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July 25, 2016

Preparing for Brexit: Analyse your Purchases

If a lot of your business’ purchases come from abroad then you may be significantly impacted by Brexit. In particularly, if the value of the pound stays low, your purchases from abroad will be more expensive (though this will also encourage export sales).

It is important to plan ahead to see the possible impacts on your input costs and to take steps to mitigate any negative effects. Here are some tips for reviewing how Brexit may impact on your purchasing costs:

Analyse your Purchases into UK, EU and Rest of World.

• UK Purchases. Your purchases from UK suppliers are the least likely to be negatively affected by Brexit. Indeed, a UK economic slowdown may reduce prices for a while. Beware though if your suppliers are UK based, but they actually import the things you buy from them: their import costs may rise and they may have to pass those costs on.

• EU Sales: Once we leave the EU, imports into the UK may be subject to tariffs. What tariffs do your suppliers who are currently outside the EU pay to bring things into the UK? What impact would that level of tariffs have on your purchase costs?

• Exchange Rates: The pound to euro exchange rate has fallen, making imports more expensive. Coupled with possible tariffs on imports of some goods, this may have a significant impact on your input costs. What impact would a 10% increase in purchase costs from EU (and Rest of World) suppliers have on your profitability? Also model the impact of a 15% or 20% increase, and any other scenarios you wish.

• Rest of World Sales. The fall in the value of the pound will make imports from the Rest of the World more expensive. Additionally, If your purchasing agreements with suppliers elsewhere in the world are based on EU agreements, what might exclusion from those agreements mean? Trading terms for British companies could get better, but they could also be worse.

• Consider holding foreign currency. If you have a lot of suppliers outside the UK and also sell products and services outside the UK then it may be worth your business operating an account in a foreign currency – most likely Euros or Dollars. Rather than constantly having to convert sales and purchases into pounds you can start to offset purchases against sales, bringing the balance back into pounds only when you need to (or when currency rates improve).

It is worth taking some time to analyse your purchases like this and consider (preferably in a team meeting) the possible impacts on the different scenarios above.

If you are heavily reliant on overseas suppliers (or have outsourced a lot), then it is certainly worth running the numbers again, and comparing costs with UK suppliers using the scenarios suggested above. That will give a likely range of impacts and it is worth preparing more detailed forecasts using “Best”, “Worst” and “Most Likely” scenarios.

One positive impact of Brexit might be a boost to UK suppliers and manufacturers. Indeed, if you are a UK based manufacturing business it is well worth getting out into the market to sell your UK credentials to UK potential customers on the basis that your products will be tariff free and free of exchange rate impacts once we leave the UK.