Inflation Busters (CONT’D FROM PAGE 24)
management on the buy side has always stretched out payables,” said Cespedes. “This is particularly so in an in- flationary environment where businesses must pay a lot more attention to the payment cycle.” Stretching payables can, of course, backfire. For start- ers, it can mean the loss of the five percent or 10 percent discounts many companies offer customers that pay be- fore their due dates. It can also result in higher prices for goods and services. “Extending too far makes you more of a risk,” said Beaver. “And suppliers tend to give better prices to customers that are less risky.” And there’s also dependability of deliveries to consider: Ongoing supply chain disruptions will cause vendors to favor deliveries to customers that pay on time or early. The cost of not having essential materials can be greater than the interest cost required to borrow money to bridge cash gaps. Mitigating Costs In an inflationary environment, suppliers of goods and services tend to raise their prices. And higher rates of infla- tion tend to make the increases bigger. “When inflation is two percent everything tends to increase by that amount, plus or minus a little bit,” said Conerly. “But at seven per- cent inflation, say, prices tend to increase by that amount plus or minus a lot.” Businesses should try to get readings on anticipated future increases and shortages. This can be done by main- taining close contacts with vendors. “Work closely with CONTINUED ON PAGE 28
grow into future roadblocks. “Maintain a good handle on what customers are doing,” said Anderson. “What are their future sales activities? Are they encountering problems that may affect operations?” Not all customers are of equal importance, and it’s smart to concentrate efforts on the most profitable. Account re- views can identify which customers should receive the most attention. “So much of the important information re- quired to monitor cashflow is tied to a selling cycle which varies by customer,” said Frank Cespedes, Senior Lecturer at Harvard Business School. “Some buyers say ‘yes’ or ‘no’ when you make a call; others require multiple iterations of proposals. Some buy what you have in inventory; others require customized items. Those things affect the time to receive cash and the cost to fulfill orders. Good account reviews unearth that information.” Companies might also explore requiring bigger depos- its from customers, said McQuaig. Sweeten the increase by emphasizing customer benefits. Maybe you already have some needed pipe in inventory, that the customer can actually come and see. Or offer free early delivery so the customer can maintain the pipe on site. Emphasize that earlier payment helps the customer avoid higher pric- es later. As for the outward flow of cash, a tried-and-true tactic is delaying the payment of monies owed. “Good financial
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26 May 2, 2022
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