One of the effects of inflation is he overall price increase, a situation that affects the consuming public and also small and medium-sized companies. Given that SMEs tend to suffer a constant lack of liquidityit is important to know the inflationary impact on your cash flow.
Inflation can have a significant impact on different areas of an SME, one of which is the increase in its operating costs. This happens because inflation causes the prices of raw materials, wages and general expenses to rise. When costs increase faster than revenues, cash flow pressure is generated, since the company needs to allocate more resources to cover those costs to maintain its operation.
Inflation and cash flow imbalance
In an inflationary environment, companies may find it necessary to increase the prices of their products or services in order to maintain their profit margins. However, like a chain reaction, this can reduce customer demand and, as a consequence, sales fall. If sales prices are not adequately adjusted for inflation, a cash flow imbalance is generated and the company’s profitability will trend downward.
Another item affected by inflation in the financial health of companies is the level of indebtedness. If a business has loans with fixed interest rates, inflation can decrease the real value of interest payments over time, which can relieve pressure on cash flow. However, if the company has debt with variable interest rates, the financing costs will increase with the interest rates linked to inflation.
The role of assets
Assets are a significant portion of a company’s value and, strangely enough, inflation affects them too. In a scenario of rising inflation, assets gain value, but liquidity is affected if the company needs to acquire or replace assets, since it will require more capital to do so. Even if the company sells some assets, the proceeds from that sale may not be enough to cover new acquisition or replacement costs.
Regarding tax liabilities, the company may face an increase in its tax burden as nominal income increases due to inflation and this also reduces available cash flow.
Is the price increase stabilizing?
Inflation affects companies in many different ways; therefore, businessmen must prepare for its effects in the short, medium and long term. For a few days there has been a trend towards stabilization of this index, which does not mean that costs will stop increasing. Now that inflation is relatively under control, it is time for business leaders to closely monitor these effects and consider implementing strategies such as price adjustments, strict cost management, and asset diversification to mitigate the downturns. negative impacts of inflation on cash flow.
Claudio Kandel Claudio has also been director of financial products at Banco Azteca, director of credit risk and director of operations at HSBC, brand manager of “Western Union: Money in Minutes” at Elektra, among others. He has extensive experience in the financial sector, both in Mexico and the United States, Luxembourg, Russia, Switzerland, Israel, Guatemala, Panama, Honduras, El Salvador, Colombia, Peru, Brazil and Argentina.