The UK electorate voted for a large Conservative majority on 12 December 2019, but what does that result mean for businesses planning in 2020?
The markets reacted enthusiastically to the result because it peeled back a level of uncertainty around Brexit. With a huge electoral mandate, Prime Minister Boris Johnson will be able to take the UK out of the European Union (EU) on 31 January, 2020, in an orderly way, beginning the transition period within which the UK aims to negotiate a free trade deal with the EU.
With such a large majority, the government has been able to pass its business through the house, unimpeded by the difficulties that faced the previous administration. While at face value this should bring more clarity for business, uncertainty still remains on a number of big-ticket items.
What does the new Conservative Brexit policy mean for businesses?
The withdrawal agreement explains there will be a transition period until 31 December 2020, where everything remains as is, with exact alignment with EU regulations and standards. This means businesses now have a little more time to think about a number of factors that can impact them.
One recent development centres on Johnson’s eagerness to have a date enshrined in law for securing a free trade agreement with the EU. That date is 31 December, 2020.
Many trade experts have mentioned how difficult it is to negotiate trade agreements, especially with a big bloc of countries. Normally these take years. Johnson’s (less than) year-long timetable is extremely ambitious, with opposition MPs concerned it could lead to a no-deal Brexit after all.
What happens if Johnson doesn’t get a trade deal?
It would mean leaving the EU’s free trade arrangement, and the trade deals that the EU has with other countries. Trade would initially have to be on terms set by the World Trade Organisation (WTO), which sets out agreed tariff rates for import/export between countries. Tariffs would likely make UK exports less competitive, raising prices in the UK if they are applied to imports. The UK government has initially said that tariffs would not be applied to UK imports coming from the EU into the UK, but the EU does not have to do the same.
Changing the tariff arrangement and implementing WTO rules would also mean that border checks have to be in place between the UK and EU. These changes are likely to cause problems at UK ports, where disruption may cause bottlenecks. This would particularly impact manufacturers, with the car industry expected to be severely impacted. The UK service industry would also lose its guaranteed access to the EU single market.
WTO rules could also be damaging to the United Kingdom and Ireland, as their implementation could see the return of a hard border between the Republic of Ireland and Northern Ireland.
If a trade deal is negotiated in time, the Conservative government needs to make it very clear to businesses where checks will be carried out should businesses be exporting or importing goods between the UK and NI. And it should advise them as to the additional tariffs that will need paying, in the event goods actually reach the Republic of Ireland, an EU member.
How do you prepare for 31 December, 2020?
It requires businesses to take a long, hard look at a number of areas to assess the potential impact on their customers, their suppliers, and their supply chain.
Much of the data required to underpin this analysis resides in an organisation’s enterprise resource planning (ERP) system. While these systems are good at data entry, they are not so hot when it comes to getting data out in a usable form. The native reporting tools that come with most ERP systems tend to be slow, inflexible, and highly technical; they leave a lot to be desired.
So, it should come as no surprise to learn that Panorama Consulting Group’s 2018 ERP Report highlighted that only 17% of respondents believed their ERP had led to better informed decision-making.
To be ready for new trade set-ups and other Brexit-related changes, companies need more reporting and analysis flexibility than their ERP provides. As a result, this requires investment in agile ERP reporting technology that supports what-if scenarios based on many existing data points. That way, finance teams can quickly define the impact of specific events to a senior management team.
Consequently, and as a ‘common sense’ checklist, we’d recommend reviewing the following questions, using agile ERP reporting technology to help guide the outcomes:
- Where are all major suppliers based, and what would WTO rules mean to the relationship with this supplier and its associated supply chain?
- How will the business’ margins change as a result of changes to EU preferential rates?
- Is it sensible to stockpile goods in Q4 2020?
- Where are you going to get workplace talent from? Would it be easier to employ UK citizens instead for the near future rather than EU citizens not residing in the UK at the moment?
- What would be the impact to the business if the UK’s credit rating is downgraded?
- What would be the impact to the business if the UK pound rises or falls dramatically?
- How much business does the company do with Northern Ireland, and what would additional checks and taxes mean to financial liquidity in the short and long term?
A Brexit transition period is a ‘nice-to-have,’ compared with what has gone before in 2019. But the Brexit story is far from over. We advise businesses all over the UK to simulate many what-if scenarios using their ERP data, so that any sudden shocks of uncertainty are factored into business planning accordingly.
2020 is set to be a turning point for the UK, but we are still (largely) unaware of the direction in which we are heading.
This article originally appeared in Treasury Management International on January 10, 2020.