March 16, 2015
Today’s article was sparked by a conversation I had with a food entrepreneur who mentioned that he keeps a very close eye on freight costs. At first I thought he meant the costs associated with shipping out his products, but he clarified for me that what he watches is the cost of freight for the ingredients and packaging that he orders and that are shipped to him.
This cost, rightly, is added into his product costing spreadsheet to ensure that his margins and pricing are taking freight expenses into account. But, as he pointed out, freight prices are constantly changing and it’s not possible to constantly change your prices to consumers. So what’s an entrepreneur to do?
His solution was to hedge the prices a bit. He didn’t do this formally on the stock market like big companies do (yes, big food companies hedge commodities all the time to try and keep their costs inline even as expenses increase) but rather, would keep a close eye on freight costs and if he saw the cost of freight decrease then he would order in more of his ingredients than normal. In order to do this well it does mean you have to have a strong grasp of your company’s finances and be able to weather a larger-than-normal cash outflow at different periods if you want to try and order in more ingredients but it does mean that you’re bringing your freight costs down as low as possible.
The good news is that right now with low oil prices we also have low freight costs but, ultimately, oil and freight prices will increase again and you need to consider the role that that’s playing in your business finances.