The volatility of the commodities market can be extremely difficult to manage as a company.
The cost of goods can fluctuate immensely, which can be devastating to those predicting profits. This can also eat away at profit margins slowly and a smaller company can quickly become unprofitable.
Most people do not realize the impacts that commodities have on everyday life. The prices of good we buy or ship are impacted on a daily basis along with the jobs that we have.
The following are some ways to deal with fluctuating commodities in order to secure a business.
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Have Built in Plans
Obviously, a company should have a built-in plan in case of dealing with a volatile commodity. The fluctuation in these prices can impact everything from the cost of goods to the margins being made off of each individual unit.
“When dealing with volatile commodities, it is not only important to think strategically when purchasing the raw materials themselves, but also when buying components whose prices are tied heavily to the commodities utilized in them.
We have found it very beneficial think ahead and to buy componentry in bulk when the corresponding commodities are at a reasonable price level.” – Nicholas Armer, Director of Business Development at Flowmetrics.
If the commodities market has a huge impact on your costs then you should do the following.
- Build in parts to contracts that have a sliding scale for prices.
- Let clients know that prices will fluctuate according to the commodity market. Stress that the prices could indeed go down and this isn’t just a formula to make more money.
- Build in parts to the cost of services or products that act as insurance in case of the market rising. Set the prices higher than you would and when a commodity dips or stays stagnant you can give a “discount” to long-time customers.
- Put some money aside in case cost of goods skyrockets to ensure no lull in production.
How It Impacts Expansion
Things like building materials and lumber are things that are closely watch by larger companies wanting to expand. Homebuilders also watch lumber very closely as they would like to scoop up lumber at its lowest price in order to maximize profit.
How to avoid commodities thwarting expansion:
- Purchase an existing office to avoid building materials impacting cost.
- Purchase materials in bulk and store them in a warehouse until expansion time is near.
- Expand to an area where building material prices are low. This has to be weighed on the profitability of the new location among other things.
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Commodities Impact Industries You Might Not Expect
When people think of cotton going up on the commodities market they immediately think about clothing companies. What many people don’t realize is the furniture and even home supplies industries will be impacted as well.
Oil prices have one of the largest impacts on the cost of good throughout the entire world. Not only do shipping companies base their pricing on the cost of oil but so do other mega stores like Target and Wal-Mart. How To Recognize How Commodities Impact Other Industries
- Think of all costs a company incurs and whether a certain commodity is needed to complete their business process.
- Chart prices throughout the year at your favorite stores and chart the associated commodities. If you see a positive correlation between commodity fluctuation and costs on multiple occasions then you will see how they impact prices. Make sure to have a few variables as some commodities undoubtedly increase as others increase or decrease.
Measuring Commodity Use
The best way to see if something is being utilized to its full potential is to measure it. For example, a breakfast restaurant would want to measure the amount of milk and coffee that it uses throughout the day. Instead of getting a rough estimate, things like human-machine interfaces can give an accurate reading. Accurate numbers are important in charting waste or can impact the amount that is reordered the next week or month.
How to take advantage of measured commodity use:
- Find where the commodity is being wasted and eliminate this. In the case of a breakfast restaurant, see how much the average coffee drinker goes through. Estimate the number of customers that order coffee or go from the month’s previous number to eliminate excess ordering of coffee.
- Adjust prices to maintain a consistent profit per item. You won’t want to increase these substantially but five or 10 cents can make a world of difference over the course of a year.
- Investing in human-machine interfaces can help eliminate the guessing game. Most of the time adding up a bunch of educated guesses does not work, and you should leave your business up to chance.
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Commodity fluctuation can have immense impacts on large and small businesses. It can make it extremely difficult to set prices to products as well as predict profits or losses going forward.
The impact of commodities on a person’s everyday life might seem small but these things impact prices for nearly everything a person buys from a grocery store or even a jewelry store. Take a good look at how commodities are impacting your business and try to minimize