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When the Chief Counting Officer announces the overall result of the United Kingdom Referendum on European Union membership at Manchester Town Hall in the early hours of the morning of Friday 24th June, many people are asking “what happens next?” if the vote is to leave.
Undoubtedly, the either/or wording of the referendum question “Should the United Kingdom remain a member of the European Union or leave the European Union?” is more favourable to those campaigning to leave rather than yes/no “Should the United Kingdom remain a member of the European Union?”. As Barack Obama showed in his initial presidential campaign, a Yes Movement can gain overwhelming momentum.
Despite the near-hysterical pronouncements in the run up to the referendum, the short answer is that the only certainty is that there will be an intense period of uncertainty.
It is akin to leaping off a ledge and not knowing whether the landing is a bouncy castle or a slurry pit. For either side to assert that they know the outcome is highly disingenuous.
The first important point is that the referendum result is a demonstration of the voters’ opinion that is not in itself legally binding. Parliament would have to pass all the necessary legislation for the UK to exit the EU and ratify the final withdrawal agreement. Technically, the House of Commons or the House of Lords could vote against any or all of this. However, the constitutional consequences of any effort to block the will of the people are unimaginable.
Under the Lisbon Treaty, the UK would have two years during which to negotiate its withdrawal from the EU and put in place new arrangements, and it is these new arrangements that will ultimately determine whether the UK as a country and people individually are better or worse off.
In the intervening period, existing agreements such as those for the Financial Services Compensation Scheme, the European Health Insurance Card and the cap on mobile data roaming charges are broadly likely to continue.
The only precedent of a country voting to leave the EU was Greenland in 1982 and their exit was driven specifically by EU fisheries policy. Whilst their economy has prospered and grown since leaving the EU, it would be misleading to claim be any natural correlation to the UK.
The two most likely immediate impacts of the UK voting to leave, that almost all economic forecasters agree on, are that the pound and the UK stock market would fall dramatically as soon as the markets open and would continue on a downward trend in the following months.
The effect on employment in the UK is less clear in the short-term. Global financial institutions such as JPMorgan Chase and Citigroup have warned that a leave vote would result in a shift in jobs from London to other European centres.
On the other hand, the UK would remain an attractive option for the international entrepreneur to set up a business with the comparatively low rates of Corporation Tax, the flexible labour laws and there being no requirement for a resident Director.
On the pound, forecasters are predicting an overall fall of up to 20%. How much of this has already been factored into the current value is unclear but the concern here is that this would trigger an inflationary cycle.
As the pound falls, imports become more expensive pushing up the rate of inflation and, thereby, reducing the average standard of living. Moreover, higher inflation could prompt the Bank of England to increase interest rates that, in turn, could lead to an increase in mortgage rates.
It is astonishing to think that the Bank of England base interest rate has been stable at 0.5% since March 2009.
As ever in economics, the impact of a fall in the value of the pound would be toned. For exporters not reliant on imported raw materials and for the UK tourism industry, this would be potentially good news.
A fall in the value of the UK stock markets can be seen to have little impact on day-to-day life but the consequences for pensioners and savers could be dire with so much of pension funds’ investments held in UK bonds and shares.
For expat pensioners living in other EU countries, their future becomes even less sure. The current arrangements allow them access to the medical facilities with the cost of the care covered by the NHS until the pensioner becomes permanently resident in that country. The continuation of these arrangements, together with the ability to receive their UK pension, could eventually come down to a bilateral agreement with that country.
The greatest danger of a vote to leave falls under the ‘law of unforeseen consequences’, that it triggers a domino effect that causes a global recession. Again, no one knows whether this will be the case.
Given that there is so much at stake when the UK votes on Thursday, it is, frankly, deplorable that both campaigns have relied so heavily on scaremongering and hyperbole rather than proper debate.
At the end of the day, the EU is far from perfect but, there again, so is the UK parliament. It remains to be seen, in a matter of days, whether the British people are going to take a leap into the unknown.
One of the risks that it is essential that a business owner avoids is to equate their business being busy to it being healthy.
A bulging order book and working seven days a week does not necessarily ensure to financial wellbeing.
This is where Key Performance Indicators (KPIs) play their part. KPIs in themselves can be used to measure performance in any area of a business from Sales and Marketing to Operations to HR to Finance.
Monitoring the financial performance is vital to ensure long-term success. Whilst there is almost an endless list of potential measures, these are the seven financial KPIs that we would recommend that you set and monitor to enable you answer the question ‘is my business on target?’
Gross Profit Margin
The Gross Profit has to cover the operating costs of the business, building funds for the future and leaving a distribution to reward the investors.
The Gross Profit Margin illustrates whether you are pricing your products or services correctly as a whole to cover these and can be measured against an industry or sector benchmark. In addition, it can give an indication of the viability of a specific product or service within your range.
The calculation for Gross Profit Margin is (Revenue – Cost of Goods Sold) / Revenue
Net Profit Margin
This will show the percentage of your revenue that was profit and, again, can be measured against industry standards as well as for budgeting and forecasting.
Net Profit Margin is (Revenue – Cost of Goods Sold – Operating Costs – Interest – Taxes) / Revenue.
One key point is that the Net Profit Margin does not a measure of the level of the cash generated in the period. This is as a result of the inclusion of a number of non-cash expenses in the Operating Costs, principally depreciation and amortization.
Current Ratio and the Quick Ratio aka the Acid Test
The Current Ratio highlights the ability of your business to pay its way by calculating the Current Assets (Cash, Accounts Receivable, Stock and Inventory) / Current Liabilities (Accounts Payable and Other Short-Term Creditors).
An adequate Current Ratio is sector specific but, largely, a ratio between 1.5 and 2 indicates a healthy business.
A low Current Ratio tends to flag that there is either inadequate credit control, an issue with stock management or an unsustainable cash burn rate.
The Quick Ratio is a more conservative measure of financial wellbeing than the Current Ratio because it excludes Stock and Inventory from the Current Assets. As a result, this gives a more realistic view of the ability of your business to meet it’s short-term obligations. A Quick Ratio higher than 1 implies that this would be the case.
Accounts Receivable Turnover
The Accounts Receivable Turnover shows the number of times per year that the business collects its average accounts receivable and will aid in determining the efficiency of the credit terms and collections. To extract the maximum value, this needs to be measured on a monthly or quarterly basis.
The simple calculation for Accounts Receivable Turnover is Net Annual Credit Sales / ((Opening Accounts Receivable + Closing Accounts Receivable) / 2)
For example, a business with annual credit sales of £450,000, and opening Accounts Receivable balance of £55,000 and a closing Accounts Receivable balance of £70,000 would have a turnover of 7.20. In other words, the average account receivable was collected in 50.7 days.
Return on Equity
Measuring the level of profit generated in relation to the monies your shareholders have invested provides a gauge on both profitability and efficiency.
The calculation for Return on Equity is Net Profit / Total Equity and a high or improving ratio validates to backers that their monies are being employed wisely.
Customer Satisfaction
All these mathematical ratios count for nothing unless your customers are satisfied with the products or services that you are providing and it is key to engage with them on a regular basis for their feedback.
Finally, Have a Damn Fine Accountant that will work with you not only in crunching the numbers but also in putting the measures in place to support your business grow and prosper.