4 ways to maintain cash flow during periods of inflation

Content Type: Article

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

Many companies have been focused on stubbornly high post-COVID 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 Bryan W. Ford, head of Corporate Sales and Treasury Management at Regions Bank. 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, of course, 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 quickly—as it did after the pandemic—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.

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.
Deploy automated Treasury Management services

Managing the cash that flows in and out of a business has traditionally been a manual exercise. However, tools now exist, for example, to automatically match bills to invoices in accounts payable and generate outgoing invoices for accounts receivable. “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, says Ford. Whether inflation is rising, falling or holding steady, automation can bolster cash flow and improve a company’s capacity to navigate change.
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.”
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. Regions iTreasury Small Business, for example, provides a single, secure portal for business owners to access banking information and manage transactions online. Regions CashFlowIQ® is a solution being launched that not only keeps track of money going in and out of a company but also provides process automation and insights to drive better decisions, addressing one of the aforementioned strategies.

“CashFlowIQ can do invoice matching and forecast cash flow based on the invoices companies are paying, have already paid as well as those that they expect to receive,” Ford says. “It also provides cash flow forecasting so business owners can use that information to make strategic decisions, including when inflation rates are changing.”

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.”