Developing A Proactive Strategy To Deal With The Soaring Loonie.

As the Loonie hovers around par with the US dollar and may soar well past it, Canadian manufacturers are experiencing sagging margins that, in come cases, are so devastating, it may mark the end of businesses that have been profitable for decades. While line-ups at border crossings get longer as Canadians seek lower prices in the States, many Canadian manufacturers are struggling just to keep the doors open.

After some 20 giddy years when 65-to-75 cent dollars produced substantial profits almost without trying, Canadian businesses began facing challenges with 80 and 90 cent dollars; and that level even produced some fatalities.

Some business owners are paralyzed, only hoping for a return to a falling Loonie as fast as possible. The world changed and the Loonie is likely to outpace the US dollar for some time to come, thanks to huge US budget deficits being financed with the Treasury Dept.’s credit card, and the sharp rise in oil prices to $100 per barrel.

The solution is not just hoping for something good to happen. Remember: By not taking pro-active steps now to control how the strong dollar affects the business, executives and owners are letting time and the tidal flows control their future. In effect, no decision becomes a decision.

Responding Proactively

There are steps savvy owners and managers can take – but reducing exports to the US and selling only in Canada is not one of them. This strategy – already showing up in many companies north of 49 – merely opens the door for US exporters to bring in cheaper products for sale here.

In fact, there are four potential strategies when developed early and applied properly can mitigate against the pitfalls of a suddenly powerful Loonie:
• Match currencies as much as possible;
• Find new foreign markets;
• Review the product mix; and
• Review productivity.

Obviously, when Canadian-made finished goods increase in price in the US because of fluctuating currency values, raw materials are likely to be cheaper down there, as well. Finding suppliers in the US may reduce production costs although be sure that the savings won’t be consumed by higher transportation costs due to fuel prices. Also, think about possibly using China or other developing nations to produce some components because of cheaper labour. Moreover, countries such as China and India usually trade in US currency.

Another step is to search out foreign markets where the currency is more favourable than the US dollar, meaning that Canadian pricing is not as high or burdensome as it becoming in America.

Company management also needs to consider related products it might produce or distribute that will earn higher margins. At least in the short term, wider margins could subsidise products where currency shifts create declining margins.

Productivity is the next issue to be addressed. Capital investments in new equipment that enhance productivity and reduce labour costs ought to be considered, factoring them into the business plan if it makes sense. This is incredibly crucial because new equipment can deal with some of the high labour cost issues as well as increase productivity. The cost of labour in Canada is particularly difficult to deal with because they were high before the dollar rose. Now, on a global basis, they are another 20% higher.

Critical Work

Business owners have many years and dollars invested in their business. For many owner-operators, the value of the business represents the bulk of their retirement plan. Doing whatever is necessary to preserve that value in uncertain times is worth the effort – for the business and for an owner’s financial security.

As part of this process, it may be useful to assess the long term viability of the business. Not all companies might be viable in the future under the currency situation that is emerging. If so, it may be best to decide to cease operations rather than having someone else make that decision – like a lender. When management or an owner makes the decision, the financial result is likely to be much greater than if the wind down is handled by a third party.

A controlled and orderly liquidation can have a surprisingly good realisation, possibly leading to a restructured operation which may prove to be viable with significantly reduced risk. A simple example of this is a shift from manufacturer to distributor.

Still, it is unlikely that this “doomsday scenario” will need to be implemented provided a company understands that doing nothing could be the worst decision, proving fatal for a business. In fact, no decision is worse than the wrong decision.