How To Mitigate The Shock Of Brexit-Like Events

Any company with a budget (that is, every company) engages in some type of financial planning. Globalization has enterprises of all sizes keeping a closer eye on their exposure to risks related to foreign exchange volatility, political changes and the like.

But not every firm is prioritizing the use of technology that can provide more sophisticated financial forecasting. Following the U.K. referendum and the sudden, worldwide financial shock of the Brexit vote, we bet those companies that didn’t devote more resources to such efforts are regretting it.

Treasury management technology firm Reval says Brexit makes it painfully clear that, for those businesses not conducting contingency and scenario planning, their financial situations are far less stable.

“The future of the U.K. government and the practicalities of Brexit will leave many companies facing a number of challenges and opportunities,” said Reval Solutions Consultant Jacqui Drew in a statement last week, adding that businesses must have a strategy in place that includes scenario planning to help a company navigate through such a tumultuous period.

To get a deeper look into how scenario planning can protect a company against such events like the U.K. referendum, PYMNTS spoke with Reval’s Vice President of Product Strategy Peter Seward.

When it comes to far-reaching events like Brexit, corporations, Seward explained, must take into account a complex array of factors. Not only must businesses explore how an event will impact FX prices, but they must also determine whether an event will cause instantaneous and permanent effects on the market and on the company, or whether it will cause a sudden shock to the environment, but then those effects will gradually subside.

“This is critical for a corporate to consider, as it directly affect re-pricing responses,which, for most corporates, are annually and subject to competitive forces,” he explained.

Scenario planning technology enables a business to take all of this into account, and more, to assess both positive and negative possible outcomes of an event.

Doing so is vital to protect a company’s cash positions and cash flows, accurately and effectively budget, set prices, and to continually assess and tweak financial plans over the short and long term, he explained.

So why wouldn’t a business conduct scenario planning ahead of the U.K. referendum?

“Their reasons can vary,” the VP said, adding that staffing levels, resources allocated to treasury and financial planning departments, and the sheer prioritization of using scenario planning tools in the budget process all impact how well a company can prepare for Brexit and other similar events.

“Treasuries typically don’t have lots of resources,” Seward said. “So it’s a matter of the tools they have available to them. If they have their scenario planning on Excel spreadsheets for an annual budget, they may look at it every quarter or six months, whereas a financial professional who has a system with all of their budget plans online and globally accessible is in a much better position. It’s automatic,and they and their global colleagues can update their budgets whenever they want. A system makes it much easier to run scenarios on accurate, up–to–date information.”  

Hindsight is 20/20, and after the U.K. pound hit a 30-year low after the Brexit vote, businesses were scrambling to mitigate their exposure to this level of volatility.

But for the corporations that aren’t allocating the proper resources and investing in scenario planning tools, Seward suggested that they maybe should have known better.

“Events like Brexit come along regularly,” he said. Such “unexpected events at relatively short notice,” as he described them, aren’t necessarily rare. The global financial crisis, for instance, played its own part in enlightening corporations to the demand for scenario planning.

And analysts say there’s a significant probability that some kind of event out of China will shock the markets in the near future, Seward added, while the presence of several currencies with negative interest rates present yet another kind of scenario for which businesses must plan.

“Corporates want to forecast,” he said. “We see them taking bigger advantage of that.” Currency fluctuations and planning for these various market shocks have led businesses to refinance their debts, even borrowing in a foreign currency.

Globalization of enterprise and finance means large, multinational corporations aren’t the only ones who should be concerned about investing in scenario planning tools, either.

Seward said SMEs should also be interested in this space; a not-for-profit, he offered as an example, that accepts donations in the G7 currencies but then must deploy those funds out across Asia, Latin America and Africa in local currencies.

“They don’t have to be a large company, but the variability of the FX rate can be very important to them,” he said.

While more companies perhaps should have already deployed scenario planning solutions ahead of the U.K. referendum, there’s no time like the present. Seward said businesses need to start making it a priority, though acknowledged a sort of Catch-22 in which professionals are too caught up in operational business processes to focus on implementing a scenario planning strategy, but understand that establishing a scenario planning tool would free up a lot of their time to focus more on analytical operations instead of operational ones.

Still, he said, the cost of adopting these solutions isn’t a barrier. Plus the tactics used to meet regulatory requirements for, say, corporate stress tests can be deployed in the same way for scenario planning.

Brexit, if anything, should be a wake-up call to the importance of this type of forecasting tool.

“To have the tools available to see the impact of different scenarios and take action is very valuable,” Seward concluded.