The key to shielding your business from uncertainty is healthy pessimism
Optimism in business is good, but business operators would do much better in the long run if they looked more closely at the down side and imagined the worst.
Why would you go into business unless you were an optimist, really believing you’ll beat the odds and gain the freedom, flexibility and potential for great financial success that only your own business can give you?
So business people have to be optimistic. Particularly because there are many challenges and uncertainties in starting and running a business. Far too many new businesses fail or fizzle.
That optimism is found in the results of surveys of business owners about the future. They usually quite accurately identify when the economy, their industry or their area is heading into bad times. Still, they often come up with an upbeat outlook for their business prospects.
But we can’t ignore the potential negatives facing business owners.
Interest rates
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Interest rates have been close to historic lows for some time. This means they only have one way to go – up.
Faced with this reality, the wise thing to do is to lock in the current rate for as long as you can.
But too many borrowers are seduced by a variable rate loan because it’s marginally cheaper than a fixed rate loan. If they don’t want to pay the slight increase to lock in the rate, what will they do when the rate takes a significant jump and ups their next monthly payment?
Imagining and planning for rising rates could help. (Everything here applies to home mortgage holders as well as to business borrowers.)
Exchange rates
Canada is an open economy heavily reliant on exports. A low Canadian dollar gives our export sector a competitive edge, making it easy to sell abroad. But exchange rates are even more volatile than interest rates. If you’re competing strictly on price, an increase in the Canadian dollar could wipe you out.
The solution is to imagine the worst and plan for it. When the Canadian dollar is around US$.80, pretend it’s US$.90. Could you find any way to cut your operating costs, alter your product mix or adjust your customer base to make money with the higher dollar? (Don’t tell Canadian Revenue Agency I told you, but you might even want to keep a second set of books assuming the higher dollar, just to see what would happen to your bottom line.)
Then start putting some of these ideas into practice. When or if the Canadian dollar rises, your business will continue to thrive.
And what happens if our dollar stays low or even drops? All the cost-cutting and other efficiencies you’ve introduced will go straight to your bottom line and enhance your profits.
If your business relies on imports and you’re selling in the Canadian market, then it’s a rising dollar you have to fear and prepare for. Look for alternate sources of supply and consider finding export markets to minimize the negative impact of an increasing exchange rate.
North American Free Trade Agreement (NAFTA)
This issue challenges even the most optimistic of Canadian business people. What happens if, during current renegotiations, NAFTA goes down the tubes or is radically altered – and not in Canada’s favour?
This is very possible since neither logic nor basic economics seem to be guiding American policy decisions now. Even the reality that curtailing trade would hurt many U.S. companies and all American consumers isn’t deterring the U.S. move toward protectionism. So we have to imagine and maybe even expect the worst.
The worst could be pretty bad. About 40 percent of Canada’s economy is in trade and almost 80 percent of that trade is with the U.S. British Columbia’s trade is the most diverse with a little over half going to the States. It was less than half before NAFTA and its predecessor, the Canada-United States Free Trade Agreement.
When you’re threatened with losing your major customer, the obvious solution is to expand your customer base. But that’s something far too many Canadian operations have been very loath to do. The forest industry in B.C. is a case in point. For too long, you could predict the health of the forest industry and thus the B.C. economy with one number – U.S. housing starts. Talk about putting all your eggs in one basket.
The best time for Canadians to start diversifying their international customer base is long past. But better late than never. Let’s not wait until we’re hit on the head with post-NAFTA realities to start seeking opportunities in fast-growing Asia or taking advantage of freer trade with Europe. Post-Brexit Britain could need new suppliers and Latin America shares our time zones. Mexico could be very happy to deal with Canada if they too are cut out of the U.S. market through NAFTA renegotiations.
And if the NAFTA agreement survives relatively unchanged, we’ll be left with a growing global economy.
It’s all about expecting the worst and getting ready for it – and continuing to thrive regardless of how painful outside factors may seem.
Dr. Roslyn Kunin is a public speaker, consulting economist and senior fellow of the Canada West Foundation.
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