Whether it’s trade wars and tariffs or the general price increase of raw materials, healthcare, and even office supplies facing business owners, it costs more to do business today. But as much as the headlines point to the uniquely hot topics of the news cycle, the trend is nothing new.
All company leaders understand that some level of inflation is a given in any business environment. But at the same time they frequently complain about the impact of getting less for their money while expense line items rise. If that seems like a bit of a disconnect, it is.
Inflation has risen less than the rate of business (or GDP) growth since 2015, which means that while costs may be increasing, revenues are increasing at a higher rate. Despite a higher-than-average growth in expense items like healthcare and raw materials, the net effect after recent economic growth still equals higher profits for most businesses, even after these headline-grabbing cost increases.
But just because the inflation pains that company leaders lament aren’t technically laying blows on the bottom line doesn’t mean the pains don’t exist. They are just misidentified.
It’s not the rising costs that are causing pain; it’s the cash flow management strategies. Often company cash flow strategies are not optimized, so any increase in an expense category feels unnecessarily painful. It’s one thing to achieve a more profitable business outcome for the year and entirely another to achieve that result with consistent, reliable cash flows.
In a recent survey of more than 3,000 business leaders, 87% would sacrifice some measure of overall annual profitability to attain more predictable cash flow throughout the year.
Why? There is nothing more painful than managing “lumpy” cash flow, where cash wait flows out months before inflows replenish reserves.
You can’t always predict the timing of everything in business, but are you doing everything you can to more effectively match cash inflows and outflows? There is no way for you to accurately gauge how new tariffs will impact your costs or whether you’ll be able to pass those costs onto your customer. There is no way for you to proactively plan for how legislation might impact next year’s healthcare costs. There is no way for you to forecast global shortages in raw materials you may require or that affect the costs of the assets you acquire.
So how can you optimize cash flows in a way that combats the impact of sudden expense increases and inflation? One idea to get you thinking: maximize monthly payments.
You can examine the items you are paying for in lump sums and realign those items into a payment structure. Increasingly, vendors, contractors, and well-established lending relationships can help. You can ensure you are aligning affordable payments to fixed assets. You can ensure that new equipment required for a contract minimizes your upfront obligations until revenues start rolling in.
Payments are not just the vehicle you use when you don’t have the cash. You cannot be effective at matching revenue and expenses – and thereby creating more predictable cash flow stream – without understanding the value of payments. If leveraged appropriately, this strategy acts as hedge against the risk of inflation you cannot control. The more predictable your cash flows are, the more easily you can prepare for the unpredictable and plan for growth in uncertain times.