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Brexit: Why should you care?

Britain’s exit from the EU, commonly nicknamed Brexit, is one of the most discussed issues over the past week; particularly when it comes to the financial implications of Brexit and how it impacts business.

financial implications of brexitFor the first time in its existence, the European Union (EU) has lost a country from its (previously) 28-country politico-economic union.  News reports have been answering the most Googled questions: What does Brexit mean? What is the EU? Should Great Britain leave the EU?

Truth is, there are dozens of financial implications that businesses are going to have to contend with, regardless of whether they are based in the US or other countries. With Britain as the 5th largest economy in the world, it is bound to have a direct impact on the United States. The US currently has the largest economy in the world. Because it can be slightly overwhelming to understand what Brexit means for business (with the term “Brexit” returning over 213 million Google search results and counting), we’ve narrowed it down to 4 macro issues.

  1. Labor
  2. Stock
  3. Trade
  4. Regulation & Innovation

We’ve chosen to examine these issues because, regardless of whether you’re a domestic firm or a multi-national corporation, they could have either a direct or indirect impact on your company.

Labor

It’s a no-brainer that you need people (labor) to run a business. With labor, comes skill. In a recent article, The Guardian analyzed what the financial implications of Brexit are and, more specifically, how the talent pool is anticipated to shrink in the coming months or even years. The United Kingdom (UK) is experiencing a skill gap in many professional positions, such as IT. GB has failed to produce skilled workers or laborers internally. Many of the roles that require these types of skill immigrants from other countries in the EU hold. The Guardian quoted Bhuwan Kaushik, CEO of Spectromax (an IT-based company), saying:

“The impact of the Brexit will be sizeable and long term. There’s a huge IT skills gap in the UK. It’s going to take a number of years to close it. Leaving the EU at a time when the UK is in need of skills will be a huge blow to UK businesses, let alone the commercial opportunities that may be lost and could consequently stunt UK startup growth.”

So why does this matter?

Because labor matters regardless of what industry you’re in and what type of labor you require (skilled or unskilled labor). Even if you’re an American company who does not do business with other countries, it’s time to start digging a little deeper. Research the origins of your suppliers and their suppliers. Find out where your customers and their customers are located. You will likely find that somewhere in your supply chain there is someone who will be affected by Brexit and the effects will make their way to you.

Like I always say, pick your head up and take a good look at the world around you.  Just like the bullwhip analogy in a supply chain, one small ripple in the whip can cause huge results.

financial implications of brexit

Woodford Investment Management’s Report on Brexit

Immigration

With Europe experiencing the worst refugee crisis since World War II, this splintering of the EU is going to shock their already frail economy. In addition, they will continue to grow unemployment rates (The Independent). The Treaty of Lisbon (originally created in 2007) created stronger immigration policies to regulate those immigrating from “third countries” or in other words, countries outside GB. This treaty also set the procedures for countries who decide to leave the EU.

Now that GB has voted to leave the EU, they will start to transition into a third country position. This can result in the British Parliament enacting immigration policies. Travel between GB and EU may not be as easy as once before.

Stock

With any political action that causes major uncertainty and doubt in the market, it’s reasonable to expect that investors are going to react. Most investors are willing to take calculated risks, but when the final vote for Brexit tallies at 51.9% Leave vs. 48.1% Stay, the market becomes a scary place.

The day after voting day on Brexit, the pound fell to the lowest value in 3 decades. Oil dropped on Friday as well. Almost a week later, the stock market is only slightly bouncing back.

With the financial implications of Brexit panning out, London’s title as a global financial hub is being threatened as many investment banks are considering moving their headquarters to Frankfurt or Paris. This will not only impact GB’s stock market, but increase unemployment. The Financial Times has already reported that some of the major US banks (JPMorgan Chase, Goldman Sachs, and Morgan Stanley) are moving their operations to other financial hubs within the EU.

We expect Foreign Direct Investment (FDI) to decrease as the GB renegotiates its relationship with the EU. Assuming that Britain comes out with favorable terms, we expect FDI to rebound and recover the loss during this time period.

(During these uncertain times, it’s critical that the CEO has a wingman. Download our How to be a Wingman Guide to learn how to be a trusted advisor your company needs.)

Trade

Out of the many financial implications of Brexit, trade is most likely going to be the most important macro issue companies need to address.

Let’s talk a little about tariffs on imports and exports. If you have a facility in the EU and need something from GB, then you’ll now have to accommodate tariffs within your selling price. EU tariffs on exports were cut about 50% since the 1990s. Great Britain is in a good position at this time with exports.

Manufacturing

Going back to our conversation about labor, take a look at the manufacturing connections between GB and the EU. This division may result in higher manufacturing costs not only to cover new export/import tariffs, but costlier labor in GB as well.

Caterpillar, a heavy machinery company, owns a manufacturing facility in GB that employees over 9,000 employees. GB was a strategic location for them to optimize GB’s free trade relationship to the rest of the EU and their close proximity to customers in Europe, Africa, and Asia. What once was a competitive advantage is now in question. The Independent illustrates that this decision to approve Brexit has a ripple effect that will impact companies across the world.

Capital Economics contracted Woodford Investment Management to research the possible impacts that this separation of Britain from the EU would cause. They found that 63% of Great Britain’s exports are tied with EU members. While this most likely will not turn into anything more than an increase of tariffs, GB has 2 years under the Treaty of Lisbon to negotiate their withdrawal agreement. This is similar to a divorce followed by custody agreements.

Regulation & Innovation

There are no strong theories of how regulations might change. But it is important to be aware of changing regulations, especially when it comes to manufacturing facilities, imports, and exports. Expect security to strengthen in GB. As a result, it may result in new taxes or security measures to compensate.

Great Britain, as the 5th largest economy in the world, is not in a position where all of its innovation and brain power has disappeared with their split from the EU. GB may come to a stage where they will partner with the US and other countries to create a pool of innovation and ideas.

What impact does Brexit have on you? 

As everything unfolds within the next two years, look at your projections. Understand that if you have any international connections, you may be facing financial implications.  Be sure to adjust them as needed while keeping an eye on the economy.  Now more than ever, solid future planning can be the difference between weathering the storm or getting swept away.

Just like during any period of uncertainty, it’s important to recognize the opportunities presented.  Take stock of your operations. See if there are things you can do to strengthen your business while everyone else is chasing their tails.  The uncertainty caused by Brexit is similar to that we discussed in the Trump Effect Part 1 and Part 2 and many of the same strategies can be employed to deal with or take advantage of it.

Conclusion: Financial Implications of Brexit

By addressing these 4 macro issues, you’ll be better prepared to reduce the impact of the unpredictability of big events. Some of these big events include presidential elections and the 5th largest economy leaving the only fully economically-integrated union in the world.

In any event, try to narrow possible areas of influence down to 4-5; then start drawing out all the consequences.  This will not only leave you feeling more prepared for the battle. But it will also reduce the stress the people in your company may be feeling.

After being in the financial sector for over 25 years, I’ve learned that stuff happens in the world and we always find a way to move on. Times are tricky and the future is murky, but fortunately, it’s not the end of the world. As the financial leader, it should be your priority to guide your company during this process of analyzing how economic decisions like Brexit will impact your business.  Acting in this way, you become your company’s wingman.

It’s vital for you as the financial leader to be the trusted advisor your company needs. If you’re uncertain about where to start, I’d like to offer you a free white paper on How to be a Wingman.

financial implications of Brexit

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financial implications of brexit

With all the drama caused by Brexit, we wanted to give you something to laugh about! Here are a few of our favorite jokes and memes that have come out of #Brexit.

financial implications of brexit

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Removal Costs

See Also:
Average Cost
Agency Costs
Fixed Costs
Variable Cost
Loan Term

Removal Costs Definition

Removal costs, defined as the costs of removing any physical material from the original location it was placed in, is an often forgotten cost. Despite this, it can have a huge effect on the finances of a company. Major manufacturing plants, businesses with fragile equipment, and multi-national corporations can see removal costs average higher than the entire yearly budget of some small businesses. Though seemingly unimportant, this plays an important role in the irregular fixed or variable costs of many companies.

Removal Cost Explanation

Removal cost, explained in varying importance and detail, remains part of the cost structure of many companies. There are 3 major factors of removal cost: labor, lease on equipment used for the removal job, and spoilage or damage to the material in transit. Removal costs can be a major line item or a minute cost depending on the type of business.

The hadron collider, due to the massive and technical nature of equipment, must make a removal cost estimate and finish work by comparing this to the actual cost of the removal job. On the other hand, the local cosmetics boutique probably never thinks about the removal cost for mannequin and inventory. Still, each of these businesses experience removal costs. In a similar manner, oil companies see removal costs for their platforms in a different light. These businesses may even see these matters as important enough to enact a removal cost management system of it’s own.

Removal costs become more complicated in different environments. In a sterile and empty warehouse, removal costs would be at their minimum. In the very same warehouse, removal costs could skyrocket simply from filling the plant with inventory which then must be worked around. Under water, in mountainous regions, and other unique terrain removal costs play an important role. One day businesses could even deal with removal costs of items in space.

Removal Cost Example

For example, Kyle owns a large distribution warehouse for oilfield equipment. His warehouse has been running for quite a while and works on a tight operations schedule. Kyle, the founder and CEO of the plant, has faith in his decision making abilities.

Kyle has found a property which will serve as a more efficient warehouse. The facility is well maintained, closer to major transportation routes, and being sold at a discounted price. Kyle decides to make the switch and prepares his employees to move.

In this project, Kyle must move inventory, inventory storage and accounting equipment, offices, and more. He sees this as a minor setback to his operations which will pay off in the end.

Kyle and his team work diligently and are nearly completed with their move. Now, the only items left are the inventory storage racks. Kyle is just about to begin when his company CFO rushes out of the office to speak with him.

Surprising News

His CFO shares surprising news: moving these racks is a poor financial decision. Kyle, skeptical of this, wants to see the proof.

Liam, the CFO, shows his work. The removal cost of the inventory storage system will cost approximately $12,000 for a plant of this size. To put things in perspective, the racks have already become fully depreciated. Liam knows that the plant, even though it is being sold, will still need storage when the new tenant moves in.

Liam, through his contacts, was able to find an inventory storage system for $14,000. Though this is more expensive than the removal cost, the item will be shipped for free. On the other hand, Liam also knows the real estate market for warehouses. A new purchaser of the property will need an inventory storage system just as Kyle did. This, along with other benefits of this property, will be of persuasive value in selling the property. His calculation, based on expertise, places this negotiating power to increase total property value by $20,000. It seems many warehouse owners have the same concerns and hassle as Kyle when they decide to move.

Conclusion

Kyle remains skeptical until Liam completes his explanation. In a persuasive manner, Liam lays out the details of the plan. On the downside, Kyle’s plant could loose $2,000. On the upside, however, Kyle’s plant can make $20,000. Kyle decides to run with the plan that Liam has carefully formulated. Kyle is pleased with Liam’s work and will treat him to an expensive steak dinner for catching the mistake before it happened.

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Product Costs

See Also:
Economic Production Run (EPR)
Product Pricing Strategies
Bank Charge
Completed Production Method
Inventory Shrinkage

Product Costs Definition

Define product costs as the total costs of creating products, is an essential factor in the success of a manufacturing business. Some of these components include all direct costs, from raw materials to labor and even transportation, included in creating a finished product ready for sale.

Product Cost Explanation

Explain product cost as the entire cost spectrum for a product, can have varying levels of complexity. The product cost concept will vary greatly depending on the type of product produced.

For a simple injection-molded plastic product, product cost per unit will include raw plastics, transportation from the raw material maker to the manufacturing plant, labor, energy used by manufacturing machines, and more.

For a software product maker, a product cost breakdown will include development labor, energy, and any other costs directly associated with making the piece of software.

Any business which makes products has a product cost. To assure efficient and profitable systems it is in the best interest of the business owner to monitor these costs. From this information a company can solve internal problems and ultimately increase the company’s bottom line (Revenue – Costs = Profit).

Product Costs Formula

No single product cost formula seems to exist. More, it is the combination of all of the costs which add up to create a product. This can widely vary based on industry, production method, and more.

An industry average may be available to perform product cost analysis as compared to standard practices. This way, a company can see if they are meeting common standards. From here a company can attempt to become more efficient than the industry standard by enacting some best practices.

Product Cost Example

Sterling is the owner of a web development company. Though he works with intangible assets, mostly, he still has a product cost equation. His product cost effects his bottom line as much as any manufacturing firm.

On average, Sterling charges clients $10,000 for a perfect web application which is ready to be deployed. In comparison, it usually costs him about $3,000 to create one of these applications. Sterling would like to reduce this in order to increase company profits.

Sterling looks at his main factor: labor. By hiring better developers Sterling will slightly increase labor costs but also expects the developer to produce 10% more in one hour than his current employees.

On the other hand, by purchasing new development software Sterling expects to also increase average worker productivity by 10%.

Choosing An Option

In this example, Sterling will choose an option based on his preferences. Rather than interviewing an entire new team he opts for the new system. This way he will not have to waste time, energy, and create a hassle for his current employees. He chooses this option after speaking with his CFO, who informs him that the cost of the new system will be virtually the same as the cost of hiring new employees. Specifically, the software will cost a total of $160,000. He will have to spend $159,500 on project manager time, new employee training, and processing.

Sterling is confident that he has made the right decision. He looks forward to his new software and the happy faces of the employees he appreciates.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Product Costs

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Product Costs

 

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Manufacturing Cost

See Also:
Activity-based Costing (ABC) vs Traditional Costing
Absorption vs Variable Costing
Average Cost
Standard Cost
Cost of Goods Sold (COGS)
Absorption Cost Accounting

Manufacturing Cost Definition

Defined as the labor, material, and overhead costs in producing a finished product, manufacturing costs are the most significant factor in any manufacturing business.

Manufacturing Cost Explanation

Many explain manufacturing cost as the cost to bring a product from raw material to the point where it can be sold.

Manufacturing Cost Estimation

Manufacturing cost estimation represents the complete expenditure incurred when manufacturing an end product. While they do not include all of the indirect costs involved in producing a product, they do represent a comprehensive list of direct expenses involved in creating an item to be sold.

Manufacturing Cost Per Unit

Manufacturing cost per unit is important to monitor. These, in many ways, represent the efficiency of the production process. If labor, material, or overhead costs appear too high then action must be taken. For labor, tools, procedures, or employee numbers must be altered to control cost of keeping employees. In order to maximize productivity of each unit of these materials, materials, procedures and tools must be altered to ensure that the company wastes as little raw materials as possible. When it comes to overhead, company managers must create a working environment which does not exceed the needs it has for production. You must change and balance all of these costs to maximize shareholder value.


Download The Know Your Economics Worksheet


Manufacturing Cost Formula

Use the following equation to calculate the manufacturing cost:

MC = Labor + Materials + Overhead

To find the manufacturing cost per unit formula, simply divide the above results by the number of units produced.

Manufacturing Cost Calculation

Performing manufacturing cost calculations are simple once the essential data is available.

If:
Labor = $100,000
Materials = $75,000
Overhead = $200,000

Then:
MC = $100,000 + $75,000 + $200,000 = $375,000

Manufacturing Cost Example

For example, Austin is the CEO of a plant which manufactures home appliances. Although Austin is experienced in his trade, he has used the experiences former managers have passed on to create a profitable company. He has paid close attention to these managers for a long time and has absorbed their best practices.

Manufacturing Cost Example Calculation

Austin wants to make sure to constantly rotate manufacturing cost saving ideas. To do this, Austin has this calculation performed by his CFO:

If:
Labor = $100,000
Materials = $75,000
Overhead = $200,000

MC = $100,000 + $75,000 + $200,000 = $375,000

Although this amount is completely normal for Austin’s company, Austin would like to bring profits up by pushing his business to the next level. But the problem with this is that Austin already has state-of-the-art tools, computer hardware and software, warehousing, and all other necessary supplies. Austin falls back on what he has learned to find the solution.

Conclusion

As a result, Austin creates a department wide bonus plan to motivate employee efficiency. He then decides that the department which can decrease costs the most will receive a bonus of 5% increased pay each quarter. Additionally, these departments will have a free company lunch once a month as a reward. Austin also makes sure to have his CFO run the numbers to make sure this plan makes financial sense. Then, he begins the plan.

Austin is excited to see what lies ahead. If he can create the proper set of motivations, then he is sure that his employees will love showing up to work every day, just as he does.

If you want to find out more about how you could utilize your unit economics to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Manufacturing Cost

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Manufacturing Cost

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Inventory Cost

See Also:
How to Manage Inventory
Inventory Turnover Ratio Analysis
Days Inventory Outstanding Analysis
Inventory to Working Capital Analysis
Freight on Board (FOB)

Inventory Cost Definition

Defined as the total cost that a company experiences while holding inventoryinventory cost is often one of the most substantial factors in the success of a business. Inventory cost control has many facets, including financing, equipment, labor, protective measures, insurance, handling, obsolescence, losses by pilferage, and the opportunity cost of choosing to deal with inventory. These factors all combine to create the total cost of holding inventory.

Inventory Cost Explanation

Inventory cost, explained by each business owner with varying importance, plays a major role in the working capital requirements of a business. Based on the overall inventory needs, a company can can plan the cash flow cycles properly to avoid problems which may even cause the business to cease operations. This makes sense when one keeps in mind that perhaps the most common reason a business closes is lack of cash.

There are a variety of inventory cost methods to minimize expenditure. On the material side, a business can set up equipment, ranging from simple placement of items for optimal usage to accounting systems which serve as inventory management, which simplify and change based on the needs the business has for its inventory. In reference to processes, employees can be trained to use available resources to achieve maximum effect. When you understand the science of supply chain management, you can make sense of the most complicated of inventory projects. For smaller assignments, the average person can turn a catastrophe to a working system with a foundation of proper planning. Inventory can be as affordable or costly as the business and manager allow it to be.


Download The Know Your Economics Worksheet


Inventory Cost Formula

The inventory cost formula, summing total cost of inventory, is often referred to as inventory carrying rate.

Inventory Carrying Rate = (Inventory Costs / Inventory Value) + Opportunity Cost (as a percentage) + Insurance (as a percentage) + Taxes (as a percentage)

Inventory Cost Calculation

When one has the proper information, inventory cost calculations can be very simple.

Example:
If:
Inventory Costs = $5,000
Inventory Value = $50,000
Opportunity Cost = 10%
Insurance = 4%
Taxes = 7%

Inventory Carrying Rate = ($5,000 / $50,000) + 10% + 4% + 7% = 10% + 10% + 4% + 7% = 31%

Inventory Cost Example

For example, Stan is the warehouse manager for a distribution plant. His work has made him an expert in the science of managing inventory operations. Stan understands his work and enjoys doing it.

However, Stan wants to assemble inventory cost accounting figures. As the essence of the business, Stan makes sure to keep track of this value on a regular basis.

First, Stan calculates inventory costs:

If:
Equipment = $2,500
Labor = $1,500
Protective measures = $300
Handling = $500
Obsolescence = $100
Pilferage = $100

Then:
Inventory Cost = $2,500 + $1,500 + $300 + $500 + $100 + $100 = $5,000

Next, Stan finds the ratio of inventory costs to inventory value:

If:
Cost of Inventory = $5,000
Value of Inventory = $50,000

Then:
Inventory Cost / Inventory Value = $5,000 / $50,000 = 10%

Stan then does research to find the cost of opportunity, insurance, and taxes. These are found as a percentage:

Opportunity Cost = 10%
Insurance = 4%
Taxes = 7%

Finally, Stan adds these percentages together to finally find inventory carry rate:

Inventory Carrying Rate = 10% + 10% + 4% + 7% = 31%

Stan’s inventory carry rate has remained unchanged. Stan is happy about this. Therefore, he keeps constant research in the industry magazines, with professional contacts, and the newest products and services. As long as Stan maintains this research he can keep his warehouse running in peak condition.

If you want to find out more about how you could utilize your unit economics, then click here to download the Know Your Economics Worksheet.

inventory cost

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Direct Labor Variance Formulas

See Also:
Direct Cost vs Indirect Cost
Direct Labor
Variance Analysis
Cost Driver
Direct Material Variance Formulas

Direct Labor Variance Formulas

Commonly used direct labor variance formulas include the direct labor rate variance and the direct labor efficiency variance. Below are the formulas for calculating each of these variances.

Direct Labor Rate Variance

Direct labor rate variance measures the cost of the difference between the expected labor rate and the actual labor rate.

If the variance demonstrates that actual labor rates were higher than expected labor rates, then the variance will be considered unfavorable. If the variance demonstrates that actual labor rates were lower than expected labor rates, then the variance will be considered favorable.

Using the following formula. A positive DLRV would be unfavorable whereas a negative DLRV would be favorable.

DLRV = AH (AR – SR)

DLRV = Direct labor rate variance
AH = Actual labor hours required for the operations
AR = Actual labor rate paid to employees
SR = Standard labor rate, or the estimated labor rate paid to employees

Direct Labor Efficiency Variance

Direct labor efficiency variance measures the cost of the difference between the expected number of labor hours required for the operations and the actual number of labor hours required for the operations.

If the variance demonstrates that the actual number of labor hours required was higher than expected number of labor hours required, then consider the variance unfavorable. If the variance demonstrates that the actual number of labor hours required was less than expected number of labor hours required, then consider the variance favorable.

Using the following formula. A positive DLEV would be unfavorable whereas a negative DLEV would be favorable.

DLEV = SR (AH – SH)

DLEV = Direct labor efficiency variance
SR = Standard labor rate, or the estimated labor rate paid to employees
AH = Actual labor hours required for the operations
SH = Standard labor hours, or the estimated labor hours required for the operations

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

Direct Labor Variance, Direct Labor Variance formulas

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Direct Labor Variance, Direct Labor Variance formulas

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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