“Steel prices hit a record high in April.” Does that headline seem all too familiar? It seems like every day material costs hit record highs that slowly eat away at your business profit. If you are prepared both professionally and personally to deal with market fluctuations, these headlines should not cause panic. The key is not to put all your nest eggs in one basket – ensure that your personal investments are complementary to your business income. Once you have reached this balance, you can focus your energy on protecting your profit and inspecting your investments in response to market cycles.

Protect Your Profit

Have you noticed the increase to your purchasing budget? Are your suppliers passing increases on to you – check your invoices for gas surcharges – I guarantee you’ll see a few tacked on to your cost. As a business owner, how do you survive, and even better, budget for these increases? If your business is affected by changes in commodity prices, now is the time for you to re-visit the basics of business.

Suppliers. Instead of arguing for better prices, try to form a win-win relationship with your key suppliers. Get together for a face-to-face meeting and negotiate longer term contracts to help you even out the ups and downs of material costs – this will help you forecast your budget and quote much more accurately. Ask your supplier how you can work with them to reduce costs. For example, find out how they run their business most efficiently and try to merge styles – do they prefer that you order daily or weekly? Can you order in quantities that match their packaging? Can you receive deliveries on days/weeks when they are slow? Opening dialogue will make you a preferred customer and more likely to receive preferential pricing.

Labour. This is probably your largest single business expense and often overlooked as a commodity. In tight labour markets, it is important to secure good employees. Try to offer non-monetary incentives such as flexible hours and training as well as monetary benefits not related to salary such as bonus incentives, profit sharing and benefit plans. Also consider retaining experienced, specialized employees on contract when a job requires it – you may find that an individual with specialized skills that costs a bit more per hour is actually less costly than retaining a generalist as a full time employee.

Quoting. If your business requires that you quote on projects, be sure to create detailed quotes that allow for price fluctuations of materials that will be purchased in the future. For example, if raw materials are a large part of your quote, separate this in the contract and have it reflect the cost of material at time of future purchase. This allows you to pass the cost of the raw material on to the purchaser and mitigates uncertainty for your business.

Inspect Your Investments

As a business owner, you need to balance your business exposure with your personal exposure by diversifying your personal investments to complement your business income. Historically, commodities tend to move together and an average commodity bull cycle lasts 15 years – which puts us right in the middle of the current bull cycle. If your business income fluctuates with the commodity cycle, then ensure your personal investments are inversely correlated. For example, if your business is tied to the cost of steel, your personal portfolio should have a smaller weighting on resources and be weighted more heavily towards other industries such as banking, technology and health care.

If you would like assistance in balancing your business and personal finances to ensure financial peace of mind, please feel free to contact Glenn Ayrton at ClearWealth Advisors at 604.687.6808 or <info@clearwealth.ca>. 

Glenn Ayrton is registered as an Investment Advisor through Sora Group Wealth Advisors Inc., a Member of the Investment Dealers Association of Canada and the Canadian Investor Protection Fund (CIPF). This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert. This update is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities. The views expressed are those of the author and not necessarily those of Sora Group Wealth Advisors Inc.