UK CFOs react to Brexit deal defeat

The UK Parliament on Tuesday voted down Prime Minister Theresa May’s deal to exit the EU, leaving British businesses with even more uncertainty.

May, who struck the deal with the EU in November, was expected to lose the vote by MPs in the House of Commons — but not by such a wide margin. The deal was defeated by 230 votes. Her government survived a no-confidence vote the following day.

The path forward for the UK is equally undecided, with possible next steps including delaying Article 50 of the Treaty on European Union, calling a second referendum, finding a way to negotiate a softer Brexit, or leaving the EU without any deal at all. Article 50 outlines the procedures for a member state to unilaterally exit the EU.

For Andrea Zecchino, ACMA, CGMA, the CFO of the Manchester-based wine bar chain Veeno, one major concern going forward is currency volatility.

“Any factors that add more uncertainty to the value of the pound — it’s a very negative thing,” he said. “It makes it very difficult to forecast margins and cost of sales ... and makes our investors very nervous.”

Veeno, a privately owned company backed by angel investors, operates 19 restaurants across the UK and dabbles in e-commerce and wholesale distribution. The company purchases wine and food in euros from Italy, which could become a challenge if the pound drops significantly. But Zecchino said currency hedging is too expensive — and too difficult to get right — to consider pursuing right now.

Another, less obvious impact in Zecchino’s view is the effect that Brexit uncertainty has had on the company’s 150 employees, about half of whom are non-British EU citizens.

“Everyone is talking about this and getting distracted and panicking,” he said. “It adds a lot of time wasted — talking rather than working.”

James Owen, FCMA, CGMA, the CFO of the London-based boutique management consultant Egremont Group, said Tuesday’s vote does not technically change anything regarding his risk management strategy.

Rather, it heightens the date of the looming no-deal exit he said. “It brings into focus the 29th of March now.”

“Until this point we have been operating under an assumption that, one way or another, something will be in place [by 29 March], whether favourable or not,” he said. But now, “You can tear up the risk register because all bets are off.”

In addition to currency concerns, which he shares with Zecchino, Owen — whose company has operations in the UK, US, and EU — worries about the effect Brexit will have on his clients’ purse strings.

“A large part of our clients are retailers and, thinking very selfishly, the consulting part of the budget [is often] lumped together with marketing and is the first to go when times are hard,” he said.

Owen would also like clarity on the tax implications for his firm. If the UK leaves the EU without any formal agreement in place, it would likely lose the EU tax perks it previously enjoyed, meaning British companies could incur withholding tax there.

That said, Owen is hopeful that Tuesday’s defeat will ultimately help the prime minister renegotiate a softer Brexit with EU leaders.

“The EU now recognises that the deal on the table as it stands will never get approval, therefore they have to move,” he said. “They have to offer something.”

Philip Allega, a vice-president at the research and advisory firm Gartner, said most UK companies have already taken important steps to mitigate Brexit risks — and some could even benefit from a first-mover advantage.

“They have changed locations for intellectual property, they have changed locations for where they are hiring, they have changed locations for where they are manufacturing. ... They may have stockpiled parts or put things in different parts of the world,” he said.

“There are many risk factors that also can turn into opportunities — to resolve challenges that may be put forth, or opportunities under a new arrangement that are afforded us.”

Allega said some companies might be able to take advantage of changes to the legal framework or find opportunities to corner the market for particular skills in the UK.

“It’s the old saying, ‘Never let any crisis go to waste,’” he said.

Risk management

Owen and Zecchino may not consider the Brexit challenges they face to be opportunities in disguise, but they are doing what they can to mitigate risks.

Egremont Group’s typical contract duration (two to six months) does not provide a long enough view on revenues for the company to consider currency hedging, Owen said. Consequently, the company has internally managed currency fluctuations by ensuring non-UK customers pay for services in pounds.

As for Veeno’s risk management strategy, Zecchino said, “We’ve been thinking about this and sort of planning for a worst-case scenario in the background — so the vote doesn’t change that. It’s bad news, for sure, but we are already prepared for the worst case.”

That scenario, in his view, would be a no-deal Brexit.

“What we’re doing is just trying to build some more stock so that if anything bad happens, we have a decent amount of stock in the warehouse to use, to just resist, and hope that any issues with customs get sorted in a reasonable time,” he said.

“For a retail business, if that happens and you don’t have the stock, you lose one, two, three weeks of sales and you’re dead.”

— Portia Crowe is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.