What BREXIT could mean for YOU and YOUR business.
Whatever your view on the recent “in, out” referendum, there is no denying that this is of huge significance to the UK, both politically and commercially. Within this article, we’re not going to talk about the “rights or wrongs” or present a “view” on the result, but offer strategies about potential, likely events and how best to prepare UK business for these.
As I write, the pound sterling has just hit a 31 year low against the US dollar, David Cameron has resigned as Prime Minister (with effect from Oct 16) and no fewer than 14 Labour shadow cabinet MP’s have resigned.
What’s the relevance to us?
The implications around this aren’t neccesarily that we will miss the prime minister or that we even recognise the resigned labour MP’s names, but what it does, is create a huge amount of UNCERTAINTY……
…and one thing is for sure; people, consumers, markets and governments dislike UNCERTAINTY.
This has huge effects on our behaviour as consumers or investors.
Immediately following the announcement of the UK’s referendum, Mark Carney (governor of the Bank of England) issued a statement saying that they will take the necessary steps and measures to protect the UK economy, this may include adjusting interest rates.
Whether interest rates will increase or decrease is unknown at this point, BUT, If changes in interest rates have a significant impact on your business you should now consider what the impact of a rate rise or fall is to you.
For example, businesses who may be sensitive to increasing interest rates may be;
- Businesses with significant amounts of debt
- Businesses within the leisure and entertainment sectors*
- Home improvement business (builders, property developers)
*the impact of interest rates on your customers, if the general public’s monthly mortgage payments increase as a result of higher interest rates, there is a pretty good chance that they will reduce their “general spending” potentially on items seen as “treats” or “leisure activities”
As at 1:22 pm on the 27th June 2016, the £ is currently trading at an exchange rate of $1.3694 to the £1 – a 31 year low.
If your business imports goods from the rest of the world, the vast majority of these are charged in (or at least “pegged against” the US Dollar), which in a nutshell, means that the cost of businesses buying goods, and bringing them into the UK to sell has just increased, overnight.
“For example, a UK business purchasing $25,000 of stock (prior to the referendum) would have cost in the region of £16,667, the current cost of the same $25,000 of stock would be £18,256 – An increase of £1,589”
The importing business then has a decision, does it put up prices to cover its increased costs at the risk of losing customers OR does it leaves prices as before and continue to sell goods but at a much lesser profit margin?
On the basis that business can generally only absorb cost increases for a certain period of time, it seems likely that UK prices for imported goods will increase, if current exchange rates remain the same.
Petrol & Fuel Prices
These are worthy of special mention – as exchange rates change, the cost of fuel (purchased almost exclusively in US$) varies massively, and the impact of this is huge, think about it, an increase in fuel prices will typically;
- Reduce the amount of money that consumers have to spend
- Increase (in addition to our earlier example) businesses costs in bringing goods into the UK – product cost increases and so does the associated transport cost.
The only certainty is Uncertainty….
The BREXIT vote and other associated events creates a huge amount of uncertainty and what’s the impact?
People generally dislike uncertainty and history repeatedly proves that during times of extreme uncertainty people “buckle down and strap in for the ride” – they reduce spending and delay the purchase of large items such as property extensions, cars, expensive holidays etc.
Similarly, businesses dislike uncertainty – if business volumes reduce they may need to consider reducing staff levels, and in many cases, like consumers, businesses will often delay large “big ticket” purchases, often leading to reduced levels of investment.
So are there any opportunities? What should we do?
Understand the impact
Firstly – No surprises! Fully understand, immediately the impact of a changing interest rate and exchange rate impact on YOUR business. If you understand this in advance you can mitigate the any problems and try to capitalise on any opportunities that this huge change brings about.
For example, ask yourself;
“What impact would a 0.5% in interest rates or 1% in exchange rates have on you and your business?”
Understand the opportunities
- More expensive imports may create opportunities for UK based retailers and manufacturers.
- Reduced interest rates may give consumers a higher level of disposable income and therefore increase consumer spending.
Huge events such as the recent referendum create opportunities, they “shake up” the markets and often question what we do and why we do it, as UK entrepreneurs we need to monitor the positions and constantly review our own business models, to ensure that they remain relevant. Opportunities will almost certainly arise, for those individuals and business that can respond quickly to changes within the trading environment.