Many people mistakenly believe risk management is only for large companies. Businesses of all sizes, however, can benefit from a hedging strategy. Now, with certain minimum consumption thresholds,Â a company can have price certainty for a 24- or even 36-month horizon. The benefits of this include steadier cash flow, better ratios, and more accurate budget forecasting.
NOW IS THE TIME TO PROTECT YOURSELF
The ideal time to protect yourself is when you are taking on risks, such as when signing a sales deal or negotiating a supply contract. That said, adopting a hedging strategy is a major, long-term move for a business, and as with any big decision, getting all stakeholders on board can be difficult. The recentÂ collapse in energy prices, which are now nearing 2008 and 2009 post-recession lows, is a golden opportunity for energy-consuming businesses to rein in their supply costs.
These are challenging times for the oil and gas industry, and tighter controls of energy costs can have an enormous impact on a companyâ€™s earnings. Implementing a hedging strategy often calls forÂ a change in philosophy within the organization. However, understanding the related risks and choices should be significantly easier given the issues currently facing the industry.
The drop in refined petroleum product prices has already affected demand in the U.S. and Canada, and other changes are occurring that will impact global production capacity and make it difficultÂ to predict how long the downturn will last. The purpose of a hedging strategy is to eliminate price fluctuations and to protect your profit margin during uncertain times.