Cash Flow Issues in Inflationary Times

By Marshall Doak, Director of the Southern Oregon University Small Business Development Center

It has been said that the ramp-up in inflation costs is quick, but the subsequent reduction in costs are slow to be realized once the inflation monster has been contained. The effects of this on a business owner is that all too often, serious injury to a company’s cash flow and balance sheet occurs well in advance of the company generating the information needed in order to make good decisions regarding how to combat inflationary effects. I have heard this called margin compression, tight cash flow, or even just plain misery to manage through. Regardless of what you call it, it remains that the period of rapid increases in costs are often surprises to businesses, and the adjustment to passing those increased costs on to the end user or customer can be slow. This lag between cost increase receipt and the resulting increases in pricing and up-charging clients can cause significant adverse effects for a business.

A majority of small businesses rely exclusively on cash flow to sustain operations and viability. This was proven out a couple years ago as we entered the COVID-19 Pandemic-caused shutdowns in commerce, with many businesses finding out they had only a week or two life in their operations outside of reliance on cash flow. These businesses had no reserves or processes built for business resiliency. Even worse, the deteriorating condition of cash reserves and profitability constrained the businesses that needed to raise cash for investment purposes, operating capabilities, and to buffer supply-chain issues. The ill effects of cash flow issues in an inflationary environment are not only felt immediately, but negatively affect future operations as well.

Now is the perfect time to sit down with your accountant (not necessarily your tax accountant) and discuss what your financial outlook is. Compare your current results to past like periods and see if, or where, your economic performance has degenerated from the past. Compare your business’s cash reserves to past periods and account for business size when calculating if your current reserves are adequate. Look for specific areas of poor performance as compared to past periods to figure out what changes are needed in order to be profitable. On the revenue side, check your A/R to make sure it has not lengthened or the balances have not grown. Then check your expenses to make sure you do not have hidden recurring costs for services that are no longer needed that you forgot to cancel. Look for inventory levels to make sure they have not grown, and especially look to rid yourself of obsolete inventory which is the silent killer.

Knowing that the pressures you are under are the same your competition is facing, look for opportunity to take market share as customers are looking for new suppliers to relieve themselves of the burdens of operating in inflationary times. Activate your marketing team to refine your price, placement and presence in the marketplace with an eye towards customer service and acquisition. Make sure you have supply-chain support before making commitments to your clients regarding firm delivery of contracted obligations. Make sure you have the capacity to borrow, if needed, so that you can execute any promotion or market-penetration project you envision.

If you want to be proactive and manage your business through the current inflationary environment, and assure that you will be a survivor and not a victim, then two things are needed that are absolutely essential for success. They are: 1) Know your business inside out, front to back, the weaknesses and strengths, and have plans in place with a receptive team to improve the company, and 2) have benchmarking data for your industry available and benchmark your company against the data so you have no surprises when your banker takes the information you give them and analyzes your operations against this dataset. Don’t be the applicant who is trying to talk to their banker without being the most knowledgeable person in the room regarding your business. Dazzle them. You want them on your side as you develop strategies  for dealing with inflation and cash flow issues.

Marshall Doak is the Director of the Southern Oregon University Small Business Development Center and a huge supporter of innovation and the community that forms around innovation in the economy. In private practice, he works with businesses that plan to transition to new ownership within the next five years, assisting them to build value that can be converted to retirement income when the business sells. He can be reached through: mdoak06@gmail.com or 541-646-4126.