How to manage the risk of Brexit

Only time will tell which way the country will swing as the UK’s EU referendum on 23 June gets closer. Undoubtedly the tides will shift and if the UK leaves the EU, this could have a significant impact on businesses. What, if anything, should companies be doing ahead of the referendum?

The possible impact of Brexit will vary between industries and there is work to be done to identify and understand where the real risks lie. Businesses need to start preparing now, before the results of the referendum, to look at their customers, suppliers and employees particularly given that there will be market and exchange rate volatility in the short and medium term.

With a solid understanding of the possible effects of Brexit, you can then apply stress testing and scenario analysis techniques to determine how your organisation's finances could react. This can be applied to key variables and assumptions in an existing financial model used for forecasting. The results compared to the capacity and risk appetite of the business help to inform further action.

Scenario Analysis

Scenario Analysis involves the use of discrete, internally consistent views of how the world will look in the future to assess the effect on an objective of one or more events. It is the process of visualising what future conditions or events are probable, what their consequences or effects would be like, and how to respond to or benefit from them.

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Stress Testing

Stress Testing assesses the impact of events having extreme impact. Stress testing differs from scenario analysis in that it focuses on the direct impact of a change in only one event or activity under extreme circumstances, as opposed to focusing on changes on a more normal scale as in scenario analysis.

Stress testing is generally used to complement probabilistic measures to examine the results of low likelihood, high impact events that might not be captured adequately by distributional assumptions used with probabilistic techniques. Any analysis gives you a simplified glimpse into the future but does not change its course, which prompts action if the outcome isn't appealing. If any of it doesn’t look appealing, actions must be taken. This could include planning to contain costs, ensuring not to over leverage in the near term, building in more resilience in operations, adjusting cash holdings and payment terms. A crisis management team might be formed and a response plan specific to critical scenarios should be developed and tested.

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Risk mitigation

Any analysis gives you a simplified glimpse into the future but does not change its course, which prompts action if the outcome is not appealing. This could include planning to contain costs, building in more resilience in operations, adjusting cash holdings, forming a crisis management team and a response plan specific to a Brexit scenario.

Risk monitoring

Risk monitoring goes beyond Brexit when watching the news - it's more specifically about identifying and monitoring business risk indicators aligned to those vulnerable risk areas and being clear at what point contingency or response plans should be activated.

Whilst all businesses must deal with the same set of external uncertainties outside of their control there is a degree of luck involved. The above steps help a business to be more nimble. Successful people and organisations make their own luck. This is risk management in action.

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