The introduction of the euro has already had major implications for the way UK firms do business. Paul Coleman explains
The euro will, after the US dollar, become the most widely used currency in the world. It is likely that in time, like the dollar, it will become a reference currency and largely independent. This will be a fundamental change. Since the Second World War, we have lived with one major world currency; soon there will be two.
Already more than 50 per cent of Britain’s leading retailers are accepting the euro, pushing the country towards acceptance of the single currency ‘by stealth’. Simon Buckby, director of the government sanctioned ‘Britain in Europe’ campaign, was quoted saying: “Anti Europeans may try and keep Britain out of the euro but they won’t keep the euro out of Britain.”
Most people have their own opinion about whether the UK will adopt the euro in the near future. But few realise the massive changes it is likely to bring and companies appear to be mixed in their levels of preparation. What is certain is that if we do join, we will have very little time to prepare.
No one can ignore the fact that being ‘euro friendly’ is now a business imperative. Companies should be exploiting the new business opportunities the euro creates by delivering multi currency capability to their business procedures in advance of a political decision to join. Organizations that already have operations inside the new euro countries will be affected less by the currency conversion. Their colleagues on the mainland will have made the switch and will be full of advice. Moreover, euro compliance is not a problem for most large multinational organizations, as they have had to adjust their systems to cater for it already.
However, the risk of losing trade to euro compliant competitors is motivating many companies that do not have substantial operations outside the UK market. Others can invoice and accept payments in the new currency, which encourages customers, suppliers and investors when assessing who they can work with. Thus, commercial pressures may determine whether euro invoices need to be produced. If so, companies must also be able to transact in euros since settlement of invoices is always in the same currency. More importantly, ‘non euro friendly’ companies will still have to bear the costs of adapting to the single currency if the eventual decision is made for the UK to join.
Companies need to assess the competitive impact of the euro. Is it a threat or an opportunity? Are they losing contracts or could they generate new business as a result? Should they align themselves with their competitors or be different? Either way, the case for making an organization euro compliant is a strong one.
Companies need to make sure that their financial systems can cope with these demands. This will ensure that they have no trouble with euro currency conversions, billing and invoicing. Additionally, if the UK does join, financial software which accurately handles both the dual requirements of the transition period and the final, unavoidable, base conversion, can be used to overcome problems. This prevents inconvenient manual workarounds and time consuming queries from customers, suppliers and auditors.
With euro compliant financial software, companies can manage these exchange risks, pay suppliers in euros, invoice customers in euros and maintain parallel balances in Sterling and euro currency to enable them to report in either style.
Companies should be aware of the different levels of accreditation being given to finance related software products by international standards body BASDA (the Business Application Software Developers’ Association). Many software suppliers are claiming compliance, but it is important to satisfy yourself that the software you use is fit for purpose. Be aware that there are different levels of accreditation up to the full, level two, euro compliance (for details see: www.basda.org).
If a system is not compliant, a company must adjust accounting, finance, invoicing and payroll software to use the new currency and to enable it to cope with exchanging money between other currencies and the euro. There is no way around this; companies are being forced to change internally in order to deal with it.
This requires a basic decision: what is the organization’s euro philosophy? The nature and timing of practical measures will depend on this. If a decision is made to ‘get compliant’, it is essential to have senior level buy-in to gain maximum benefit or, at least, minimum disruption to the organization. Next, companies need to perform detailed analysis of their euro preparations. This includes general ledger, bank and cash transactions, treasury, payroll and pricing.
Many companies in Europe left it very late to prepare. Although no major crisis was highlighted, it resulted in periods of time that were stressful and unproductive, and directly affected the efficiency of these businesses.
The best time to convert may be at year end. It makes sense to start a new year’s figures with this capability instead of interrupting it half way through. The motivation for the change should, ideally, come from the accounting department. This is because finance is the department that will require the most change.
We can all learn from the benefits of hindsight. We can take advantage of the lessons learnt by some of our European colleagues to get prepared with particular focus on staff. They must be fully trained. Additionally, there may be opportunities to sell products at a higher price point in euros. Companies may even be able to apply different prices for each ‘euro’ country instead of standardizing it across the euro zone. This could mean higher margins on sales.
This relates to the issue of ’rounding up’ and ’rounding down’. Take the example of a computer that is sold for £999. This equates to €1,639.66. To get a psychologically appealing number, should the PC be sold at €1,599 (rounding down), €1,699 (rounding up) or any other price? Whilst rounding up has the advantage of increased margin, a decrease can also be true in other cases.
Far sighted companies will acknowledge that the euro may be coming. If they prepare now for the transition, they will be able to run their business from a euro perspective and create new revenue opportunities as a result.
Companies, who previously dealt mostly in sterling, should see the benefits if it becomes easier for other companies to do business with them. Even having the ability to offer invoices in euros will in turn help to make more money by being competitive in Europe. After all, the ability to be paid in this single currency will enable organizations to offer their goods across 12 countries, giving major opportunities for growth.
The strength of the euro will increase. Once this happens, the euro zone could gain from all those theoretical benefits of a single currency: transparency, free movement of goods and services, and massive economies of scale. After all, the agenda will be to remove all barriers to trade in Europe and improve the single market.
HM Treasury has issued a self assessment chart. The higher the score out of 10, the more the business needs to think about taking action
Factors to consider:
Do you have any customers in the euro area?
Do you have suppliers in the euro area?
Are you unable to make or receive payments in the euro?
area if asked?
Do you have outlets in euro area countries?
Do you carry out much business in existing European currencies?
Are you unable to take advantage of the business opportunities
arising from the changeover process in the euro area?
Do you apply different prices in different euro area countries?
Are any of your competitors based in the euro area?
Will euro notes and coins have an impact on your business?
Are you in a supply chain with a multinational?
Legal and tax issues: www.hmce.gov.uk or www.ir.gov.uk
UK Government Treasury: www.euro.gov.uk
European Union on-line: www.europa.eu.int
European Central Bank: www.euro.ecb.int
Euro Information Service: www.euro.fee.be
Financial Times euro survey: http://specials.ft.com/euro/
Banking and cash handling issues: www.bba.org.uk
Invoicing issues: www.icaew.co.uk
Pricing issues: www.dti.gov.uk/europe/europlanner
SunSystems’ euro compliant software: www.sunsystems.com
Paul Coleman is the author of the SunSystems financial and business management software, the core product range of the Systems Union Group.