Not having the right stock in the right place after Brexit could leave your working capital working overtime. Here’s how to beat a cash drain.
So what is the problem?
Think about what Brexit could do to your supply chain if there’s more friction around our borders: the stock on its way to you, or to your customers in Europe, will take longer to arrive. And on bad days, it might not arrive at all. Those longer lead times mean you hold more safety stock as well as more cycle stock to cover day-to-day replacement. All that ties up your working capital.
And if you are, say, an industrial client exporting to the Continent, you face a double whammy: needing to hold more foreign-sourced raw materials on site while also having to pre-position more finished products on the Continent keep deliveries running to your customers.
Okay, I’ll put this on my to-do list.
Don’t wait around. Calculating the time you’ll need to build up buffer stock is based on how disruptive you think Brexit will be (and therefore the number of days cover you’ll need) multiplied by the time it takes to build up one day’s stock. If you buy in that stock, that’s relatively simple. But if you manufacture and you’re already flat out, it’s going to take a while.
Afraid so. Right now, a British retailer pays no VAT on a consignment of, say, French T-shirts. The manufacturer doesn’t charge any French VAT on the sale either and although the retailer has to account for VAT on its return, they can simply offset this against other lines, meaning they only have a liability on paper. Net result: the retailer’s cash remains free.
But post-Brexit, unless the UK and EU sign a treaty retaining the current arrangements, our retailer has to pay VAT to HMRC as the T-shirts arrive in Dover. The retailer will still recover that cash down the line, but up to 4 months later. Net result: 20% of the cost of the T-shirt (multiplied by the 200,000 it bought for stores around the country) is tied up.
At least we can keep buying the T-shirts…
… if you have the money in the bank first. If the UK no longer subject to the European Court of Justice as the ultimate arbiter of trade disputes, there’s a possibility that EU-based firms selling to UK customers will want to see a letter of credit first. Banks typically ask for some sort of security or cash to issue that letter, so that’s another call on your working capital.
Is everyone stocking up already?
We’ve seen a general rise in inventories over the past 18 months, though few have explicitly linked that to Brexit. I would estimate that companies are over-ordering by 15-20 per cent.
Who needs to watch out?
If your business is capital intensive and fast growing you may be more vulnerable. One sector to keep an eye on will be industrial manufacturing as it ticks both those boxes right now. Another is retail: if consumer spending goes south, firms might overstock to make sure they don’t miss sales.
How vulnerable am I?
Everything depends on how many days cover you think you need. If it’s a substantial amount – say 15% of inventory – and on top of that you have to account for VAT, and letters of credit, that will put a serious dent in working capital, and at best curtail investment plans. At worst it would tip some over the edge.
It’s okay, I’ll just go back to my bank…
Some companies might have covenants with their banks linked to thinks like net assets or their working capital position, so check whether that would trigger a review. And of course if you are funding your working capital by borrowing that’s all going to cost more now than before interest rates went up.
At least things will be simpler when we trade more with the rest of the world
Not necessarily. If British companies start to trade more, further afield then goods will take longer to reach their destination, meaning a longer gap between production and payment.
Sounds like I need a plan
There’s lots of good stuff companies can be doing now to reduce their inventory. Instead of simply accepting you will have to carry more inventory, assess now what you could whittle it down to. The things that you don’t sell much of, or you would be able to get quickly or ask yourself whether you can order 100 tonnes of a ‘thing’ rather than 500 tonnes. There are as many as 30 or 40 actions a company can take in response, but a couple of simple first steps can make a big difference.
Irrespective of Brexit, this is no-regrets planning – the things you should be doing anyway. So after you’ve optimised working capital, might only need to bring stock levels back up to where they were before as a result of Brexit. And longer term, hopefully once frictionless borders have returned, you’ll be sitting pretty.