Inflation implies to the rise in the prices of goods and services over time, and may pose a significant challenge to businesses of varying types. Kavan Choksi / カヴァン・チョクシ underlines that inflation may erode the purchasing power of money and eat into the profits of a company, if it is not managed in an efficient manner. Businesses need to adopt an initiative-taking approach featuring a combination of well-planned strategies and prudent financial management to protect their profits from inflation.
Kavan Choksi / カヴァン・チョクシ underlines a few tips that can help businesses deal with high inflation
Inflation and political uncertainties have always been a reality for businesses. However, there are also strategies for navigating them successfully. Business leaders need to maintain a proactive attitude and formulate a plan to weather the storm, and come out stronger on the other side. Here are a few tips that can help a business deal with high inflation:
- Determining the real business costs: It becomes critical for businesses to gain a good understanding of the true costs of their operations during periods of high inflation. Traditional accounting principles put emphasis on assigning a value to all expenses and income, however analysing variable and fixed costs and contribution margin significantly assists decision makers to understand profitability in a more dynamic manner. Understanding the difference between fixed costs and variable costs, is important for business leaders to assess their ability to cover expenses as well as make decisions about stopping unprofitable operations.
- Managing the cash flow: During inflation, staying on top of cash levels can feel like a juggling act for business leaders. While they need to have enough cash on hand to make necessary payments and reach profit targets, holding onto too much cash can result in its value decreasing due to inflation. A good way to make sure that a business maintains an optimal balance would be to report cash flows on a regular basis and monitor the working capital. This would allow the business leaders to effectively understand where there their cash coming from and going, so that they can make more informed financial decisions.
- Understanding the cost of borrowing: Being a borrower can have certain advantages in inflationary economies. When prices go up, the amount of money people owe in loans might not seem as significant. Lenders, however, have to account for inflation and tend to raise interest rates as per its accordance. This shall imply that the borrowers must stay on top of their repayment schedules to avoid any extra charges. In addition to being aware of inflationary trends, managing debts in a responsible manner can also assist borrowers in maintaining their financial stability in the long run.
Kavan Choksi / カヴァン・チョクシ also mentions that scenario planning is a good way to stay ahead and anticipate potential challenges during uncertain times. This would involve modelling the potential impact of changes in supply chain disruptions, interest rates, inflations and even currency fluctuations on the cash flow.