It’s been several weeks since the historic and disruptive Brexit vote, where the UK voted yes to a referendum deciding to leave the European Union. Stock markets around the world immediately had a knee-jerk reaction, and there has been speculation that banks—particularly U.S. banks—will move their London operations to other locations. As the dust around Brexit is settling and the world is beginning to comprehend and work through what a UK exit from the EU looks like and how and when it will happen. We sat down with Don Cole and Lee Lazarow at Revelwood to understand how Brexit could impact your Fx conversions.
First, let’s look at how Fx currencies are handled in typical ERP systems. Since these are tools that are modeled to reflect a company’s operating structure, many companies handle their Fx conversions as simply conversion rate times base currency. This provides a one-dimensional view of the data and provides no insight into the true financial impact.
Revelwood takes a different approach when working with our clients on Fx conversions. We develop a variety of conversions to provide real insight into the operating results. This approach enables companies to correctly analyze whether a loss in a region was the result of currency fluctuations, or actually sales or service losses. These conversions include each of the respective currencies (e.g. USD, EUR and GBP) at the following rates:
- Current Year Actual Rate
- Current Year Budget Rate
- Current Year Forecast Rate
- Prior Year Actual Rate
- Prior Year Budget Rate
With a system such as described above in place, companies can easily adjust their planning assumptions to reflect the fall of the pound sterling since the Brexit vote. This level of visibility can help companies to understand what changes they can and should make to their current assumptions and/or sales strategies to make up for the financial loss due to the dropping currency rates, or how to at least avoid a big surprise at the end of the fiscal year.
In the longer term, once Brexit happens, there is likely to be major changes to pricing in the UK, and possibly in other regions. One of the key aspects of Brexit is it will decouple the UK market from the EU market, meaning that the UK will need to renegotiate many trade agreements with other nations. And while the UK is still a large nation, in theory it will have less bargaining power than that of the EU. But, that is still many years out. In the meantime, now is the time to re-examine how your company handles Fx conversions and make some changes to better manage the financial fluctuations in the world market.