Inflation is the decrease in the purchasing power of a currency over time. In short, rising inflation means that a certain amount of money will be worth less than it was previously.
The international business community is no stranger to inflation, as the last few years have seen enormous rises, causing chaos for businesses and individuals alike.
A low level of inflation is considered acceptable (sometimes desirable) in a healthy economy. However, higher inflation rates can lead to major economic instability.
The impact of inflation on businesses
For a business, high inflation can be bad news, bringing several financial and operational challenges with it.
- Increased costs: High inflation means the cost of doing business goes up. This could be the price of raw materials or energy in manufacturing, as well as other inputs. Increased costs can reduce profit, which means the company needs to raise prices.
- Reduced purchasing power: High inflation lowers the amount that customers can (or are willing to) spend, which negatively impacts demand for goods and services.
- Increased uncertainty: High inflation creates economic uncertainty. This uncertainty makes it hard to plan for future investment, hiring and other growth plans.
- Interest rates: Inflation can force interest rates up, which makes it more difficult and expensive for businesses to borrow money. Less borrowing can mean less investment in new projects or operations.
- Reduced international competitiveness: Inflation reduces the value of a currency, which impacts international trade by making exports more expensive.
It is extremely important that your business has plans to deal with high inflation, especially in 2023 as it hits unprecedented levels in recent history.
One way to mitigate the risk of inflation is to be smart with your management information – particularly your cash flow.
How your cash flow reports can help
When inflation increases the cost of running your business, tracking your cash flow can help you manage these increased expenses and adjust your budgets appropriately.
If inflation is affecting your pricing and revenue streams, carefully monitoring your cash flow can help you identify potential shortfalls in revenue before they happen. You can then take steps to mitigate them, such as by adjusting your prices or introducing special promotions.
Businesses can also use cash flow analysis to free up cash to invest in tools that actively reduce the long-term cost of production.
Finally, you can use cash flow to monitor and build cash reserves to maintain a healthy cash balance. Cash-healthy businesses are much better equipped to handle economic downturns and other unforeseen challenges.
Scenario planning to deal with high inflation
Scenario planning can help a business deal with high inflation. By helping businesses to anticipate the impact of inflation, develop strategies to mitigate the impact, and make better decisions, scenario planning can help them to increase their resilience to economic shocks.
How the Genus team can help
A reliable cash flow forecast is an essential business tool, especially in a period of high inflation. The Genus team are specialists in helping our clients produce detailed, robust, and user-friendly management reports of all kinds, including cash flow. These reports are designed with a common goal: to help you make better business decisions.
We have several useful resources about this in our blog, but we also encourage you to get in touch for a consultation if you need help getting started.
Alicia Williams
Alicia is Director of the Genus team at Shorts, a chartered certified accountant and Xero specialist.
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