In the face of persistent inflation, now is an important time to evaluate your approach to cash flow management.
Inflation is top of mind for many business leaders, and with good reason: Maintaining cash flow during inflationary periods can be a complex undertaking.
“Cash flow is king for businesses,” says Bryan W. Ford, Head of Corporate Sales and Treasury Management at Regions Bank, noting that many businesses he works with are facing compressed profit margins as a result of inflation.
With the current inflationary period expected to persist longer than initially anticipated due to ongoing supply chain disruptions, geopolitical events, and other factors, now is a valuable time for business leaders to evaluate their approach to cash flow management.
“The main thing that businesses need to be watchful of is maintaining their liquidity position,” Ford says. Whether that includes readily available cash or access to a credit facility, liquidity is critical for a business, no matter the economic environment — but it’s especially important during periods of inflation.
How Inflation Impacts Businesses
In an inflationary environment, it’s likely that the cost of some of the components for your business’s products might be rising. “When those input costs are rising, a business may not necessarily sell any more of its product, but it may cost more to produce, and therefore the need to access working capital will increase,” Ford explains.
“There are so many different factors now that cause things to change on a dime,” explains Brian Willman, EVP and Head of Commercial Banking in Episode 16 of Commercial Insights with Regions Bank. “Business owners must determine what is relevant and what will impact their business versus what is just noise, then, as much as they can, work to take some of that risk off the table.”
To help deal with increased prices, some businesses have begun making early buys or bulk purchases of raw materials or inventory. While this approach may help reduce costs long term, it’s important to carefully evaluate the short-term impact this approach may have on your liquidity.
“The additional cash out the door for raw materials does have an impact on cash flow, so businesses will need to determine if they are prepared longer term,” he cautions.
Maintaining a diversity of suppliers is another good hedge that businesses should consider as they’re looking to stay proactive during a period of high inflation. “If a business is utilizing a single supplier and that supplier starts to have cash flow issues of its own, it could have a downstream effect,” Ford explains.
Plus, overreliance on a single supplier or geographic region can also increase the risk of disruption due to supply chain issues — a lesson learned by many during the early days of the pandemic.
Vendor diversification, renewed contracts, and dedicated supply chain oversight are key to reducing supply chain risk, according to Carl Lund, Procurement Operations Group Manager at Regions Bank. “Each link in the supply chain offers an area of complexity, but with the right safeguards in place, those risks can be managed effectively,” he says.
Engage the Support of Your Bank
Finally, Ford emphasizes the importance of maintaining an open dialogue with your financial institution. “This can be critical during inflationary periods, especially since we haven’t experienced one in years,” he explains. “When there are early indications of need from a business owner, their banker may be able to provide ideas and solutions before the situation becomes critical.”
