Over the summer the Brexit conversation was focused in on a no-deal scenario and the hardest of hard Brexits.
These conversations have continued with Trade Secretary Liam Fox estimating the probability of a breakdown in negotiations at around 60%. Some may assign this to little more than political positioning by a prominent Brexiteer but it certainly made the sterling sit up and take notice.
In the first quarter of the year the WorldFirst Global Trade Barometer found that 44% of businesses disagreed with the following statement; “I am worried about the UK leaving the European Union and the impact it could have on the region(s) my business operates in”. However, our latest survey found that this figure had fallen to 28% in Q2, with 49% of businesses now agreeing with the statement.
With a little over six months to go until Brexit Day – March 29th 2019 – we must now ask ourselves just how prepared the SME sector in the UK really is. What do small business contingency plans look like and when will they be enacted? How can SMEs protect against uncertainty in the longer term?
The publication of the Chequers plan confirmed some fears around the UK’s ongoing relationship with the European Union in a post-Brexit world, most notable of which was the complete lack of provision for the services industry; a totem that makes up over three quarters of the UK economy. Of course this may all be academic within a few weeks given the belief that the Chequers plan will not be voted through by the UK parliament let alone the one in Brussels.
In the meantime, international businesses are enacting contingency planning. We heard a few months ago how, in the event of no deal or a bad deal, Airbus and Jaguar Land Rover would look at shifting some of their production facilities into the EU in a bid to maintain supply chain reliability. Such plans will likely be out of the reach of the majority of SMEs however.
Businesses who trade internationally by now should have had conversations with both suppliers and customers about everything from pricing and invoice settlement to delivery logistics and regulatory changes. With such a high level of uncertainty still as to how the land will lie come the end of the Article 50 process, these conversations should allow individual supply chains to work out what is and isn’t viable. Loyalty should be rewarded with favourable terms such as discounts or longer invoice periods.
Similarly, advice on access to funding should be sought from the company’s backers and banking partners. Investment may have been postponed in order to maintain a ‘rainy-day’ fund but aggressive companies may look to the opportunity from M&A operations in the European Union to circumvent customs issues in the future.
As to when these plans should be enacted, if you haven’t already started then you are behind.
How can SMEs protect themselves against the uncertainty?
Even following a horrible few weeks for sterling our data has shown that businesses are not hedging away currency risk with any more vigour than usual. The average tenor – length of contract - of currency hedges remains at around three months; businesses are protecting themselves quarter by quarter with importers – sterling sellers – not wanting to miss out on favourable bounce in the pound following a constructive development in the Brexit negotiations. Of course, in the event of further falls in the pound all this plan does is further impinge on already pressured margins.
Risk calls for more hedging, not less, of currency as well as interest rates and commodities should they be applicable to your business. We do not have crystal balls and we are not in the business of predictions but instead of risk mitigation.
Keep an eye out for part two of this series, in which we’ll look at how the possibility of a no-deal outcome is impacting business confidence, as well as set out more practical steps small firms can take to mitigate their exposure to Brexit-related risk.
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