Small Business Should Know
Written by CMG News Contributor, Doug Carleton
It was supposed to be easing up by now - no more ships stuck in the Suez Canal, ports in China reopening, production of many items picking up again, but it's almost going in the opposite direction.
This is having a direct impact on many businesses' costs and their ability to get the products they need to sell. Here are two examples of the kinds of things that are happening:
The owner of a kitchen supply store has discontinued stocking placemats because she has no idea when her next shipment will arrive. She recently received a lid to a pot that had been ordered eight months ago.
A board game maker in Miami Beach normally pays $6,000-$7,000 for a 40-foot container. His next shipment will cost almost $26,000 because of the current shipping issues and container shortages. His freight agent has warned him that the prices may continue to increase.
Some companies that desperately need certain parts or components are resorting to air cargo which is the most expensive form of shipping. Rates for air cargo is up as much as 40% higher than this time last year and are expected to continue to get higher. The whole shipping system is at almost 90% capacity now. All of this is a textbook example of the ripple effect. A shipping container that cannot unload in Los Angeles because of too many dock workers quarantined is a container that cannot be loaded with soybeans in Iowa. This effect continues as it leaves buyers in Indonesia waiting for goods and potentially triggering a shortage of animal feed in Southeast Asia. A jump in orders for televisions in Canada or Japan exacerbates the shortage of computer chips, forcing auto manufacturers from South Korea to Germany to slow production.
Shortages, which we are seeing more of, lead to price increases due to scarcity, which drives up inflation. Shortages can also create panic and cause consumers to buy ahead (toilet paper, anyone?), which, in turn, creates more shortages. Unlike historic economic situations, the fallout from the pandemic is creating situations that are seemingly happening overnight. If you are caught anywhere in this sales cycle, what might it be doing to your sales and profits? If it takes eight months to receive the lid to a pot, it is more than likely the pot is sitting in inventory unsold for the entire duration. No sale and no profit for eight months, but the ongoing costs of running your business - including the carrying of inventory - does not stop. Magnify situations like these to the broader economy, and you can envision the resulting lower sales and lower profitability to your business and others. All of these factors can make your company less attractive as a potential borrower to a bank. If there is a need for working capital to carry your company through this period (which could last into next year), and your business has been good up to this point - consider looking for a loan now. It is best to get ahead of the cycle if you feel your sales and profits could suffer (or begin to suffer) for a while. Don't just wait on that container.
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