Small and medium-sized businesses need to focus even more closely on cash management, protecting margins and spreading their funding risk following the surprise announcement of a snap election on 8th June. They can counter the prevailing climate of uncertainty by taking stock of their supplier base and hedging against risks posed by exchange rate volatility.
Following Prime Minister Theresa May’s announcement of a snap election, markets are anticipating an increased Conservative majority, allowing room for more steadfast Brexit negotiations. Despite this, SMEs could find there is a heightened risk of currency fluctuations and supply chain disruption in the short term, putting pressure on cash flow and making it harder to invest for the long term.
Before taking any action, SMEs need to conduct a financial risk assessment of their business model to identity which areas are most at risk. This assessment should take into account supplier contracts, access to funding, maintaining a diverse customer base and losing access to skilled labour. Such risks are not always readily apparent but depending on the outcome of the election and subsequent Brexit negotiations, they could have devastating consequences.
Will the economy stay stable?
One of the main challenges facing businesses in the months ahead is the ongoing exchange rate volatility and currency fluctuations. The sudden strengthening of the Pound in the days that followed the announcement of the snap election demonstrates the sharp movements that can occur; making it difficult for businesses, which are buying or selling goods in a foreign currency to know whether goods and services will return an appropriate profit.
To avoid losing out, businesses should take steps to minimise their exposure to currency-related risks by buying goods and raw materials in the UK if necessary and hedging against future currency fluctuations.
Businesses should avoid trading currency using spot rates and look at other financial instruments such as forward contracts. Whilst these contracts will incur bank charges, buying currency ahead of schedule and fixing exchange rates removes uncertainty in the short term and enables business to plan ahead in the knowledge that margins are protected. This in turn means that pricing strategies can be set at the right level.
Strength in Sterling
The strengthening of the pound is offering some relief to businesses that have seen their import costs rise significantly since last year’s EU referendum. However, if further currency adjustments take place and goods sourced from overseas become more expensive again, businesses should take steps to re-negotiate supply contracts and consider alternative sourcing strategies.
Another option is to secure an agreement to buy products or raw materials in sterling, thus passing the financial burden to the other party – however, this could be a difficult position to negotiate. In some instances, it may also be possible to alter the terms of existing supply agreements to allow raw materials for example, to be purchased and sold to the marketplace in the same currency, which removes the currency exchange rate risk altogether.
Many SMEs are heavily reliant on a single, large customer contract, which can significantly add to their risk profile during times of uncertainty. Although the benefits of large contracts speak for themselves – increasing turnover and driving up profits – they can also bring risks. Such customer dependency could put pressure on SMEs to accept terms of business that may not be favourable as well as increasing the risk of cash flow disruption if the customer later pulls out.
The best way to minimise such risks is to ensure that early contract negotiations with all new customers are managed carefully. Concerns about contract terms should be raised proactively and, if necessary, compromises agreed at an early stage.
Additionally, it is wise to check customer’s credit history before taking on a new contract. Understanding a customer’s financial position can help SMEs to make informed decisions about whether working together is going to be mutually beneficial.
Planning to invest in uncertain times is a particularly high-risk activity but proving to investors that the business is sound, has a clear strategy and an attractive proposition, will leave SMEs in a strong position to secure the finance necessary to progress their plans. Whilst some short-term delays in securing finance might be expected, businesses that present a strong business case should still find funds forthcoming.
To spread their funding risk, businesses should consider alternative sources of finance that are geared to supporting small businesses through periods of uncertainty. These include crowdfunding, peer-to-peer lending, invoice financing as well as challenger banks such as Metro Bank, Aldermore Bank and Atom Bank, who provide more flexible bank finance solutions for businesses compared to traditional lenders. It is important to select the right approach to funding and in some cases; investors may require some degree of business control.
By assessing their exposure to exchange rate-related risk and taking steps to diversify their customer base or modify supplier agreements SMEs will be better prepared to navigate the current uncertainty. Understanding the importance of careful cash management and ensuring the business has access to the funding it will need to take advantage of any improvement in trading conditions, will be essential for future success.
Salvador Amico is partner and head of the Brexit team at accountancy firm Menzies LLP.
Further reading on the snap election
