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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 are held by immigrants from other countries in the EU. 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 immigration policies being enacted by the British Parliament. 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 addressed.

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.

HOW TO BE A WINGMAN

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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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The Trump Effect | Part 1 Business Confidence & Uncertainty in Elections

Business confidence is low. Uncertainty is high. Candidates are spewing whatever words they think will win that one last vote. Challengers have dropped out left and right, leaving us with 3 major contenders.

business confidence presidential elections

Make America Great Again. | Hillary for America. | A Future to Believe In.

Now what?

business confidence presidential electionsPresidential elections bring all kinds of uncertainty. Voters are choosing from candidates that have opposite policies with little to no middle ground. Businesses aren’t sure what to invest in and when the oil crisis will end. Economists are unsure of where the economy is going.

Business confidence: an economic indicator that measures optimism and pessimism that business managers feel about the outcome of a company.

Uncertainty: state where there is no objective nor are any outcomes or alternatives known.

Talking is one thing, whereas acting could result in something entirely different. If Sanders is preaching for free college, we have to assess how those words are going to work when they are acted upon. Whereas if Trump is pushing for the wall, we have to acknowledge that there is a lot more work that goes into building a wall than words can speak. If Clinton wants to have 33% of all energy sources come from renewable energy by 2020, we have to factor in the feasibility of accomplishing the goal in that time frame.

Talk is just talk. And there’s a lot of talk going on with presidential campaigns! This causes both economists and businesses to be uncertain about what to expect. When you have three strong candidates campaigning in the United States presidential elections, it can be so easy to focus in on the differences (which are many).

Economists Are Stumbling

business confidence presidential elections

Election Angst Hurting US Economy http://www.cnbc.com/2016/06/03/election-angst-hurting-us-economy.html

Economist reckon that because of the vast differences of the candidates, we are about to see the most uncertain election in decades.

If you were to compare Trump and Sanders, it’s rather difficult to draw a direct comparison. Because of their different beliefs, economists have been forced to adjust their economic forecasts. For example, Trump is focusing on enhancing immigration laws whereas Sanders is emphasizing the need to adjust the tax code. Because of these different focuses, economists aren’t sure what to do causing severe uncertainty.

Elections Impacting Businesses

There are several macroeconomic issues that businesses witness during presidential elections: stock market volatility, currency value fluctuations, decrease in business confidence, and increase in uncertainty.

Disclaimer: We acknowledge the possibility that the economy has affected the election process (rather than elections impacting the economy). The issue of elections and business confidence is too complex to make any one assumption.

Stock Market Volatility

As the stock market becomes more volatile, investors become more anxious about making a bad investment and more conscious about making any investments at all. This results in a dip or potentially a collapse in the stock market.

According to Forbes, the Dow Jones Industrial Average is typically higher during the pre-election year out of the 4-year cycle between each election. BUT when a new president is elected, as in the case of 2016, the stock market is at its lowest of the 4 year cycle. Think of Bush in ’89, Bush in ’01, and Obama in ’09.

Value of Currency

The value of currency adjusts as a response to the change in interest rates. Each party (Republican or Democrat) has an influence on the value the US Dollar (USD). Different economic and political policies enacted by the President, among other external economic or international governmental factors, either increase or decrease the value of a dollar.

Over the past 30 years, we’ve seen inflation rates fluctuate so severely due to political elections that entire countries or regions find themselves in economic distress, a debt crisis, restricted resources, and terrible conditions for those living in the countries.

Especially during the months leading up the election and those following after the election, expect changes in value of currency.

Changes in value of currency do occur in other times than change of political command.

Business Confidence

Thomas Costerg, Senior Economist of the Standard Chartered, said that “the issue is that many candidates are ‘talking down’ the economy, affecting confidence.”

AICPA_web-logo_1C_PMS293_rThe American Institute of CPAs puts out a quarterly report that surveys businesses, CPAs, and the economy.  The 2nd Quarter of 2016 Report was released recently and showed surprising results. While this report does not compare the economy/businesses to the election period, AICPA found that optimism improved from 28% to 37% in Q2 and pessimism from 34% to 21%. Inflation is becoming more of a concern now as we progress closer to election day.

(Are you confident about your company’s unit economics? If not, download our free guide, Know Your Economics, to calculate your economics.)

Uncertainty

logo-2As an entrepreneur, I am part of many business organizations including the Turnaround Management Association. Financial advisors, credit advisors, bankruptcy attorneys, business owners, CFOs, and many others comprise this organization. At a recent meeting, the topic under discussion was how long we can expect the oil crisis to continue. Very quickly, the conversation turned towards the election currently taking place in the United States. The following ideas were raised during this conversation:

The oil crisis all depends on who wins… Who is elected as the president of the United States determines whether the oil crisis will continue beyond 2017 or will taper off mid-2017. 

Business aren’t sure what to do right now because that could all change come November 8th.

 Everything could change. Nobody really knows what to expect from any of the candidates at this point. 

Consumers and businesses are wary about investing and spending during this time of uncertainty. In addition, new tax codes, economic policies, health insurance regulations, etc face businesses. Even adjustments to the Federal Income Tax (FIT) impacts the sustainable growth rate of a business. There is a lot of uncertainty that business owners and financial leaders face.

SWOT Analysis

These issues could have severe consequences for some companies. See these as threats. This is why during a SWOT Analysis, you complete a PEST Analysis where the first letter of the acronym is P for political.

Because of this uncertainty, bankers and economists find that companies avoid hiring or investing in large projects during the second half of an election year due to the sheer unpredictability of the situation.

Arleen R. Thomas, CPA, CGMA, American Institute of CPAs (AICPA) senior vice president for management accounting and global markets, concluded after the first quarter poll hosted by the AICPA that “company executives are clearly monitoring the potential business impact of the presidential election. But overall economic conditions and challenges for their particular industries are weighing more heavily in their calculations right now…” Additionally, Thomas claimed that more weight being placed elsewhere is “likely why [they’re] seeing little election-cycle impact on such key categories as hiring or capital spending.”

During this uncertain time, it’s useful to find economic indicators that impact your business.

What does all this mean?

Typically, we find that business owners or financial leaders stick their head in the sand during times of uncertainty. Remove your head from the sand. Know that this is happening. And prepare for anything. It will be okay. This too shall pass. business confidence presidential elections

What can you do now?

First things first… Make sure that before you analyze external factors that could impact your company, you know the basics of your company. More specifically, know your unit economics. This is one simple step that you can do to ensure that you, your management, and your company know where you stand.

If your economics are out of whack, then regardless of who gets elected, your business will suffer. If you’ve checked that your economics are sound and you’re still finding issues, you might have a company that is in trouble. This could be an issue with internal factors.

If your company is still bleeding, then check out next week’s blog for the Trump Effect | Part 2.

To help you deal with this uncertainty, we want to give you a free guide, Know Your Economics, that will help you analyze the building blocks of profitability in your company. By knowing your economics, you’ll be better equipped to project the future more accurately and deal with the economic uncertainty to come.

Know Your Economics (on blog)-2

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Blue Chip Stocks

See Also:
Preferred Stocks (Preferred Share)
Stocks Firm; Focus on Fed

Blue Chip Stocks Definition

Blue chip stocks are long-established, well-known companies with reliable earning power and growth over time. Following are common characteristics of blue chips:

  • Sell diversified and high quality products and services in a variety of geographic locations
  • Competitive advantage in the market through their reputation and cost efficiencies
  • Steady consumer demand for products and services because they are not affected by changing technology or changing consumer tastes
  • Long-term share price returns
  • Consistent dividend payments to common stock holders with a tendency to increase dividends payable to each share
  • Solid balance sheets with secure assets and minimal debt levels allow them to borrow money at a lower cost than competitors
  • Excellent credit ratings
  • Known to overcome operate profitability in economic downturns
  • Large and steady revenue streams and market capitalization

Benefits of Owning Blue Chip Stocks

Blue chip stocks can be some of the best investments in the market because they provide consistent dividend payments and long-term price returns. While many consider blue chips as boring and outdated, these stocks have consistently demonstrated growth and profits.

The Dow Jones Industrial Average

The Dow Jones Industrial Average provides a list of the thirty most prestigious blue chip companies around the world. Editors of the Wall Street Journal analyze and select the list of blue chips for the Dow Jones. This list rarely changes because of the stability of blue chip stocks.

How to Invest in Blue Chip Stocks

Investors can purchase blue chip stock investments through a:

Examples of Blue Chip Stocks

  • Coca-Cola
  • Johnson & Johnson
  • General Electric
  • General Mills

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Blue Chip Stocks

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Blue Chip Stocks

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Cost Control vs Cost Reduction

cut costs There is a difference between cost control vs cost reduction. Most people think that controlling costs and reducing costs are one and the same when, in fact, they can generate two totally different outcomes.

The first thing you need to know is that you can’t grow a company by cost reduction alone. You can get short term gains but, eventually, they fade. When public companies reduce costs through a restructuring there is typically a  short term lift to their stock price. However, for the increased stock value to be sustainable they must grow revenue.

An example might be Barnes and Noble bookstores. No amount of cost cutting is going to change the situation that they find themselves in today. They must reinvent themselves and pivot.

So if we want to add value we must grow revenue, how do we do it? There are three ways that come to mind. We could develop new products or services, increase market share or increase selling efforts. What do all three of these strategies have in common?

You have to increase costs to increase revenue!

So instead of looking for the lowest cost in a transaction you should look, instead, for the largest value received per dollar spent. It is easy to apply this train of thought to selling costs, marketing costs or product development costs, but what about overhead?

Does hiring the candidate at the lowest salary translate into a good value proposition? Does paying a premium get you a better employee?

The answer is: “it depends”. You should evaluate each cost incurred in light of the excess value received and the goals of your company.

We knew a company who wanted to spend as little as possible on their accounting staff. So they hired the cheapest accountants they could find not the most competent. In the end, they spent more money on cleaning up the financial statements, bringing them current and completing the year-end audit than the savings recognized.

The moral of this story is that you can’t build a house with only a hammer. Consequently, you can’t grow a company profitably by just focusing on cost reduction.

Learn how to apply concepts like this in your career with CFO Coaching.  Learn More

cost control vs cost reduction

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Tokyo Stock Exchange (TSE)

Tokyo Stock Exchange (TSE) Definition

The Tokyo Stock Exchange (TSE) is among the world’s largest by trading volume and market capitalization. Furthermore, the TSE listed firms are around 2,400.

Tokyo Stock Exchange (TSE) Meaning

The TSE indexes are both the Nikkei 225 and the TOPIX index. The Nikkei is a price weighted index for the top 225 Japanese companies. Whereas, the TOPIX index is a value weighted index of the “first section” companies. The TSE exchange has three different groups or sections to the market. The first section includes the largest companies in Japan as well as whoever would like to be listed on the TSE market. Then the second section contains mid-sized firms. Finally, the third section is commonly known as the “Mothers” section. The Mothers section of the TSE is for smaller companies that are emerging or are in a high growth stage of development.

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tokyo stock exchange

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tokyo stock exchange

See Also:
New York Stock Exchange (NYSE)
National Stock Exchange of India (NSE)
London Stock Exchange (LSE)
Bombay Stock Exchange (BSE)

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Treasury Stock

Treasury Stock Definition

The treasury stock definition is the shares a company buys of its own stock on the open market. Shares of treasury stock were issued by the company, and then repurchased. So consider it issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.

Treasury stock can either be retired (cancelled) or resold on the open market. In addition, the shares have no voting rights, and they do not pay or accrue dividends. It is not included in financial ratios that use the value of common stock.

Treasury Stock on the Balance Sheet

Record treasury stock in the owner’s equity section of the balance sheet. Then record it at cost – what the company paid to acquire the shares – and subtract the value of the treasury stock from the stockholders’ equity account. The treasury stock account is a contra-equity account.

Stock Buyback (Repurchase Shares; Buyback Shares)

There are several reasons why a company would repurchase its own shares, including the following.

1. A company might buyback shares if it considers its stock undervalued. If the stock is undervalued, then management might want to buy shares because they consider them cheap.

2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)

3. A company can also repurchase shares to exercise stock options or to convert convertible bonds.

4. You can use stock buyback to thwart a takeover – if a company buys its own stock, then that stock is no longer available to the potential acquirer.

5. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds to repurchase stock.

6. A stock buyback could also be a sign that the company has excess cash and no other viable investment opportunities.

Treasury Stock Definition

See Also:
Convertible Debt Instrument
Common Stock Definition
Reverse Stock Split
Preferred Stocks
Hedging Risk
Private Placement

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Synthetic Stock

Synthetic Stock Definition

Synthetic stock is created when a holder of a call and put option simulates the stock when that holder buys and sells the options accordingly. Without participating in the market the holder can stand to make a gain. Then, they can invest in the stock as long as the expiration has not occurred for the options.

Synthetic Stock Explained

Synthetic Stock can be created in various different ways but the most common ways involve having a long or short stance on a put option, and the same for a call option. A synthetic long stock is where an investor will take a long position on the call option while taking a short position on the put option. The other stance is known as a synthetic short stock. That involves the investor taking a long position on the put option and a short stance on the call option.

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synthetic stock

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synthetic stock

See Also:
Call Option
Put Option
Intrinsic Value – Stock Options
Stock Options Basics
Common Stock Definition

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