With rapidly rising electricity and gas costs intensifying the inflationary pressure on businesses, careful cashflow management is vital, warns GroForth’s Paul Murphy
Last month, according to a Eurostat flash estimate, Eurozone annual energy inflation topped 38% — a whopping increase but one that won’t surprise Irish businesses, most of whom have experienced at first-hand the impact of energy price hikes in the recent months.
From a planning and business management perspective, rising inflation erodes the purchasing power of both businesses and their consumers. This is biting into forecasts for Q4 and will have a major impact on budgets for 2024.
A further concern is that interest rates are also starting to inch upwards, making the cost of borrowing more expensive. The European Central Bank raised rates twice recently (July and September 2022), and in a recent RTE interview, ECB Chief Economist Philip Lane predicted further increases in Q4 and into next year.
Managing cashflow in inflationary times
During inflationary periods, it is vital to ensure you have sufficient cash available to pay your staff and bills on time. There are a number of practical steps you can take to optimise your cashflow. These include:
- Review your pricing
- Raise invoices promptly
- Make it easy for customers to pay
- Run credit checks on new customers
- Chase money that you are owed
- Train your staff so that they understand the importance of controlling costs and bringing in cash on time
- Review your costs, particularly costs in key areas like property, wages, energy, administration and marketing, and financing. Look for opportunities to eliminate unnecessary or wasteful expenditure
- Monitor stock levels (avoid over-stocking)
- Consider leasing instead of purchasing new equipment
- Consider outsourcing administrative tasks rather than hiring additional employees
Keep in mind that it’s not just internal factors that affect your cashflow — external factors like trends in your industry or sector and wider economic trends (like inflation and rising interest rates) also need to be taken into account. Scenario planning can be a useful tool to help you anticipate the likely impact of increased input costs or interest rate or currency fluctuations on your bottom line.
Leveraging management information
It is also very important to actively monitor your cashflow situation in realtime. Running low on cash can be a warning sign that your business is in trouble so it’s important to spot potential problems as early as possible.
Can you use your existing financial systems to generate a weekly cashflow forecast setting out what money you expect to bring in and what expenses you will incur on a week by week basis?
If you have good financial management systems in place, you should be able to get timely, accurate information at a moment’s notice. This will alert you to potential problems and give you an opportunity to deal with them before they escalate into more serious difficulties.
Lack of financial expertise? GroForth can help!
Businesses don’t always have the financial know-how or resources to generate reliable management information in-house. If you haven’t got an in-house finance team, now might be the time to investigate using a virtual finance department.
GroForth provides a comprehensive suite of services covering everything from basic bookkeeping and payroll to management reporting, cashflow management and credit control. These services can be customised to suit your individual requirements.
Our team is based in Ireland which means you don’t have to worry about time zones, language difficulties or regulatory differences when you rely on us for support. To find out more about how we can help your business, please get in touch.