Finance is key to navigating the risks and leveraging the opportunities.
The immediate impact of the referendum result has been uncertainty and exchange rate fluctuations.
Despite the UK economy showing continued economic growth, we see organisations struggling to make the right operational and commercial decisions without knowing the impact of Brexit.
The uncertain picture ahead has led to many businesses struggling with issues such as revenue forecasting, and a change of strategy may be required.
The triggering of Article 50 does not materially change the regulatory environment, and the extent to which it may change in the future depends on the details of a new UK-EU deal.
Triggering Article 50 does not affect the manner in which companies report. But the risks Brexit presents to a company, such as economic uncertainty and currency fluctuations, must be clearly communicated in annual reports, keeping in mind that these disclosures should be "fair, balanced and understandable".
To ensure appropriate consideration and disclosure of these risks, you should:
- assess the risks presented by Brexit in an impartial manner
- challenge valuations
- review tolerances and sensitivities of your modelling
- consider how these risks will be managed.
Things to consider
Plan for the uncertainty
In scenario planning, businesses should undertake a board-level assessment of the potential financial impact of the top five downside-risks and upside-opportunities presented by Brexit.
In order to do this you must check:
- whether you have got access to the necessary data and whether this is reflective of the uncertainties the entity faces
- ensure you have the necessary access to budgeting, forecasting and modelling skills.
Insulate your balance sheet
Ensuring businesses have a sufficiently robust balance sheet will be key to shielding against any harmful impacts on trading performance, and will provide the flexibility to take advantage of any opportunities presented. With this in mind, you should assess whether you have sufficient liquidity in your balance sheet.
You can begin by reviewing and optimising working capital performance, exploring alternative sources of finance and reviewing hedging positions.
It is critical that key stakeholders have confidence in a company's ability to navigate the Brexit process successfully. To provide stakeholders with that confidence, businesses should be proactively engaging key stakeholders (bankers, shareholders, analysts etc.) in a positive dialogue about how the challenges and opportunities posed by Brexit may present themselves and how they will react.
One of the key channels for this communication is your annual report.
Re-evaluate operating models
In response to scenario planning and financial modelling, organisations may need to review key parts of their operating model to cater for new realities as Brexit unfolds. You should consider:
- how operations may change in light of potential new relationships with Europe
- the tax implications on supply chains and the options to restructure
- the impact of carving out European operations into new entities
- current finance structures and how IT systems may be impacted.
While there is great uncertainty over what will follow Article 50 negotiations, you can prepare now by:
- thinking about how administrative burdens might change if the UK leaves the Customs Union, and what impact this would have on incremental costs
- understanding the impact WTO duties would have on a business as a worst case scenario
- mapping the people, process, systems, contracts and asset related issues around potential operational remodelling
- beginning to think about the financial reporting implications of operational decisions.
The depreciation of sterling will make UK assets more attractive to overseas investors, while the uncertainty will provide opportunities for those willing to take a risk on Brexit. As such there is likely to be opportunities for those wishing to enter or exit markets.