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Inflation Can Eat Your Cash Flow

As everyone knows, inflation is higher that it has been for a very long time. With inflation, there can also be early signs of a wage-price spiral. We are seeing costs going up rapidly; prices rising to keep up with them; employees paying higher prices in the marketplace and, thus demanding higher wages in order to sustain their buying power. This, in turn, increases the businesses' cost and round and round we go. All of this doesn't even take into account that the interest rates to finance things is also going up - raising costs again. This is classic inflation at work. These are the places where rapid inflation will begin to eat your cash flows. You may be spending more on the "costs" side, but not getting the same amount on the "sales" side: hence, the need to spend more cash to make up the difference. If you should need to finance more inventory, these higher rates will make borrowed money cost more - again requiring more of your cash.

Cash Flow Decision Making

Look hard at every day decisions to determine how they affect your cash flow. Then, do a three, six, and twelve-month projection. There may be some things in your day-to-day operations that you have never considered altering,. But, by calculating three projections up to a year out, you may see items that you have utilized cash for that, you could possibly eliminate or choose a cheaper alternative. Can you cut an hour off of your opening or closing times? Can you delay purchasing something that may improve your bottom line, but can actually wait a few more months before buying? Can you possibly do with one less employee for a few months?

Are You Planning?

Finally, and possibly most importantly, are you seriously planning? This may be more important now than ever before. Planning is a critical tool that helps you focus on the specifics of your business, enabling you to take action. Planning provides a needed sense of direction and outlines measurable goals. If you do not have specific measurable goals, you are basically flying blind. Today, cash flow planning is critical to put at the top of your "to do" list. Consider the supply chain problems that are regularly cited. Often, things like these happen with lightning speed. What will be the cash flow effects for the luxury car dealers who have any of the 1,100 Porsches, Audis, and Bentleys that are being consumed by the carrier in the middle of the Atlantic Ocean? If you think that your business has any vulnerability, you should be reviewing your cash flow projections monthly (possibly daily or weekly depending upon the volatility of your industry) and projecting out three to six months. If you are unknowing of how inflationary changes could affect your cash flow, you may suddenly discover that inflation has eaten enough of your cash to give you a serious case of indigestion.

Source: Doug Carleton, 'Small Business Should Know'. Contact at


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