After nearly a decade of operating in a bull market, many business owners are getting the feeling that what goes up must come down, and a dip in the economy may be coming sooner rather than later. The market is already becoming increasingly volatile. Financial analysts repeatedly report lower consumer confidence in stocks before any major elections, and the market has yet to fully recover after the November 2018 midterm elections.
The cause of this unrest? Business owners aren’t able to plan future sales around stable trade deals with a tariff war bubbling on the western horizon. While international trade is an important part of the American economy, there are still steps a business owner can take to ensure they are prepared for tough times in extremely volatile market conditions and potentially during a trade war. It starts with balance. In times of extreme market volatility, business owners need to look at their cash flow balance – operations, financing and investments – as well as specifically at their investment balance.
Volatility can work to your advantage if you have the savings to be patient. When working with such investments, it’s important to keep one to two years of back up cash so you aren’t forced to sell when the market hits bottom.
A volatile stock, one that tends to rapidly or significantly change in price over a period of time, and can open up more growth opportunities as some investments become more reasonably priced. That stock has more potential to buy low and sell high.
As long as your business isn’t dependent on investments to pay bills, a volatile stock can show a higher return than other safer investments. This is not to be confused with risk, which is the probability that an investment will result in permanent or long-lasting loss of value.
Many business owners and everyday investors struggle with staying patient during the highs and lows of their volatile investments. With the media causing a panic over major but normal dips in stocks, many investors pull their money out rather than waiting it out and end up with significant losses. Others take to the “ostrich effect” of staying aloof and avoiding knowing what’s going on with their money.
If a volatile market isn’t your style, look into a smart asset allocation with a diversified portfolio of stocks, bonds and other asset classes that makes sense given your business’s age, size, revenue flow and working capital needs.
Cash Flow Balance…
Just as your investments should be diversified, your overall cash flow should be, too, within operations, finances and investments. The trade war hype may cool down, but it never hurts to be prepared. Actionable tips to prepare your business for the worst-case scenario are…
1. Lock In Rates With Suppliers
Having at least a year’s worth of security on stable prices can help you plan ahead for pricing projects and buying inventory. Not every supplier will be willing to think that far ahead, but it’s certainly worth it to try.
2. Research Local vs Imported
If your business only uses locally-sourced materials, never imports, then you’ve already got an advantage over companies that do import materials. If you do import, items that were once cheaper from overseas may now become more expensive which can trickle down to raising prices on your business in multiple areas.
3. Communicate With Customers
Communicate with customers about why prices are up, explaining that base material costs are out of your control and in order to operate smoothly your business needs to keep its profit margins. Now is the time to gradually increase prices so that clients aren’t hit with a steep jump.
4. Plan Ahead With Pricing
Interest rates are still relatively low on loans, so there are opportunities to work with customers to help them with their cash flow challenges before any tariff hikes set in.
5. Buy and Expand Now
Now is the time to expand your company while the market is up so you can coast through potentially slow business. If you’re thinking about offering more services, do it now and establish them before competitors do.
6. Offer Services
If you sell products, somewhere down the supply chain someone you work with will have to pay import tariffs and it may hit you. But that’s not often applicable in the services industry, and many business can see stable profit by offering services like consulting, installation or clean up.
7. Research New Markets
Hopefully not all countries will be affected by a trade war. Economies abroad may be able to benefit from your business’s products or services, and you can fill the profit deficit by marketing there.
8. Look Internally
All of your expenses, operational, general and administrative, should be regularly revaluated. If it’s time to cut overhead, every dollar added to your profit margins will give you more breathing room if customers are feeling the strain of price increases.
If more tariffs are put in place or even if an international trade war develops, rising costs of base materials could ripple throughout the economy. Only businesses that prepare ahead of time will be able to ride out the storm, and the smoothness of that journey depends on early foresight and preemptive action.