bear in woods

It’s time for small businesses to get serious about Brexit

By Matt Dallisson, 06/02/2019

You might be enthralled or appalled by the Westminster shenanigans; you might be a leaver, remainer or remoaner; you might predict we’ll have no deal, the withdrawal agreement much as currently agreed, a second referendum, or we’ll go full circle and be welcomed back by Brussels with open arms.

But, as we get towards the end game, where are you on planning for what you can influence and control – your company’s response to various Brexit scenarios?

I am struck by how few small businesses are thinking about how they may be impacted in 2019 – either those that are at risk or can exploit opportunities.

Brexit: the clock is ticking

Just this week I was in a conversation with a couple of entrepreneurs about investing in their business. For 4 hours, they, their brand, their strategy and what they had achieved bootstrapping and growing through the last 12 months were super impressive. But then we talked about potential Brexit risks…

They import product from Portugal but hadn’t looked up the impact of a reversion to World Trade Organisation (WTO) trade tariffs and what that could do to their pricing.

And because they were paying for their small volumes directly in Euros, they hadn’t worked through the potential future impact of another Sterling slide on the back of a no-deal Brexit – or the upside potential for a Sterling recovery should the 20-month transition period be agreed and then a favourable trade deal negotiated.

Conversely, a more established business for which I am a director has reminded me exactly why I invested in such a buttoned team.

They have been gathering opinion from various sources, working through the various ramifications on their business and engaging their board in a discussion about what seems important; probable or not, and therefore worth investing in preventive mitigation.

Equally, many large businesses have not got their act together. But those that have can be a very useful resource. If you are an apparel and/or retail business, it’s worth looking at Next’s half-year results briefing from July 2018.

Pages 43-53 are a dense but useful summary of their mitigation plan. If you are in another sector, have a rummage around other relevant public company results for their published summaries of Brexit risks.

So, having observed various large & small businesses, these are my macro thoughts & questions about Brexit planning.

1. Are you prepared for the risks and opportunities of Brexit?

The first task is to assess how exposed your business is to Brexit risks or whether you can hunt out some opportunity. Could you be subject to changes in tariffs for incoming raw materials and/or supply chain disruption from chaos at ports?

Then there are currency impacts – how much you import and so how much your margin is at risk from a slide in our Pound? But equally, how much opportunity do you have to export and benefit from a reduced value of Sterling? What will be your competitors’ and customers’ reaction to price changes? If you sell into the big UK grocers you can be sure they are going to expect you to absorb price increases.

But will others in your category do that or have they the willpower to go for price increases? Then there is the macro economic impact. Even if you are a service business and only sell in the UK – so no tariff, supply chain or currency concerns – you are still likely to be exposed to consumer confidence. Of course, we’re going to have a bump, slump or wobble in general sentiment and expenditure if we have a disorderly Brexit.

2. Have you considered the probabilities and consequences of Brexit?

Here we need to distance ourselves from the media noise and the bias of partisan politicians. I find the bookies are much better forecasters than the commentators or politicians. They broadly have the withdrawal agreement (in some form) going through Parliament by March as an evens chance.

Then for that 50% chance of a no deal Brexit, we know the government has some macro-contingency planning in place. We can hope that would reduce the chances of port and other logistics chaos, say by half. So that gets us to a 25% or so chance of major disruption. Is that business critical to you? Is a four to one chance worth spending time and effort on contingency planning?

Another reflection here. When campers in the forest see a hungry bear – the one who survives is the one running just faster than the other.

Say we go back to our example of supplying a grocer and a scenario of major logistics disruption. Your customer is going to be preoccupied with their major volume. It will be great (and potentially a chance to increase volume) to be sitting with full availability – but possibly not a catastrophe if you are not.

After looking at exposure, probability and consequence then you might have decided you need to take mitigating action. For example, finding a new supplier in the UK? Or taking on warehousing and building up stocks of your most critical component or end product? Or thinking through your pricing strategy to protect margin? Or starting a sales push now for more exports? Maybe also including setting up a subsidiary in the target market?

Then take a step back from these decisions as all will impact cash flow. Should you be creating a cash flow buffer? Should you be raising cash now? If you are going to be desperate for cash next year, what will be your bank’s attitude or wider investor sentiment?

Every business is different, so every business’s risks will be different. Very few businesses are going to be immune from the fall-out of whatever Brexit we end up getting. It is getting close now (even if you believe we’ll have another 20 months of transition) – definitely overdue for some thinking if you haven’t done so already.

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It’s time for small businesses to get serious about Brexit