KPMG: Brexit opinion piece

Brexit economic forecasts foretell significant ‘working capital crunch’ for businesses

Towards the end of last year, there was a flurry of Brexit-related economic forecasts published by HM Treasury and the Bank of England. And now, as we rapidly approach the March 29th deadline, and amidst political gridlock, KPMG is seeing a significant increase in enquiries from organisations that are looking to take action to mitigate a significant ‘working capital crunch’ that may result from ‘no deal’.

Businesses around the country, including in Knowsley and the wider Liverpool city region, have been contingency planning for some time now. However, the forecasts from both the Treasury and the Bank of England regarding the impact to the British economy of the various Brexit scenarios currently in play appear to have prompted companies to take more direct action.

We know from our conversations with banks that they are increasingly concerned about how to support their customers’ working capital requirements in a ‘no deal’ scenario. This has seen some rapidly trying to segment and prioritise their portfolios to form views on credit risk appetite and how to respond to what may be tens of thousands of requests for new credit facilities or extensions to existing lines. Indeed, we’ve already seen a number of banks confirm they have set aside extra cash for exactly this purpose.

Meanwhile, businesses are ramping up their own contingency planning. Clearly there are numerous complex issues to contend with. However, we’re now seeing a short-list of ‘critical path’ items that, for a significant number of businesses, are considered a priority – that is, those which could have the most direct and immediate impact on day-to-day liquidity, access to capital and bottom line profitability.

First, the impact that tighter border restrictions may have on working capital and cash conversion cycles, should import and export lead times be slowed. At the same time, many companies are running the slide rule over what further significant currency volatility would do to their margins, in addition to evaluating the operational impact of migration measures affecting lower skilled workers.

We are also seeing clients assess and respond to the potential risk of problems emerging in their supply chains, from a basic modelling of the impact of import cost rises to, for some, a total restructure of their supply chain to avoid product outages.

Finally, recent weeks have seen more and more large organisations confirm their intentions to stockpile goods, with typical buffers ranging from one to two months upwards of incremental stock being put aside.

Given the extra capital being set aside by some of the banks, financing for incremental inventory purchases may be available which will be comforting news for many. However, we’d caution that we expect such funding to be limited to those with a strong credit proposition, backed by robust analysis. In simple terms, that means illustrating clearly why and when any significant new funding will be required, but perhaps more importantly, how and when inventories will be unwound, and that short-term funding repaid.

With the threat of a new working capital crunch looming large, it’s heartening to see so many firms taking action. However, our message to companies in Knowsley that are still in ‘wait and see’ mode is this:  if you can lock-in liquidity now, you should. That means any borrowers with debt maturing in 2019 or 2020 should be actively considering refinancing processes right now.