July 6, 2021
For those of you who are old enough to remember the 1970s, the current inflationary period is bringing back memories of management practices during that period. Prices and costs changed overnight, impacting profit margins, short and long run investment plans, and the behavior behind decision-making. The following are some perspectives from that era that can be applied one-half century later.
In an inflationary environment, monitoring financials once per year will set you up for a disaster. Inflation creates situations where the speed of change can be a business killer. Developing a monthly or quarterly cash flow and income statements can assist one in navigating through the financial whitewater that inflation creates.
One must realize that the cost of production and margin management are moving targets. If the numbers are not used as a reference point for objectivity, you may find yourself in the trap of emotional decision-making.
The extreme price and cost volatility that inflation brings requires one to constantly reassess financial outcomes with scenario planning using a spreadsheet. Planning and monitoring can provide various outcomes that can prevent one from diverting into the proverbial financial ditch or the negative part of the ledger.
Cash flow budgets are critical for planning working capital needs either through cash generated by the business or lines of credit from an agricultural lender. A producer recently mentioned that his planting costs exceeded his working capital line of credit as a result of higher crop input costs and feed expenses for his livestock enterprise. Past experience has found that one often needs to budget 25 percent more working capital than originally projected during inflationary times.
What will be the backup plan if a supply chain disruption occurs? How will this situation affect costs? Operational management intensity is required so that you can obtain the necessary equipment and machinery parts on a timely basis during a breakdown. In the high-tech environment, computer sensors are critical and failure to find a replacement sensor can result in thousands of dollars in lost margin when equipment is out of service.
Proactive management intensity is the name of the game in inflationary environments. Being able to adjust marketing and risk management expectations based on financial scenarios that are grounded by goals and expectations can bring a sense of logic to a chaotic environment with surprises around every corner.
Source: Dr. David Kohl, which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
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