Brexit and the Beast – preparing for the worst is always best

The recent snowfall in Ireland caught many of us unprepared
The recent snowfall in Ireland caught many people unprepared

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Walking into any open shop during the recent storms to find hundreds queuing for bread and beer after only a day of snow was bewildering. We were well warned in advance. How hard can it be to insulate pipes and put a few loaves of bread in the freezer, or be ready to make your own bread?

Presumably many people did not believe the warnings but, even if Met Eireann had been exaggerating, surely insulating your pipes can only ever be good, and making your own bread is always a pleasure?

Preparations for Brexit in Irish business feel very similar.  After the initial shock and sterling drop, businesses now seem to be lulled into a sense of complacency. There is the philosophy of “we will take it as it comes” without any sense of an urgent need to prepare.  Many no longer even believe it will happen.

Businesses who do not prepare for Brexit are likely to see far worse consequences than running out of bread but mitigating against Brexit risk is a bit more complicated than insulating pipes.

For many business owners, trying to prepare for Brexit right now may seem impossible.  How can I prepare for something that may not even happen, and even if it does happen we are still guessing as to what it will look like?

 

Preparing for the Unknown Knowns

Anti-Brexit protestors outside the 2017 Conservative Party conference
Anti-Brexit protestors outside the 2017 Conservative Party conference

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We read daily reports of radical disagreement within the UK Tory party on the desired outcome, leaving us unsure what we are meant to be preparing for.

For any business looking for a sustainable long-term future, Brexit, like any other significant risk has to be addressed, measured and managed.

Unlike the Twin Towers attack, or the Icelandic ash cloud, this is more like Storm Emma, you can’t say you were not warned. We do know there is a very high probability that something will happen on March 29th, 2019, and that it’s very unlikely to be pleasant for Irish industry.

To manage any risk the first step is to measure it. How badly would I be impacted in the worst outcome – a full hard Brexit with the UK exiting the Customs Union and the Single Market? To do this you stress test your forecast. Run your profit and cashflow forecasts and then change your assumptions to the worst possible scenario – what would happen if…

 

Predict, Forecast, Measure, Predict Again

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Brexit will bring a worry of tariffs and levy’s not seen for decades

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Different sectors will be impacted in different ways. Food companies manufacturing in Ireland exporting to the UK worry about tariffs, weakening sterling and fret about their shelf life as the prospect of horrendous border delays looms imminently. Other concerns often raised include a future “buy British” mindset in the UK which may impact how consumers make purchasing decisions, or cheaper competition from less regulated geographies eroding price for better quality but more expensive Irish goods.

Software companies with major revenues from the UK public sector worry about how a post Brexit UK government will purchase when EU regulations no longer apply.  Many Irish companies have operations that are deeply integrated between Irish and UK facilities with goods moving back and forth across the Irish sea or indeed the Northern Irish border carrying out various steps in the production process as they move. How is that going to work in a work of border checks with a hopelessly under-resourced UK customs infrastructure?

The customs paperwork required if the UK becomes a “third country” is absolutely terrifying and the costs of compliance will sky rocket with a shortage of people who actually understand the system.

Running a forecast on a “what would happen if” basis will probably focus your mind very quickly to the fact that Brexit complacency is just not an option for most Irish businesses. Profitability would be quickly annihilated by a combination of sterling drops and tariffs, let alone the increased overhead burden from the extra administration work.

 

Strategy Works

It would be easy to get pessimistic, but the really important step is to pull together a coherent strategy to deal with the issues. Let’s take an example of a food company manufacturing in Ireland selling to the UK.

captureWhile hedging may help in the very short term, the reality is that for most businesses Brexit will demand much more productive and efficient operations and major strategic changes, including market diversification for the many companies who are over dependent on the UK. The good news is there is a huge amount of help available from all of the Irish support agencies as this is currently a top priority for the Irish government.

For many companies Brexit is acting as a catalyst to implement the sort of changes businesses should be constantly implementing anyhow – lean operations, better procurement processes, tightening up financial management in particular forecasting, planning, product profitability management and hedging for the major risk exposures of foreign exchange and commodity prices.

These are all changes that can only benefit the companies whether or not Brexit materializes. Brexit is like a health warning that galvanises you into a better exercise and nutrition regime.

For Irish businesses, it’s time to stop waiting in queues, roll up the sleeves, and make some dough.

 

head-picMoira Creedon is an associate faculty member on the IMI Diploma in Management. Moira works with a wide range of Irish businesses in Food, Technology sectors and Life Sciences to address and prepare for Brexit risks.