Reviewing Business Cash Flow in Response to Inflation

The inflation rate in Australia is rising, and that can affect business cash flow. It’s more important than ever to review your business cash flow as soon as possible so you can implement proactive strategies to minimise the negative effects of inflation.

First, let’s look at why the inflation rate has risen sharply over the past year.

Why is the inflation rate so high?

According to the latest figures from the Australian Bureau of Statistics, the inflation rate in Australia over the past 12 months has been 6.1%. This means that prices of goods and services in Australia have increased by an average of 6.1% over the past year. This is the fastest annual increase in more than 20 years.

There are a variety of reasons why the inflation rate has risen so sharply over the last year. Some of the major contributors to the sharp increase have been:

• A huge increase in consumer demand for many products and services during COVID-19 restrictions, aided by government stimulus packages.
• Record low interest rates prior to the recent increases along with government building incentives that contributed to a property boom.
• The war in Ukraine, which has increased petrol prices.
• Floods across eastern Australia that have impacted the supply chain and increased the prices of many agricultural products.

The importance of reviewing your business cash flow

The increasing prices that come with inflation has two major potential implications for business cash flow.

1. It is likely to increase your business costs as your suppliers increase their prices to keep pace with inflation.
2. Your customers may have less disposable income to spend on your products and services.

With prices going up, and less money coming in (or taking longer to come in), many businesses are finding themselves in a negative cash flow position (when cash outflows are larger than cash inflows). A business’s cash flow position can change from day to day, so just because there is no cash to spend today, doesn’t mean the business won’t experience positive cash flow tomorrow. The trick is to get the timing right; in an ideal world, your debtors would pay their invoices on the day you need to pay your expenses. However, it doesn’t work like this in reality, so it’s important to ensure good cash flow management.

Strategies to minimise the impact of inflation on your business cash flow

There are a range of strategies that you can use to minimise the impact of inflation on your business cash flow, including:

• Raising the prices of your goods and services to your customers to offset your increasing costs.
• Minimising or eliminating any non-essential business expenses.
• Looking to source cheaper suppliers.
• Adjusting the timing of your revenue and expenses if possible. For example, some businesses may provide discounts or incentives for customers with credit terms to pay their invoices sooner. However, this discount can eat into profit. Negotiating longer credit terms with suppliers can also help to manage cash flow.
• Organising cash flow finance. This option is explained in more detail below.

Cash flow finance

Cash flow finance can give you the funds that you need for a range of purposes, including:

• Buying the stock that you need to sell to keep your revenue coming in.
• Buying raw materials to produce the products you sell.
• Helping to pay for business operating expenses, including wages, utility bills and other operational costs.
• Helping to grow your business.

How does cash flow finance work?

If you offer credit terms to your business customers, cash flow finance allows you to bring forward revenue recognition — essentially, you can access cash before your customers have paid your outstanding invoices. This can help manage your cash flow shortages so you have the funds to take on business opportunities as they arise, rather than having to wait for your revenue to come in according to the credit terms stated on your invoices.

This type of cash flow finance is called invoice finance or debtor finance. You don’t need to provide any other form of security other than your accounts receivable ledger (unpaid invoices).

Review your cash flow

Regularly reviewing your business cash flow should be a part of the ongoing financial management of your business. It’s crucial during periods of high inflation like we’re experiencing in Australia right now. A good place to start is your cash flow statement. This can help you identify seasonal trends or periods where additional support and more money is needed. With correct management and cash flow forecasting, you’ll be in a good position to Implement the right strategies that can help to ensure you maintain healthy cash flows for your business.

If you’d like to explore how commercial finance could help you manage your business cash shortages, please feel free to get in touch with us at darkhorsefinancial.com.au.

FAQs

What is positive cash flow?

Positive cash flow means there is more cash flowing into the business than out of it at any given time. For example, if your business receives $10,000 today, and paid $5,000 in expenses, the net cash flow position for the day is $5,000

What are the different types of cash flow?

• Operating cash flow, cash flow from operating activities or free cash flow from operations is cash from the business’s normal business operations.
• Investing cash flow or cash flow from investing activities is the flow of money from activities such as purchasing or selling assets or other investments.
• Financing cash flow is funding from owners, investors or creditors.

Where can I get help with a cash flow projection and management?

If you’re not familiar with cash flow statements, a balance sheet or income statement, but you’re continually facing a shortage of money, it might pay to get a professional to assess your situation. At darkhorsefinancial.com.au, we help businesses manage their cash flow with strategic commercial finance solutions.