, given that the UK purchases approximately £290billion worth of goods and services from other EU countries (over 50% of total imports) and sells approximately £230billion worth of goods and services to other EU countries (over 40% of total exports), it is likely that most businesses will feel some impact from Brexit.
Even for those businesses that don’t directly engage in trade with other EU countries, FDs may find that customers or suppliers do and this will have an impact of its own.
Now is the time to get the facts about your business, perform a detailed analysis, and begin to plan actions, rather than wait for the political discussions to conclude.
Mark Kennedy is a managing partner of Mazars Dublin.