How to manage business cash flow during inflation: 4 effective strategies

With proper planning and the right tools, businesses can lessen the impact of high inflation.

Key takeaways

• High inflation can put pressure on cash flow by increasing the cost of labor, materials, utilities and other business expenses.
• Regularly updating financial projections can help businesses prepare for different inflation scenarios and make informed decisions about liquidity, inventory and financing needs.
• Treasury Management technology and automation can improve visibility into cash positions, accelerate collections, streamline payments and reduce operational risk.
• Businesses may be able to protect margins during inflationary periods by evaluating pricing strategies and working with trusted financial advisors to identify opportunities for improvement.

Many companies have been focused on stubbornly high inflation and with good reason: Inflation—when it’s both high and low—can affect a business’s bottom line.

“Cash flow is still king for companies, so it’s important for business owners to manage their cash flow to be able to weather times of higher or persistent inflation,” says Regions Head of Treasury Management Bryan Ford. “By taking a proactive approach, companies may be able to minimize inflation’s effects.”

Smart cash flow management depends on knowledge of what inflation is and how it impacts a company’s accounts payables, receivables and inventory. Inflation is the rate at which prices rise over time, and a certain amount of inflation is a natural part of the economy. But when inflation rises and remains persistently elevated, it weakens the spending power of both businesses and consumers. When inflation spurs price increases, businesses must pay more for inputs like labor, utilities and materials.

Strategies for managing cash flow during times of high inflation

While companies can’t control many economic factors, businesses are by no means powerless when it comes to optimizing cash flow to respond to the challenges of elevated and sticky inflation. These strategies may help bolster cash flow.

1. Maintain updated financial projections

   The only constant in operating a successful business is change. That’s why it’s so important for business owners to frequently update their financial projections to account for everything from demand from new customers to supply chain challenges to the rise and fall of inflation.

   Up-to-date financial projections that account for scenarios in which inflation increases, decreases or remains the same can guide businesses on how to best manage cash flow. “Trying to understand the impact of different inflation scenarios on the cash flow of a business allows a business owner to plan ahead,” Ford says. “Do they need to supplement their cash flow through a credit facility? Or maybe they need to change the terms of accounts payable or receivable. Perhaps they should consider bulk or forward purchases of inventory or, conversely, reduce inventory on hand.”

   The merits of each of these cash flow levers are unique for every company. For example, retailers with large inventories can free up cash by lowering inventory levels and negotiating new terms with suppliers. The larger point, however, is that financial projections provide the understanding necessary to determine whether changes to cash flow management are needed and what those changes need to accomplish.

2. Deploy automated treasury management services

   Managing the cash that flows in and out of a business does not need to be a manual exercise. Automated digital solutions can offer tremendous benefits when it comes to cash flow management. “A business may get paid more quickly and accelerate the cash that goes into the business,” Ford says. “Automation can help to provide real-time views and forecasts of a company’s cash position.

   Choosing to automate processes can also remove some of the paper invoices and checks that are in the mail system, which can help reduce fraud.”

   Some examples of technology platforms that can enhance processes include:

   • Regions BillerXchange® – Reduces costly paper invoices and associated manual processes to receive payment faster through a branded, customized online billing payment portal.
   • Commercial Card – A commercial card program can help businesses maximize working capital availability by extending days payable outstanding (DPO) as well as reducing operational costs and risks.
   • Regions iTreasury®- Provides a single, secure portal to access banking information, automate payments, streamline approvals and monitor liquidity.
   • Regions Cash Flow Advisor – An intelligent conversation tool analyzes a company’s collection and payable efforts and provides reporting and insights around the company’s cash management cycle.

3. Adjust prices

   Often considered only as a last resort—and certainly a step that needs to be first researched and fully analyzed—adjusting prices can be an effective way to manage the impact of inflation. Strategies may include revisiting quantities delivered at new price points, adjusting promotions or discounts, moving to an indexed pricing model or raising prices—all of which can help protect margins.

   “Businesses have to analyze their competition to see what they are doing with prices, but they may be able to deploy these strategies to maintain their margins,” says Ford. “There’s a good chance that competitors are already raising prices, and customers may expect they’ll have to pay some higher prices.”

4. Work with a trusted advisor

   One of the biggest challenges a business owner faces in optimizing cash flow as inflation rises and falls is lack of time. There’s always so much to do. One thing that can help is working with a banker who knows your business and industry and can propose solutions to help manage cash flows.

   Regions complements the expertise of its bankers with uniquely powerful tools to help companies manage cash flow in any inflationary environment.

“Maintain an open dialogue with your financial institution. The tools a bank can provide can help companies manage cash flow in the face of inflation,” says Ford. “But they are nowhere near as powerful if they aren’t accompanied by the insights of a banker who knows a company’s business and what they’re trying to accomplish.”

Ready to help

Regions can help with Treasury Management solutions to improve cash flow, streamline payables, manage liquidity and help mitigate unnecessary risk exposure. Connect with us to learn more.