In Canada, inflation is creating some instability for businesses. Your suppliers may be set to raise prices, your clients or customers may be intent on spending less, and you may not be sure how to handle your own pricing scheme. One way to better ensure you weather an inflation storm is to focus on your cash flow.
Between increased costs and lowered sales, some businesses will find themselves remarkably low on cash, potentially to the point of significantly impacting their ability to meet operating costs and stay afloat. How do you protect your working capital? Here are some cash flow tips specifically for times of high inflation.
1. Stop Extending Credit
Extending credit to your customers when
inflation is minimal may make financial sense. However, as inflation rises
steeply, the cost of that credit is amplified. What might have cost you $100 to
deliver this month may cost you $120 to deliver the next. The money your
customer is giving you a few months down the road is dramatically less valuable
than the money you could get from them at the time you rendered your services. Of
course, you’ll always have some delay between fulfillment and payment, but this
delay is more disadvantageous during times of high inflation. Stop extending
credit and create new policies or invest in new technologies that can encourage
clients to pay you as quickly as possible.
In addition, you also should consider the
possibility that your clients will be overwhelmed by inflation themselves and
may not be able to pay you. Avoid bad debt and stress on your business by
denying credit moving forward.
2. Increase Inventory - Wisely
Your supplies and inventory cost less today
than they will tomorrow. Where your supplies or goods are shelf stable, you may
consider purchasing and storing more, especially if you expect inflation to
continue to rise. It is most wise to do this for core products or supplies that
you are sure you will be able to sell. Stocking up on products that may
decline in demand can leave you with inventory you can’t sell and further
undermine the stability of your business. Stocking up on solid inventory can be
a hit to your cash flow now but can make it much healthier down the road.
3. Understand the Risks of Loans
When you’re struggling to keep your cash
flow healthy, a loan may seem like a good option. And, it can be, but the value
of a loan is diminished during times of high inflation. By and large, loan rates
increase during periods of inflation. If you have fixed rates for any loans or
lines of credit you have then you don’t have to rush to pay them off. However,
taking on new or having variable rate loans can be detrimental to your
business.
4. Explore Invoice Factoring Options
Invoice factoring is a wiser way to achieve
a healthier cash flow. In this arrangement, you send your invoices to a
factoring company which pays them immediately, and then secures payment from
your clients or customers. You get the benefit of your cash right away, which
is essential as any delay in time means the value of your money is reduced.
Your factoring company can even shield you from bad debt in what is known as
non-recourse factoring, which is highly beneficial in times of high inflation. Whether
you're looking for cash to increase inventory, hire, or otherwise invest in
your business, factoring is an option worth considering.
Reach out to J D Factors to discuss how
invoice factoring can help your business have healthier cash flow.
