News & Insights
Managing Margins and Cash Flow During Inflation
July 7th, 2022
Accounting & Outsourced Solutions |
Reporting & KPIs
It seems as if every month, a new report is published talking about rising inflation. The consumer price index (CPI) reached its highest level since 1981, when the May 2022 rate was 8.6% year over year, and inflation is showing no signs of slowing down. The producer price index (PPI), a leading indicator for the prices consumers will eventually pay, rose to 10.8% for the 12 months ending May 2022. What can manufacturers do to remain competitive in this challenging environment? The key is managing margins and cash flow.
Review Budgets and Forecasts
The first place to start is to ensure that your business’s budgets and forecasts are up to date and accurate. If your budgets have not been reviewed or updated since the beginning of the year, you may be in for a surprise come year-end. Raw materials, utilities, and wages have all been experiencing significant increases in cost over the past year. Along with the rising costs for materials, utilities, and wages, the Federal Reserve has been raising interest rates to combat inflation, which causes borrowing costs to increase. Thus, businesses will find that any debt with variable interest rates costs them more than what may have been originally projected. Once the budgets and forecasts have been reviewed, manufacturers will clearly know where inflation is directly affecting their business.
Battling Shrinking Margins
If your company is like most businesses in America, the odds are that your margins are shrinking. A PwC Pulse Survey found that 73% of industry leaders expect to increase their prices through 2022. Some critical questions for many manufacturers will be, how significant will those price increases be? Will these increases lead to customer defections? Manufacturers can use the information gathered through the budget and forecasting process with their sales and procurement teams to help justify any price increases.
A transparent and open dialogue with customers is crucial to keeping close relations. Manufacturers should open the dialogue channels early so that customers can plan accordingly.
Additionally, manufacturers can get creative in their pricing strategies by discounting service fees or spare parts so the customer may realize cost savings on the back end of the product’s life. Procurement teams can also be proactive by forging closer relationships with suppliers via increased data sharing and communication about price increases. Being proactive on the supplier and customer side is one of the best ways for manufacturers to manage margins in an inflationary environment.
Management of Cash Flows
While managing margins is a great place to start, there are some other ways manufacturers can manage cash flows during inflationary periods. To start, payment terms need to be more strictly enforced. For example, if terms state 60 days to pay, businesses need the discipline to enforce those terms. Additionally, manufacturers should look at the terms of their payables and match them up with their receivables. For example, if a business receives payment 90 days after the sale but pays its vendors in 45 days, that will put a significant crunch on cash flows. If late payments on receivables quickly become an issue, accounts receivable factoring may be a viable solution. Additionally, manufacturers should ensure they have a working line of credit. Even as the cost to borrow increases, a line of credit may help manufacturers through a tight period until their cash flow can catch up.
While inflation can be scary for manufacturers, intelligent and proactive businesses will only become stronger. If your business needs help forecasting for the future or managing cash flows, the Maner Costerisan team is always here to help.