Simon Etherington, Technical Risk Manager and Brian Gore, Senior Credit Analyst, discuss ways to mitigate Brexit-related risks and give your business the best chance to succeed
How should companies look to assess Brexit-related trade risks?
Simon: First, it is critical to understand your supply chain and where you fit within it. I recommend mapping out the supply chain in detail and pinpointing where the pressure points are now and could be in the future. By doing this, you can identify what potential impact Brexit will have on working capital facilities, once tariffs are introduced. It will also allow you to identify whether changes need to occur to certain supply contracts, such as amendments to the incoterms. When speaking with suppliers who have exposure to the European Union (EU), you should try to understand what challenges they may be facing. Can they continue to deliver on quality, in a timely manner and at a reasonable cost, for example? This is important within sectors such as automotive where International Organization for Standardization (ISO) standards need to be adhered to. Within your own business you should identify any unplanned costs, such as IT upgrades, and assess whether existing financing arrangements, such as revolving credit facilities or invoice discounting facilities, include clauses that could be triggered as a result of Brexit.
Brian: Other things you might need to think about when you know what the supply chain looks like include demand levels, logistics, materials, tariffs, licencing requirements, labour and regulatory impacts, plus the impact on financials and the type and availability of funding.
In light of all this, should businesses be talking to each other more?
Brian: Contact with customers and suppliers is always important and could be absolutely vital in the current environment.
Simon: I agree - you should keep dialogue as open as possible. Try to understand and discuss challenges faced by all parties, whether they be pressure on lead times or required adjustments to contracts.
Brian: You can feel lost, particularly as a small business, but trade associations, government helplines and websites, as well as regulatory bodies can help.
Specifically, what advice do you have for businesses that trade with companies in the EU?
Brian: Speak with your trading partners to try to get assurances about their readiness for Brexit and whether, for example, they expect to have any logistical problems. I’d also recommend talking to freight forward or import/export agents to try to anticipate and mitigate any transportation issues. Be aware that you will need an Economic Operator and Registration Identification (EORI) number, which is required when importing from or exporting to the EU (you can apply for one at https://www.gov.uk/eori). It might also be worth investigating the “Trusted Trader” programme and whether it is worth applying for Authorised Economic Operator (AEO) status, which is an internationally recognised certification scheme that can help to speed up customs clearance and provide access to certain simplified customs procedures.
Simon: I’d also recommend looking at the existing contracts that you have in place – check whether they will be impacted by increased costs of moving goods across the border, for example. It may also be worth looking at whether you need to put in place appropriate hedging strategies to protect your business from volatile exchange rate movements. However, bear in mind that this may be dependent on how niche the product that you’re procuring or distributing is. And note that all the points above are potentially likely to create upward pressure on costs.
We are hearing a lot about stockpiling in the current environment – what thoughts do you have on this strategy?
Simon: It presents a risk if the increased stock levels prove to be slow-moving – due to a fall in demand or expected orders failing to materialise, for example – and a business has much of its working capital facilities utilised. Stockpiling may be appropriate for fast-moving critical components for just-in-time manufacturing. But we have seen an overall increase in Days Sales Outstanding (DSO) − the average number of days that it takes a company to collect payment after a sale has been made − across the industry with higher demand for raw materials along with input shortages and supplier capacity issues. Our information also shows an increase in both payment incidents and repayment plans due to buyers not being able to meet clients’ payment terms. A number of companies have significantly upgraded warehousing capabilities and capacity to cope with extra stockholding, but this comes at an additional cost. Others have looked at flying in components if they are in a position where they enjoy strong profit margins or receive support from the end customer. Others have look at alternative ports on the east and west coast of the UK, as those on the south coast are expected to be particularly busy.
Brian: As Simon points out, there are some really pragmatic points to consider. For example, you need to think about whether stock will be available if everyone in your industry is looking to do something similar. Then there is the price you are going to have to pay – will you still make money if it goes up? You also need to think about the lifespan of the product you want to stockpile – if it is perishable then the amount you can keep will be limited. This brings you on to storage options, which Simon mentioned. Warehouse capacity is limited and the product may require a more specialised storage solution. Some foods, for example, need to be held in cold storage, which is currently at a premium. Last but by no means least, you need to think about the funding implications. Working capital will increase, potentially for an extended period, and this will increase borrowings and limit capacity to finance other business needs. Consequently, try and maintain a good relationship with your bank as their support could be crucial if the worst comes to pass.
A good customer can be worth their weight in gold in tough times, but how can businesses identify who is most important to them?
Brian: For SMEs it’s often intuitive. Generally, it will be related to which customers contribute the most to sales or profits. That doesn’t always have to be the case, however. There may be a supplier that is a small link in the overall chain, but without them you would not be able to produce what you produce.
Simon: That’s very true. Another factor to consider is which customers pay on time – an important consideration when times are tough. Other points to consider include whether customers are consistent with their purchasing – do they cancel or amend orders, do they place a small number of large orders or a large number of small orders?
Brian: And remember that the biggest customers are not always the most reliable. The most reliable can be those who are most accommodating when you have a problem and vice versa. Personal relationships also count for a lot in some sectors.
What practical steps can businesses take in order to build closer relationships with their customers in the current, uncertain environment?
Simon: Communication is so important. Keep dialogue as open as possible as it’s key to understanding the challenges both you and your customers are facing – it may help you to identify whether there is potential to grow and support customers. Make sure you have a clear understanding of your cash flow projections and profit margins, as this will help you to reduce the number of surprise costs and give you flexibility to work more closely with your customers and suppliers, should they need your support. At all times, ensure that you meet the standards required by customers and suppliers.
Brian: I’d add to that by saying, as well as maintaining your existing product offer and quality, it is important to keep innovating. It’s also vital to be as flexible and reliable as possible. If you provide a good customer service and get a reputation for doing what you say you are going to do, it counts for a lot. You might even get more latitude when you need it in return.
What can companies do to mitigate against customers and suppliers going bust as a result of Brexit?
Simon: Trade credit insurance and payment protection are two options that you can look into.
Brian: In operational terms, you should check whether you can source from alternative suppliers or re-direct sales. If you are reliant on a particular raw material – if it has to be of specific quality with a certain origin, for example – then you may be limited in what you can do. However, most businesses should have options that will enable them to spread the risk.
Simon: That’s true – it might be worthwhile identifying whether materials or goods can be sourced from countries outside of the EU if higher tariffs are to be applied. Be sure to check whether transportation costs and tariffs would be more or less attractive compared to your current EU supplier. Another point to consider is whether this activity could be moved to the UK? Importing at an early stage in the supply chain means that the product could be potentially cheaper and maybe available with a lower tariff, thereby helping to control the cost of production.
Any last word of advice?
Brian: We still don’t know exactly how Brexit is going to pan out so you should prepare for the worst. Even in the limited time available and without knowing for sure how you will be affected, it is important to give worst-case scenario planning some thought. I think it’s worth reiterating that as well as talking to customers and suppliers, it is important to discuss the financial implications with your bank or other funders – having their support if trading weakens will be crucial. Brexit is going to be a bumpy ride so try and give yourself the ability to react to different scenarios.
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