How does inflation affect cash flow? There has been a lot of talk about inflation affecting businesses in the news as of late. While the major networks like to paint inflation negatively, it has some positive economic effects. However, the macro steps to mitigate inflation impact on businesses often directly impact cash flow across the board.
What Causes Inflation?
There are three leading causes of inflation.
- Demand-pull Inflation: This occurs when demand exceeds capacity creating room for competition and the potential for returns on speculative investments.
- Cost-push Inflation: This happens when production and delivery costs force businesses to raise prices on goods and services.
- Built-in Inflation: This refers to gradually increase in the overall cost of living, wages, and expenses. For example, compare the average cost of a new car today to when you were younger.
How Is Inflation Mitigated?
Barring a post-scarcity economy, not much can be done about built-in inflation. For demand-pull and cost-push inflation, where the value of the US dollar is in a decline, the Federal Reserve typically steps in to announce interest rate hikes. For example, between 2017 and 2018 the Fed raised interest rates multiple times as the economy slowed, due to announcements of tariffs and other legislation.
Currently, analysts are looking at inflation as the result of PPP loans from 2020, the swathe of businesses that defaulted on existing loans, and the legislation needed to get the economy back on track in 2021. Our previous post discusses how rising interest rates drive the need for alternative business financing
The Impact of Inflation on Business Cash Flow
What are the effects of inflation on businesses and how does it affect cash flow? Lenders comply when inflation starts making headlines, and the Fed announces interest rate hikes. That means businesses with existing loans suddenly find themselves making larger installments.
In turn, the higher loan payments mean businesses are retaining less revenue, which places a major strain on cash flow. Businesses were caught in this dilemma after multiple rate hikes in 2017 and 2018, which greatly hurt small businesses in all industries. At the same time, higher interest rates and qualifications prevent businesses from getting the financing they need. Learn how to finance your business without traditional loans.
During inflation, prices traditionally go up fast but are slow-paced in coming back down. There also can be shortages of finished products in the market as well as disruptions in the supply chain. At the same time, the cost of borrowing is also higher, and there may be less availability of loans which can cause problems down the road. This is why it’s more important to have the cash flow you need to respond to each scenario.
Dodging the Inflation Bullet with Invoice Factoring
To strengthen cash flow and retain revenue, businesses are pivoting away from loans and turning to accounts receivable, factoring from New Century Financial. Our comprehensive factoring services turn unpaid invoices into cash and make funds available within 24 hours. Invoice factoring does not place debt on the balance sheet, and we put you in the driver’s seat, so you can tell us which invoices or parts of invoices get factored.
Boost Your Cash Flow with Invoice Factoring
If you want to accelerate your cash flow, contact the team at New Century Financial today. Discover how accounts receivable factoring works.Learn how we can help your staffing agency reach its growth potential with our “Entrepreneur’s Guide to Factoring.” Call us today at 866-579-1483 orApply Now to get started.
The negative effects of inflation can be managed by having a good financial strategy during economic downtimes. Being prepared will put you in a better position and keep you ahead of the competition. You can further mitigate inflation risks by following these tips.