The current economic environment is certainly scary for business leaders, as inflation and political uncertainty add to the huge challenges already posed by the pandemic.
However, it is important to remember that these are not new obstacles. Inflation and political uncertainty are constant realities for businesses, and there are strategies to navigate them successfully.
The current climate may feel like a perfect storm, but it's important to approach it with a positive attitude and make plans to weather the storm.
By doing so, we can come out stronger on the other side.
Here are seven things businesses can do to combat high inflation.
Determining actual business costs
During periods of high inflation, it is important for businesses to understand the true cost of operating their business.
While traditional accounting principles focus on assigning value to all expenses and revenues, analyzing fixed and variable costs and contribution margins allows decision makers to assess profitability in a more dynamic way. Help you understand.
Understanding the difference between fixed costs (costs that remain the same regardless of production level) and variable costs (costs that change as production changes) allows companies to assess their ability to cover expenses and eliminate unprofitable operations. you can make a decision.
Additionally, determining the contribution margin, which is sales revenue minus variable costs, helps evaluate the profitability of individual products or services.
Cash flow management
Keeping track of your cash levels can feel like a juggling act.
On the other hand, it's important to have enough cash on hand to meet your payments and meet your profit goals.
On the other hand, holding too much cash can cause its value to erode due to inflation.
One way to ensure an optimal balance is to regularly report cash flow and monitor working capital.
This will give you a better understanding of where your cash is coming and going, allowing you to make more informed financial decisions.
When inflation rises, the cost of goods and services often rises as well.
This means it can be a wise decision to hold on to assets that can be converted into cash in the future, as they can increase in value over time.
For manufacturing businesses, maintaining higher levels of inventory may also be a wise choice as the cost of goods may increase.
Understand borrowing costs
In an inflationary economy, it can be advantageous to be a borrower.
If prices rise, the amount you owe on a loan may become less important.
However, lenders must take inflation into account and may increase interest rates accordingly.
This means it is important for borrowers to stick to their repayment schedule to avoid additional charges.
One way to do this is to hire a credit manager who can ensure on-time payments and manage your debts.
In addition to staying aware of inflation trends, managing debt responsibly can help borrowers maintain financial stability over the long term.
As inflation rises, bank terms and borrowing limits may become increasingly strict.
Therefore, it is important to regularly check these levels and compare them to your cash flow forecast.
This helps avoid unexpected violations and fluctuations in income and expenses.
It is also important to reassess the sustainability of borrowing levels, especially considering potential changes in interest rates.
Leverage is advantageous when interest rates are low, but can quickly become costly when inflation rises.
Overall, keeping a close eye on these factors will help your business run smoothly.
scenario planning
One way to stay ahead during uncertain times and anticipate potential challenges is to use scenario planning.
This includes modeling the potential impact on cash flow of inflation, interest rates, supply chain disruptions, staffing changes, and even changes in currency fluctuations.
Scenario planning helps you think about potential risks and helps you make decisions to ensure business stability.
Stress testing should also be part of this process, such as considering some extreme scenarios to see if your business can survive.
Overall, employing scenario planning can help you mitigate surprises and prepare for unexpected challenges when they arise.
In today's volatile environment, it's more important than ever to think ahead and stay on top of future developments.
pricing strategy
Companies may want to offset price increases by making multiple small adjustments throughout the year.
However, this can be an uncertain strategy for both companies and customers.
Instead, it may be better to plan for a one-time, large price increase and communicate it effectively to your customers.
Of course, it's important to weigh the risks of this strategy against the potential benefits for your particular business.
Fixed cost management
It's important to remember that not all solutions are a one-size-fits-all approach when it comes to managing fixed costs.
Yes, cutting costs is essential in the short term, but it's not necessarily the most sustainable solution in the long term.
Disposing of certain resources or equipment now may cost you more in the future if replacements become limited or expensive.
It is important to take a balanced approach and assess and manage fixed costs on an ongoing basis, rather than seeking ad hoc solutions.
This way, you can prepare for both unexpected expenses and future financial growth.
Preventing inflation in business contracts
Short-term contracts also help manage potential risks by providing more certainty in terms of pricing and making termination easier to negotiate.
Long-term contracts may have limitations, so it's important to understand your options and consider the possibility of exiting an unprofitable deal.
Alice Telfer's article originally appeared on ICAS website.
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