Created by Expense Reduction Analysts
When it comes to good business, there is never time to sit back and relax—especially when the market is doing well.
So what are some areas where your business can take advantage? Fuel prices.
Fuel prices are moderate. Is it time to protect yourself from what may come?
It’s been a while since gas prices soared to the heights that resulted in eroding margins and blown budgets, which caused severe aggravation for corporate fleet management. Fortunately, the industry has experienced a pretty nice run of moderate gasoline and diesel fuel prices. With the current environment, this concern is well down the priority list.
When fuel prices were insanely high, many executives used to ask about commodity hedging as a strategy. With gas prices at moderate levels, maybe this is a good time to consider investigating options to protect you from future risk.
In recent years, an alternative way has emerged to protect against the risk of large fuel pricing increases and avoids the complexities of traditional commodity hedging or cost control. In a typical hedging strategy, the buyer still has an inherent risk if the commodity market prices move below the swap price. A new insurance product caught the eye of expense managers that might have some benefits to you for not only fuel but also for other high-volume factory overhead commodities you have.
Like a typical insurance policy, you make an initial premium payment to remove the risk of an undesirable change in market pricing (e.g. higher prices). Interestingly, you can still retain the benefits of a desirable change in the market pricing (e.g. lower prices). You are simply evaluating if the cost of the premium gives you an adequate benefit by keeping you insulated from the impact of market fluctuations.
This isn’t for everyone, but if you spend more than of $1M per year on fuel, or any supply chain cost, and believe that large increases can negatively impact your business, this may be worth a look. In addition to being a straight-forward strategy, it significantly reduces most accounting concerns associated with traditional hedging.