Financial Management Basics: How to Deal with Inflation
It’s no secret how business survival rates in Australia are directly affected by the inevitable rise in inflation rates. This is especially true for businesses who are in their early stages of growth. As you know, inflation has a tendency to cause businesses to increase their prices and cut costs, which can have a negative impact on their bottom line.
In order to avoid those pitfalls, it’s important for businesses to have a solid understanding of how they can keep up with inflation while maintaining their current growth trajectory.
In this blog post, we'll discuss how to deal with inflation so that you can stay calm when it hits.
First, what is inflation?
Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time.
Inflation is also a persistent problem that affects everyone—even if you're not aware of it. But you can prevent the negative effects of inflation by taking precautionary steps to ensure your savings are safe and sound.
Build a reserve.
Find ways to manage your cash better. A method you can explore is the practice of building cash reserves. Once you have these cash reserves, it will be easier to straighten out short-term cash slip-ups and avoid borrowing.
Here are some tips on how to manage your cashflow
- Keep track of all incoming funds and outgoing payments daily, including any bills or fees that you need to pay.
- Set up a system so that all financial transactions can be recorded accurately in real-time, rather than having to go back through old records at the end of each month or quarter.
- Make sure you have an accurate account of all expenses related to running your business—these should include salaries, utilities, taxes and other expenditures—so that there is no confusion later when you're trying to determine if there's enough money left at the end of the day (or week).
Control your overhead.
Cutting down on some of the recurring costs for your business could help you out of a tight financial crunch. Note though that the best way to control your overhead is to cut down on your current bills rather than to take it out of the budget altogether, especially if this could affect your business operations. For example:
- Consider outsourcing some tasks or processes; this way, you'll be able to save on labor costs while maintaining quality assurance standards as well as reducing time spent on non-core activities that might be better performed by an outside party.
Change prices gradually.
Keep an eye on inflation rates. If the price of consumer goods and services are on the rise, it would be advisable to start raising your output price as well. However, be careful to do it gradually. Passing on the burden of inflation rates to your clients is justifiable but this is not a license to impose price adjustments in one go.
You should aim for a gradual increase in your output prices rather than a sudden one-time increase that may sound too much for clients. For example, if you want to increase your prices by 5%, you can do so by adding an extra 1% or 2% every quarter until you reach 5%.
Improve payment collection.
Developing your billing and collection initiatives is a great way to increase your revenues. And of course, as your revenues go up, so do your cash inflows. You can use your positive cashflow to combat inflation.
By outsourcing this task, you can be sure that companies provide the best possible software to improve your payment collection. This means that you don't have to worry about getting stuck with an inferior product or system that won't meet your needs.
Find strategic investments.
Have you considered putting your money to work through investments? You can invest and diversify your portfolio to increase potential returns, mitigate risks and beat inflation. Investing in inflation-protected securities, for instance, is very strategic as it can significantly help offset inflation.
As a business owner, it is important to acknowledge that inflation is something that we cannot control. The good news is, there are many effective ways to help you counter its effects.
D&V Philippines offers a wide array of services to help you manage your business finances better. Contact us today! Our accountants are well-versed in using various accounting software. Our goal is to provide you with the tools and resources needed to run your business smoothly and efficiently. This includes helping you understand what's happening to the overall health of your business.
You can also download our whitepaper Outsourcing: How to Make it Work to find out more ways to succeed in outsourcing.
This post was first published 09 December 2019 and edited 03 March 2023. Edited by: Angelica Garcia