How To Guard and Improve Business Finances Amidst Inflation

Inflation continues to intensify and cause economic volatility across Canada. Although it has decreased from 8.1% to 6.9%, it remains high. Small businesses are vulnerable, given their limited access to capital and other resources. A recent survey shows that over 50% are worried about its impact on their business.

Inflation means increased prices of labour and materials, raising production costs. Since this translates to higher prices for consumer goods, it may lead to lower demand.

Overall, this means trouble for many businesses. Owners must watch out and ensure their financial stability and consistency. This article will provide tips to guard and improve business finances amidst inflation.

Beware of Borrowings 

All businesses, whether startup or established, need adequate resources to sustain operations and expand during economic downturns. You may need to borrow if you are in danger of running out of cash. However, it would be best to be cautious about borrowings, given the alarming series of interest rate hikes in 2022.

The Bank of Canada (BOC) raised the interest rate by 75 basis points for the third time in September. Recent forecasts indicate it may peak at 3.25%, far higher than previous estimates.

Think twice before applying for bank loans amid inflation. Higher interest rates mean higher borrowing costs, so stay away or get out of debt as soon as possible.

However, it might still be a good idea to borrow if the potential returns are promising. Check your balance sheet, especially if your business is capital-intensive.

Financial indicators help you assess your capacity to earn and pay borrowings. These include Net Debt/EBITDA, Return on Asset, and Quick Ratio. If you are not sure what these are, consult your accountant.

Monitor Your Revenue, Costs, and Expenses

Inflation drives prices up, so consumers have to pay more for goods and services. However, it does not guarantee stable demand and revenue. Consumers may adjust to the situation by buying less. Worse, they might transfer to a competitor offering the same goods and services at lower prices.

Your best move is to stay competitive. Stabilize your prices to account for the necessities of both inflation and competition. Remember that your acquisition costs are also rising.

Check if your revenue covers your costs and keeps your profit margins sustainable. If your business offers multiple products or services, you may be able to adjust the production level to improve margins.

Keep Cash Flow Projections Realistic and Reasonable

Your business plan must be flexible to react to drastic changes and account for economic volatility. That way, you can cushion your business from adverse circumstances and stay ahead of the competition. You might want to translate them into figures.

For instance, you can project increases in the cost of labour and materials by specific percentages. The plan should include contingencies for situations that impact revenue, like supply chain disruptions. These will help you project your financials and develop a more fluid business plan.

Automate Processes

Automation has become a necessary adaption for many businesses as they undergo digital transformation. You can save time, money, and effort by automating business processes. It can also improve productivity and output quality, ultimately improving profit margins. For instance, you can automate accounts payable instead of dealing with piles of invoices.

Taxes

Many businesses struggle to pay taxes on gross receipts because of high expenses due to inflation. On the other hand, not paying your taxes on time may lead to hefty penalties, worsening your financial situation.

Furthermore, your income statement may also become inaccurate because market volatility affects the valuation of assets. It may inadvertently lead to the erroneous recording of accounts.

However, you may still save money on your taxes during inflation. The flexible tax system allows the government to adjust various elements of the complex tax code annually. These include the standard deduction to reflect the impact of inflation.

In any case, it is essential to be adaptable to changes. Fortunately, there are a lot of experts with reliable tax audit solutions. These allow accountants to prepare tax returns and construct all records into audit-ready books. These also promise clients the proper protection and representation.

Weathering the Economic Storm

The market environment is still volatile as the effects of inflation and pandemic restrictions persist. However, there are ways to keep your business finances on an even keel and stay competitive.

With the right strategies, you can reduce the impact of inflation on revenue and sustain your business operations. Use these tips to manage your business more efficiently and prudently.