The oil & gas industry has long been known to experience regular cycles of booms and busts. One of the most recent examples occurred only a few months ago, when Organization of the Petroleum Exporting Countries (OPEC) made the decision to maintain its current level of production levels in an attempt to capture greater market share. This decision caused the price of oil to tank. By the time the dust settled, oil prices dipped 60 percent and the ripple effect had already begun to take a toll on companies throughout the industry.
This is just one example of how the market can change overnight, but this type of volatility is not exclusive to the oil & gas industry, which is why all business owners throughout all industries should consider taking the steps necessary to guard against a bust – even if you are still riding high on a boom.
3 Tips To Help You Navigate Your Industry’s Busts – And The Booms
- Take Good Care Of Your Assets – Successful navigation of a finicky industry depends on how well you manage your assets. For example, when times are good, take the necessary steps to manage your cash flow and consult with an advisor who can help you make wise, sustainable financial decisions. When it comes to investments made outside the volatility of your business, consider giving your blood pressure a break and make it a priority to first seek the preservation of your capital over your rate of return. Emphasizing capital preservation can better prepare you for those unexpected downturns.
- Live Frugally (Even When You Don’t Have To) – Don’t buy that new car unless you are absolutely sure that you will have the funds needed to cover the payments, and any other unexpected expenses, later on. Setting goals for your spending and saving habits, for example, can help keep your finances in line – helping you to keep your head above water when your business, or the industry, takes unexpected downturn. Instead of driving off the lot in that brand-new car, start by putting some money aside to make a nice down payment. Even though you may have to postpone the purchase for a few months or so, when you are finally able to put the money down you will also be able to significantly reduce your monthly payments – putting you in an even better long-term financial position.
- Choose To Play The Long Game – It may seem hard to diversify your business when so many others appear to be doing pretty good for themselves by chasing the quick rewards. But by operating your business and managing your personal finances more conservatively, you stand a better chance of securing long-term wealth – not to mention a comfortable retirement. In other words, when you diversify your assets, you are able to protect yourself and your business from a sudden and complete collapse.
Owning a business in a volatile industry can be a big gamble, but if you strategically manage your assets, your odds of success become much greater. Be prepared for outside factors that may force your business to go lean by preparing early and creating a solid, sustainable financial management strategy. Take a look at your current operations and consider what changes you can make today to help protect your business from a possible financial catastrophe tomorrow.
Email Rea & Associates to discover more ways to protect your business.
By David Shallenberger, CPA (Wooster office)