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Inflation is a fundamental economic concept that affects individuals, families, and businesses alike. Here in Alberta, we see how everyday costs consistently rising for everyday goods and services. These aren’t necessarily luxury goods, but the basic necessities from food prices, gas prices, mortgage payments, car loan interest, and rents.
When prices rise over time, the purchasing power of money decreases, making it crucial to manage cashflow effectively. In times of inflation, proactive financial strategies are essential to ensure stability and growth. Let's look at cashflow and some practical tips for managing cashflow amidst inflationary pressures.
What is Cashflow and What Are It’s Effects
Cashflow: It’s not just a game created by Robert Kiyosaki, it is defined as the movement of money into and out of a business or individual's financial accounts over a specific period, typically monthly, quarterly, or annually.
Cashflow represents the inflow and outflow of cash and cash-equivalents, including income, expenses, investments, and financing activities.
Cashflow is an important aspect of financial management as it indicates the liquidity and solvency of an entity, reflecting its ability to meet short-term obligations and sustain operations.
The Two Different Types of Cashflow
1. Cash Inflow: The flow coming into the business. This includes all sources of money coming into the business or individual's accounts. It comprises revenue from sales, investments, loans, interest earned, and any other form of income.
2. Cash Outflow: The flow going out of the business. This encompasses all expenditures and payments made by the business or individual. It includes expenses such as operating costs, salaries, utilities, taxes, loan repayments, investments, and any other outlays.
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As a small business owner, studying your monthly Profit & Loss Statements and Balance Sheets can give you a good idea of what is going on financially in your business. Don't have those and you'd like to see them? As a part of our bookkeeping package, we can provide your Alberta small business with financial statements. Book an appointment today!
What is Positive Cashflow
Positive cashflow occurs when the cash inflows exceed outflows, indicating that the entity is generating more cash than it is spending. This surplus cash can be used to reinvest in the business, pay off debts, fund expansion, or accumulate reserves. Positive cashflow is generally considered favorable as it signifies financial health and sustainability.
What is Negative Cashflow
Conversely, negative cashflow occurs when cash outflows exceed inflows, indicating that the entity is spending more cash than it is generating. While occasional negative cashflow may be unavoidable, prolonged negative cashflow can lead to financial difficulties, including liquidity problems, inability to meet obligations, and even bankruptcy if not addressed promptly.
How is Inflation Affecting Albertan Small Businesses?
According to the Alberta Economic Dashboard, Alberta is the second highest province (only Quebec is higher) in the consumer price index at 3.5%. Canada as a whole is under 3% at 2.9%. This means Alberta small businesses are feeling the inflation pinch to be quite real. The biggest increases being rent, energy, restaurant meals, food, and transportation.
And it gets worse if you are doing business in the city of Calgary. Calgary is higher than the average Alberta inflation, with housing and rent being the biggest part of that. According to the City of Calgary Website, Calgary’s main drivers of inflation were shelter, gas, and transportation costs.
As you can see, these are some of the most common business expenses for small businesses. With these prices being up, small business owners will need to learn how to tackle inflation by managing cash inflows and outflows
How to Better Manage Cashflow During Inflationary Times
Effective cashflow management involves monitoring and forecasting cashflows, optimizing revenue streams, controlling expenses, managing working capital, and implementing strategies to ensure sufficient liquidity to meet short-term and long-term financial commitments. It is a critical aspect of financial planning and decision-making for both businesses and individuals, enabling them to achieve financial stability, growth, and resilience.
1. Budgeting with Flexibility:
Inflation can disrupt even the most meticulously crafted budgets. To counter this, adopt a flexible budgeting approach. Allocate funds to essential expenses while leaving room for adjustments in discretionary spending. Regularly review and adjust your budget to accommodate changing prices and prioritize essential needs over wants.
2. Diversify Income Streams:
Relying solely on a single source of income can be risky during inflationary periods. Explore opportunities to diversify your income streams. This could involve freelance work, rental income, investments, or starting a side business. Diversification not only boosts your earning potential but also provides a buffer against inflationary pressures.
3. Monitor and Adjust Pricing Strategies:
If you run a business, monitoring and adjusting pricing strategies is crucial during inflation. Conduct market research to understand how your competitors are responding to inflationary trends. Consider gradual price adjustments to reflect increased costs without alienating customers. Communicate transparently with clients about pricing changes to maintain trust and loyalty.
4. Manage Debt Wisely:
Inflation can erode the value of debt over time, making it tempting to borrow more. While strategic borrowing can be beneficial, it's essential to manage debt wisely. Avoid high-interest debt and prioritize paying down existing loans, especially those with adjustable interest rates. Refinancing at fixed rates can provide stability amidst uncertain economic conditions.
5. Build an Emergency Fund:
An emergency fund is your safety net during financial turbulence. Aim to build a robust reserve that can cover at least six months' worth of living expenses. Keep this fund in liquid assets such as cash or short-term investments to ensure quick access in times of need. Replenish the emergency fund regularly to keep pace with inflation.
6. Invest in Inflation-Hedging Assets:
Certain assets tend to perform well during inflationary periods. Consider allocating a portion of your investment portfolio to inflation-hedging assets such as real estate, commodities, and Treasury Inflation-Protected Securities (TIPS). These assets have the potential to preserve purchasing power and generate returns that outpace inflation.
7. Stay Informed and Adaptive:
Inflationary pressures can vary depending on economic conditions and government policies. Stay informed about macroeconomic indicators, monetary policy decisions, and geopolitical developments that could impact inflation. Remain flexible and adaptive in your financial strategies, ready to pivot as circumstances evolve.
Cashflow And the Business Cycle
If you know much about the business cycle, the main idea is that there are economic seasons much like how there are seasons of weather. Spring is a great time to plant seeds, while fall is the time to harvest them.
In the same way, the dynamics of cashflow are closely intertwined with the broader economic cycle known as the business cycle. Understanding how cashflow interacts with the various phases of the business cycle is essential for your small business in Calgary to navigate through these economic fluctuations and come out on top.
The four Phases of the Business Cycle
1. Expansion: During the expansion phase, economic activity is on the rise, characterized by increasing production, rising consumer spending, and growing investment. In this phase, businesses often experience healthy cash inflows as sales revenue grows, leading to positive cashflow. Increased demand for goods and services can also provide opportunities for businesses to expand operations, invest in new projects, and take advantage of favorable market conditions.
2. Peak: The peak marks the highest point of the business cycle, where economic growth reaches its maximum level. Business activity is robust, but signs of potential overheating may emerge, such as rising inflationary pressures and tightening labor markets. Cashflow during this phase can be strong, but businesses need to exercise caution and avoid overextension, as the economy may be nearing a turning point.
3. Contraction (or Recession): In the contraction phase, economic growth slows down or contracts, leading to reduced consumer spending, declining business investment, and rising unemployment. Cashflow challenges often emerge during recessions as businesses experience lower sales, shrinking profit margins, and tighter credit conditions. Managing cashflow becomes critical during this phase to preserve liquidity, reduce expenses, and weather the downturn.
4. Trough: The trough represents the lowest point of the business cycle, where economic activity bottoms out before starting to recover. Business conditions are challenging during this phase, with weak demand, excess capacity, and heightened uncertainty. Cashflow may remain constrained as businesses struggle to generate sufficient revenue to cover expenses. However, proactive measures taken during this period, such as cost-cutting, restructuring, and strategic investments, can position businesses for recovery as the economy begins to rebound.
While there is no way to predict the future and what will happen, the business cycle is something that can be tracked throughout history and is repetitive.
Because Calgary is a city with an exceptional appetite for all things business, we see amplified phases of the business cycle. I never lived through the 80’s, but I’ve heard stories of what happened in Calgary economically during the 80’s.
I did live through the early 2000’s in Calgary and can say it’s a great place to be during the expansion phase. Calgary seemed to dodge the GFC as did Canada, but that doesn’t mean it is immune to economic contractions.
It appears that we have been in an extended peak phase and have gone through a period of fighting off recession. How long we can fight it off for is uncertain, but I can guarantee it won’t be forever.
Conclusion:
Inflation is an inevitable aspect of the economic landscape, but with proactive cashflow management strategies, individuals and businesses can mitigate its adverse effects. By budgeting with flexibility, diversifying income streams, adjusting pricing strategies, managing debt wisely, building an emergency fund, investing in inflation-hedging assets, and staying informed, you can navigate inflationary challenges with confidence. Remember, preparation and adaptability are key to financial resilience in an inflationary environment.
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