Craig Nevatt of Drumm Nevatt and Associates, Chartered Accountants based in Tauranga, understand how the cost of living and inflation affect businesses.
Inflation determines the prices of goods and services. Cost-of-living measures change, up or down, specifically for life necessities like food, housing, and healthcare. The supply and demand of currency cause the value of money and inflation.
Businesses need to be able to adapt and react quickly to significant changes in inflation – at the same time.
Inflation can be volatile – your business has to be agile to adjust. Using comprehensive planning and analysis and establishing better cash flow in your business will be an asset in future years.
Craig Nevatt addresses the Seven Key Causes of Cashflow.
” Although some might be irrelevant to your business, it is important to understand them to identify improvement opportunities”.
– The first is your accounts receivable process; if this is adequate, your debtor days will be too high. As a result, payment from customers may take longer.
– The second is your accounts payable process. Again, a flawed process could cause you to make payments late, leading to penalties or missing prompt payment discounts.
– The third is your inventory process. If you carry stock or work in progress for too long, it will tie up your cash for longer.
– The fourth is having an inappropriate debt/capital structure, causing unnecessarily high-interest charges.
– The fifth is having overheads which are too high. Again, you should review these annually.
– The sixth is having a low gross profit margin. In other words, this is what is left from sales after variable costs get deducted. You don’t need to increase your prices to increase your gross profit margin.
– The seventh is sales levels being too low to support overheads and other cash demands on your business. If this is the case, your business is not currently viable, and it is essential that you work to improve your sales levels.
Three Key points to note:
– Inflation erodes the value of money owed to you by your customers. Therefore, the sooner you collect it, the less impact inflation will have on what you can spend the proceeds on, ultimately enhancing your business performance.
– In times of inflation, margins can quickly become consumed. Therefore, review these margins regularly, and where you check the pricing, ensure you do it with the future in mind, not just the price increases you have incurred to date.
– Finally, overhead costs are also rising due to inflation, so review your expenses and suppliers regularly to ensure that the prices you charge remain competitive.
Craig Nevatt takes an objective approach when discussing Cashflow and Improvement in your business.
Firstly, Craig will help you understand your business Cash Conversion Cycle and then identify one cashflow strategy to implement for business improvement.
Once identified, you will identify and implement one profit improvement strategy leaving the final step to set actions ensuring cashflow and profit margins potential are understood.
The pandemic has magnified the value of beating inflation through cash flow. Asserting control in an uncertain world by implementing strategies to increase cash flow and inflation-proofing your business is critical for the growth of an efficient business.
Drumm Nevatt and Associates Limited provide a full complement of accounting and taxation services allowing you to focus on your business without the stress.