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Does Your Business Hedge Against Rising Input Costs?

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Input Costs

Input Costs

I have been thinking about commodity costs lately as they are subject to increased volatility and upward pressure on costs due to the expansion of emerging markets. Anyone who has a product they re-sell or manufacture that has a large cost component attributed to a commodity such as grain, metals or is petroleum-based etc. is subject to risks when these go up and down. Companies like this can gain additional profit when they buy at a good price and sell when the market moves higher. The reverse is true and can be painful.

What can be done about this without going to options contracts or other hedging transactions? These can require a level of sophistication the average small business owner does not have. They are then forced to ride the waves and hope they can navigate successfully. Many small business owners rely on their past experience and time the purchases when they deem it is right – their gut reaction.

Some owners use a consultant on retainer to guide them when to buy. More often than not a good consultant can make the right decisions for them and a good one will also have the courage to say they don’t know what is going on with the market. There are some markets that can be very volatile and perhaps manipulated by “market makers”. A consultant can also give guidance on when to buy options contracts and how much.

If your business is not greatly affected by large swings in input costs there are still times that a small business owner can strike when the time is right and pounce a good deal. If your business keeps cash reserves and has a low amount of debt the best thing to do might be to make a big buy on a good price even if it takes several months to liquidate it. Cash reserves are currently paying next to zero interest so the holding costs over three months are minimal. If you invest in a large inventory purchase and you think it is at a 3% savings – that is an annualized 12% return over the three months. It is not a great deal of money but if you can pounce on good deals multiple times per year then it becomes a little more interesting.

In a small way I suspect we all hedge a bit in our personal lives by filling up on gas when we see a good price at the pump or by waiting until we are on fumes when we think the prices will go down. I know I do that but there was that one time that my wife took my car and ran out of gas…

Have a great week.

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Written by pacelinebiz

May 5, 2014 at 8:01 am

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