How your business can protect profits amid inflation
Inflation has taken root. Businesses everywhere are dealing with annualized cost increases of nearly 7 percent – the fastest pace in 40 years and significantly higher than the 1.8 percent average of the past decade.
The resulting operating cost upticks can cause serious damage to bottom lines.
“We’re in a very unfortunate situation now,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon. “Businesses that have always devoted their efforts to serving customers and being productive must also start worrying about covering their costs in the most effective way. That means they need to shift some of their focus to coping with inflation.”
The challenge is all the greater for its unfamiliarity: It’s been 30 years since inflation was much of a player in company planning.
Experts don’t see relief any time soon, either. They point to a number of root causes, one of which is energy.
“With the cost of oil baked into so many things, it seems we are going to see more significant inflation in the months ahead,” says John McQuaig, managing partner of McQuaig & Welk, a Wenatchee, Washington-based management consulting firm.
McQuaig points to a continuing global disruption in the delivery of goods and services as yet another cause.
“Supply chain issues tend to create opportunities to raise prices because of the effect of supply and demand,” he says. “When the former is crunched, prices go up by the nature of the market.”
And there’s yet a third driver of higher costs: a wage spiral resulting from the pandemic’s softening effect on the labor supply.
Forecasting cash flow
Of all the steps businesses can take to mitigate the bottom-line effects of inflation, the most important is better management of cash flow.
Inflation tends to accelerate the drain of money from company coffers and throttle the flow that comes in. If left unaddressed, these battling trends can gut profits and threaten business survival.
Experts advise looking at the coming months with an eye toward estimating what will happen to cash balances.
“Proactively managing cash flow is critical right now,” says Lisa Anderson, president of LMA Consulting Group in Claremont, California.
This can be done by running periodic forecasts.
“What I would recommend,” Anderson says, “is looking at your demand side and asking: ‘What are we really going to need here?’ And then [look] at your supply side and [ask]: ‘What will I have to make?’ And then [determine] what the answers mean for cash flow. If it’s going to be negative, you better borrow some money.”
Such analysis, of course, involves estimates of future revenues – a practice tainted by uncertainty.
“Having a sales forecast is great, but that doesn’t mean you will collect all the money you think you will,” says Scott Beaver, senior product marketing manager at Oracle NetSuite. “And even if your sales forecast is 100 percent accurate, will the expected timeframe be met?”
What determines cash on hand is not sales but collections, and history shows that, during inflationary times, customers start paying slower as a result of their own cash squeezes.
Planning must reflect the reality of cash flow uncertainty.