Up to date financial information is critical for Brexit affected manufacturers
Last updated 11 January 2021
Brexit is going to fundamentally change the way manufacturers do business. To ensure business owners and their management teams remain on top of the business, the need for up-to-date financial and management information is vital. The information manufacturers will need is outlined below.
As a bare minimum, business owners will need relevant, reliable and up-to-date management accounts that include a rolling 12-24 month forecast of profit and loss, balance sheet and cash flow. Given the current uncertainty following the implementation of a second UK lockdown, this should be updated with real-time numbers, with forecasts amended regularly to cater for changing circumstances.
However, we recommend that those management forecasts should go further to include sensitivity analysis or “what if” scenarios. This might include:
- Taking into account the effects of reductions inactivity due to delays in the delivery cross border to customers and the effects that undoubtedly will come with working from home.
- The effect on sales of non-arrival of vital raw material supplies.
- The ability and impact of stockpiling raw materials on site.
- Delivery of finished goods to an EU warehouse in anticipation of customer delays.
- The impact of customer delays on working capital.
The importance of having this information at your fingertips becomes even more important should you need to approach bankers for additional working capital. Without it, bankers may look to impose high interest rates or refuse to extend banking arrangements completely, perceiving the business to be at higher risk.
It should also be kept in mind that additional banking facilities will require additional security, with a straight loan or overdraft requiring a charge on assets and/or a personal guarantee.
Manufacturing businesses trading overseas making large payments in foreign currencies will need to consider the foreign exchange implications that will arise as a result of the continuing economic uncertainty and resulting 3rd lockdown in the UK.
The Bank of England is no doubt geared and ready to support Sterling as far as is possible, but there will undoubtedly be residual effects where large liabilities scheduled to be settled in USD and Euros will result in higher-than-expected foreign exchange deficits. The early arrangement of a foreign currency or forward exchange cover may be a way of mitigating these losses and early consultation with bankers to arrange these facilities is recommended.
Protection of profitability
Manufacturing businesses need to ask how respective products will be affected by increases in costs that will arise as a result of increased bureaucracy that will arise from non-tarrif barriers. There are many cross-border simplifications that existed under EU customs rules that are no longer available. This will cause increased administration which will increase the cost price of goods. Many businesses are totally unaware that these benefits that existed previously no longer exist.
Have you advised or consulted with key customers of the possibility of higher prices following the imposition of tariffs? Can these costs be passed on or is the company facing a reduction in gross margin? Do fixed contracts that extend for some time after Brexit include escalation clauses that allow for price increases? If you are unable to pass on these price increases to customers, are the margins sufficiently robust and large enough to ensure that continuing this product line is reasonable after the overheads are included? Businesses may need to make difficult decisions and discontinue product lines and find more profitable alternatives.
Manufacturers, if you have not done so already, will need to understand the various non-tariff barriers that could affect your business and prompt action here is vitally important. Given the existing constraints imposed under the current lockdown with working from home, the lack of expertise in these areas given that the legislation is brand new and government staff lack familiarity, it is important that business owners consider consulting experts including their accountants and business advisers on how these matters will be managed from 1 January 2021.
If you are a manufacturer or business looking for advice or guidance on this topic, please contact me here.
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