Comment And Reply

comment and reply on the following three sources, 100 words for each. 

1. Due to the financial uncertainty around Brexit, firms must look to ways they can protect their cash flows. One way to do so involves investing in foreign short-term securities. These securities may have higher interest rates than domestic rates in certain periods in the future, providing diversification in a firm’s cash flows. Investing in foreign currency through derivative contracts is another method of preserving cash flows which observes a similar process of protection as do the securities.

Another way to protect cash flows from uncertainty is to pay suppliers in advance or at the purchase order date, which can prevent a firm from facing insolvency issues due to rising debt. Along with this, firms can focus on engaging with domestic supply chains as domestic suppliers and buyers will face the least disruptions further preventing possible disruptions to cash flows. Along with these methods, there are clerical factors that can protect the company if properly accounted for. Such factors include developing a comprehensive cash flow strategy ensuring optimal efficiency. Storing receipts in an organized fashion and ensuring all transactions are properly documented protects a firm from discovering unknown debt or losing track of assets.  

2. In response to the dramatic fall in the price of Sterling following the Brexit vote, UK firms should take on adequate practices to avoid hitting cash flow crises. In such times of economic uncertainty, good cash flow management practices deem ever-important especially for smaller businesses. Companies ought to continue to monitor their cash flows closely and review regularly. They should work on improving accountability and visibility in cash management by systematically organizing receipts and ensuring that all financial transactions are properly documented. They might also need to consider sourcing alternative, domestic suppliers if importing was involved. 

In order to protect their cash flow, UK firms should minimize any potential loss that can occur due to fluctuations in currency exchange rates. Two most common currency risk hedging strategies include forward contracts and currency options. Both contracts allow the business to buy or sell currencies at a predetermined-rate on a future date. However, the company is not forced to do so with a currency option. Because it is a right rather than an obligation, companies are further protected from unfavorable currency movements compared to a forward contract.  

3. The Brexit vote had a huge impact on the UK economy, largely a result of cash flow reductions and supply chain interuptions. The reason this matters lays in how the overall supply chain works across Europe. The EU states’ free-trade agreement means goods can flow between the UK and the other European member states without customs and excise checks, thus there is an economic flow of commerce with a physical flow of goods and materials. The financial supply chain and the physical supply chain are therefore linked. For example, if you cannot receive delivery of your raw materials, then you cannot fulfill your customer orders. If you cannot fulfill your orders, then you cannot submit your invoice and, most importantly, you cannot get paid. Therefore, any disruption to the physical supply chain will quickly place greater demands on working capital requirements. This will in turn lead to less confidence in investors and less foreign investment into the UK and its curency.

In order to protect against these problems there are a number of things that firms can do. Investing in foreign securities that are more stable, even though you are faced with higher interest rates. They can use derivative contracts (which I will mention in more depth in the following paragraoh) as another method of maintaining a cash influx. When it comes to preventing disruptions in the supply chain, paying in advance with more favorable rates is another option. 

Finally, and perhaps the best method, is through hedging. “Four-fifths of Britain’s major companies have hedged against the risk that a vote to leave the European Union would knock more than 10 percent off the value of sterling, a poll of almost 800 of the top 1,000 showed on Wednesday.”

Hedging is making investments that offset the risk posed by currency movements which can be through options or other derivatives contracts. According the the reuters article I have referenced, this has surged after Brexit as companies, asset managers and speculative hedge funds take a view on the vote.

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