The political turmoil of the last few months has brought the risk of a no-deal Brexit into painfully sharp focus for many UK small businesses
Last year, many were blithely postponing risk management exercises. They assumed the UK would achieve a deal with the EU before it left in March and set a transition period, giving them time to adjust.
But two Parliamentary defeats for prime minister Theresa May’s proposed deal and ongoing chaos in Westminster have brought planning for the risks of no deal to the top of many SME agendas.
In September, only 14 per cent of small businesses had started planning for no deal, according to research from the Federation of Small Businesses (FSB). This is despite 48 per cent believing that it would affect their business negatively.
By November, pressure was building with research by data and analytics provider Dun & Bradstreet showing that nearly a third of SMEs were considering leaving the UK altogether, with Brexit their biggest concern.
37 per cent had cancelled or postponed plans in the last year as a direct result of Brexit. 40 per cent said it has slowed their growth significantly. 69 per cent said the fluctuating pound had impacted their business. And 41 per cent said Brexit could damage their ability to recruit talent. In general, the larger the business the greater the impact, said Dun & Bradstreet.
Edward Thorne, UK managing director of Dun & Bradstreet, says the likely significant impact of changes to import tariffs and border controls has been widely reported, especially since HMRC published its transitional simplified procedures on customs.
“However, our survey showed that SMEs face a range of other Brexit‐related risks such as fluctuating currencies; compliance with General Data Protection Regulations and the flow of personal data in and out of the EU; recruiting talent; and the wider impact on supply chain relationships.
“Regardless of views on Brexit, it’s important for businesses to identify potential opportunities such as expanding into new geographic markets, targeting new customers or optimising cross‐border supply chain relationships. There may also be increased opportunities for SMEs in the UK as businesses and government departments review their supply chain relationships and potentially look to source locally – an example is the Ministry of Defence’s 2018 report on their contribution to UK prosperity.”
Rupert Lee‐Browne, chairman and chief executive at Caxton FX, said: “If we don’t reach agreement, the ramifications are immensely complex. One of the biggest hidden risks is inflation due to many factors such as weaker pound and increased difficulty of obtaining certain imported items. It’s not just factory gate prices. For example, if buying goods and services in Europe, we may have to source these further afield, from the Far East, the Middle East or the States, so that extra cost has to be built in to our output prices and that will get passed to the consumer.
“Small company owners need to be aware of impending risks. But SMEs have been taking action and coming up with strategies to deal with this. They have woken up and are preparing.”
Small company owners need to be aware of impending risksRupert Lee‐Browne, chairman and chief executive, Caxton FX
David Hall, managing director at private equity firm YFM Equity Partners, says he is surprised that SMEs did not plan further ahead. But they have realised the urgency in the last few months, so are starting to assess risks across their businesses.
“A few themes are emerging,” he says. “Companies that [import] physical items are looking at the potential for border delays [caused by a no deal]. They have started building stock to avoid running out. Some are now topping that up and may do again. If they have thin margins, stockpiling might create cash flow problems, especially if sales hit a bump. To address this, they will likely negotiate longer payment periods with creditors, especially as they are buying more.”
Another example is a company that warehouses imported items in the UK, then exports them back to the EU, says Mr Hall. It is investing in a warehouse in Holland to avoid the potential duties and bureaucracy of a no deal scenario.
In contrast, service businesses do not move physical items across borders and often buy and sell in dollars. Factors such as the weaker pound mean they could be net beneficiaries of Brexit, says Mr Hall.
However, such companies still have risks. For example, one software business in the south of England employs many project and software engineers from Eastern Europe. It may be harder to employ such people given Brexit uncertainties, so those companies are trying to partner with businesses in Estonia, Latvia and Poland, which brings its own complications.
A potential hidden consequence of Brexit is the effect on your customers, says Mr Hall. For example, if you supply software to a car maker and it leaves the UK because of Brexit, they may find a local solution elsewhere and cut you out. So businesses need to look for risks like that in their customer base.
To combat this, you could try to become more international – for example, have an office in Japan. But most importantly you should have a diversified spread of customers across regions.
“Looking outside your geographical area may create a long‐term opportunity,” he says. “Hold your nerve. Keep innovating. Focus on gaining market share rather than defending it. If the wind blows, build a windmill not a wall.”
Experts suggest the first step in planning for Brexit is to model a worst‐case scenario and how it will affect all areas of the business – from sales to operations and finance — using an enterprise risk management (ERM) approach.
Most commentators agree that the worst‐case scenario for SMEs is no deal. For example, the Institute of Directors (IoD) has said most of its members who are contingency planning are preparing for no deal as their baseline.
To help companies assess the risks, the government has issued 106 technical notices on its web page “How to prepare if the UK leaves the EU”. A decision tree filters these depending on whether you do business outside or hire people from outside the UK; or if you have data; intellectual property; or government funding issues.
SMEs should read all relevant notices; and a separate document “UK government’s preparations for a ‘no deal’ scenario”. This advises on areas such as ports, traders, pharmaceutical firms and other organisations that use the border about potential disruption and how to prepare supply chains.
Once firms have identified their biggest risks, they may also seek advice on these from accountants, lawyers and other advisers.
A no deal scenario would mean a move to world trade organisation (WTO) rules. This would likely mean paying customs duties for exporters; new contracts with trading partners; different coding of goods; and customs declarations. Companies that do not want to manage the administrative burden, could use an agent such as a customs broker, freight forwarder or logistics provider – and do it soon as demand for agents will be heavy if there is a no‐deal Brexit.
They might also research how the EU countries they trade with handle customs declarations, duties and VAT payments for non‐EU countries. Some countries have already started sharing such information in preparation for Brexit.
Hopefully, any companies that receive funding from the EU will already have identified that they may lose this and are looking at alternatives.
Importers are likely already aware of the administrative changes they will need to make in the event of a no deal. These include applying for an import reference number; and for authorised economic operator trusted trader status, which secures qualifying businesses’ roles in international supply chains.
SMEs should also have identified all their EU staff and whether they will qualify for settled status. Companies could offer to help these workers and their families apply.
Risk consultant Crowe suggests firms also consider a workforce planning exercise to understand future employee needs and the impact of changes to free movement. How will a fall in migrants to the UK, which has started already, affect you? Or a potential brain drain of disillusioned younger workers moving abroad? Could you, for example, use enhanced benefits, or apprenticeship or other schemes to compete for talent?
Understanding the impact of regulatory changes is also crucial, says Crowe. For example, will the goods and services you buy from the EU still be acceptable in the UK and vice versa? If not, what can you do about it? Do you need an EU presence to satisfy EU regulations?
Incorporating an EU company, for example in Ireland, is relatively quick and inexpensive, says Crowe. This will ensure a legal presence and ability to meet EU regulations. Many financial services firms such as fund managers have done this already to ensure a seamless service to their European customers. But companies need to understand the tax implications of a relocation for the organisation and its employees; and what it means for your company infrastructure and who will do what, where.
Some companies may also open an EU bank account, which will allow them to pay suppliers and be paid by customers. This is much harder than it used to be and can take months. But if banking becomes complicated post‐Brexit, a ready bank account could pay dividends, says Crowe.
A report by solicitor Menzies on the effect of Brexit on manufacturing SMEs reveals more potentially hidden risks of Brexit and is also relevant to many companies outside that sector.
It says another important step for most companies to mitigate risks is regular cashflow forecasting. This should help ensure the business is managing working capital effectively and enable it to react to external changes quickly.
Menzies also recommends checking external information such as global supply chain data and migrant statistics, which could indicate increased pressure on skills.
“While it won’t be possible to eliminate Brexit related risks entirely, most businesses can take steps now to alleviate potential pressures,” says Menzies. “For example, a business concerned about a fall in orders could renegotiate contracts now, seeking to tie customers in for longer, or switching to volume‐based purchasing in exchange for a lower price. Agreeing rebate orders over a certain value may also be possible.
“Structuring decisions can also de‐risk the business. For example, it may be possible to protect assets and shareholder value by placing them in a group holding company, separate from the trading company. A similar strategy could be adopted by businesses seeking to de‐risk product innovation activity and protect intellectual property. If exchange rate fluctuations are a significant risk, it may be possible to hedge risk or renegotiate arrangements to match the currency used for purchases and sales. Alternatively, it may be possible to form strategic alliances to pool the FX risk with other companies.”
Without EU protection, SMEs may need to act to avoid brands being copied or undermined. They should review their intellectual property and look at a range of preventative measures, says Menzies.
It also warns that cutting investment could be particularly dangerous if competitors invest in game‐changing technologies such as data analytics, automation and robotics, says Menzies.
It recommends reviewing investment plans against various scenarios, reviewing timing to take advantage of tax incentives, and considering alternatives such as the UK’s Catapult innovation schemes to access machinery.
Supply chains could be another hidden risk. Companies may have looked at their immediate suppliers in the context of a no‐deal. But have they looked at how Brexit affects their suppliers’ suppliers and further down the chain? Some companies with complex supply chains have up to 20 tiers, but many do not assess risks beyond the first one or two.
Even for the best risk managers, it is hard to know exactly how a no deal might affect their company. A big worry for many is that new duties, border delays and transport costs will force European businesses to reduce trade with the UK and focus instead on fellow member countries.
Many firms conclude that they therefore need to diversify and start looking for other client niches or marketing streams, particularly outside the EU.
Amanda Thomson, CEO of UK‐based champagne company Thomson & Scott, is a good example. She says the uncertainty in Britain has a long‐standing effect on spending, so non‐essential food and drink businesses are likely to face dips in growth.
“We have no experience of a post‐Brexit landscape so uncertainty and lack of spending could well prevail for some time,” says Ms Thomson.
“However, it as an opportunity to re‐shape our strategy and focus on non‐European international export territories, such as the US, Latin America, New Zealand and Australia. We will also launch Noughty — our alcohol‐free organic sparkling wine — this spring in the UK.”
As for the future, Thomson says there are many hypotheticals, but you still have to prepare for them.
“The saving grace is that start‐up founders like me are used to surprises, and not just happy ones,” she adds.
Navigating Brexit risk: top tips
- Model your worst‐case scenarios and how you will respond to them
- Use an enterprise risk management approach
- Read the government’s notices on preparing for Brexit — identify your biggest risks
- Research how EU countries trade with non‐EU countries
- Use workforce planning to understand your future employee needs