I started my own business a few years ago, and I considered myself very lucky when it became profitable almost immediately. I was sure that was a sign that it was destined to keep growing, but to my surprise, my earnings became stagnant after being in business just a few months. I thought I was doing everything right, but I just wasn't making enough to stay in business much longer. I finally reached my wits end and called in outside help from a business consultant. I wish I had done it sooner, because it was the outside, unbiased view I needed to make my business more profitable. The consultant helped me make a few tweaks to my supply chain and marketing plan, and my profits increased dramatically. I like helping new business owners, so I decided to create a blog to share my tips!
Mining financial risk modelling is a critical part of success in the industry. You need to know how to stay ahead of developments, especially in the commodities market, to ensure your company is maximizing profits and minimizing risk exposure. The job is often less about exploiting opportunities and more about avoiding catastrophic mistakes. You can reduce the risk of a financial crunch at your mining operation by being mindful of these 5 potential mistakes.
Balance sheets, inventories, and debt obligations should all operate within an integrated system. Similarly, the system should integrate real-time commodities and options prices. You should be able to quickly see how current and future receipts and liabilities are coming onto or going off of the books.
A fully integrated system will allow you to model risks closer to real time. That will make your analysis timelier while improving your ability to respond quickly when markets go through major swings.
Lack of Dynamic Cash Flow Modelling
You also need to know how small changes could affect your operation's risk exposure. Dynamic cash flow modelling will make it easier for you to project how changes could lead to negative or positive outcomes. You can then model the worst-case scenarios to ensure you'll have the necessary liquidity to ride out unexpected events like commodities prices collapsing, key equipment failures, or shifts in financing availability.
Poor Checking for Errors and Sanity Issues
Whenever you develop a model, you should check it for potential errors. Likewise, you should run sanity checks. Test the model against extreme scenarios to verify that the projections will still make sense. If the model suggests something impossible, go through the math by hand to determine if something is off or if there's a worrisome problem like infinite risk.
Scenarios Aren't Diverse Enough
When you look at scenarios for mining financial risk modelling, you need to consider a diverse range of scenarios. Projecting high and low commodity prices are the simplest. However, you should also look at potential shocks to supply chains, available equipment, labor costs and availability, and other inputs. Considering these possible problems will make your organization more resilient.
Always make sure to use consistent formats. If you have a bunch of cells in a spreadsheet, for example, verify that the cells always represent the same period length. You don't want to mix one-month cells with quarterly ones. Make sure you're using the same units of measurement in all reports, too. Keep styles consistent so people can always recognize, for example, that green means profit and black means loss.
For more information about dynamic cash flow modelling, contact a local company.