Inflation is an economic phenomenon characterized by rising prices and reduced purchasing power. Inflation can pose major challenges for businesses of varying types and sizes. In the opinion of Kavan Choksi UAE, following a few smart strategies can help businesses to effectively deal with high inflation.
Kavan Choksi UAE discusses tips that can help businesses deal with high inflation
It becomes crucial for businesses to understand the true costs of their operations during periods of high inflation. Traditional accounting principles put emphasis on assigning a value to all income and expenses. However, analyzing variable and fixed costs and contribution margins can significantly help decision makers to understand profitability in a more dynamic manner. With a good understanding of the difference between fixed costs and variable costs, a business shall be in a better position to effectively assess its ability to cover costs and make decisions in regards to stopping unprofitable operations. Determining contribution margin, moreover, can help in evaluating the profitability of individual products or services. The contribution margin implies to the earnings from sales minus variable costs.
Managing business cashflow efficiently is an important aspect of dealing with high inflation. At times, staying on top of cash levels can feel like a juggling act. It is critical for businesses to have adequate cash on hand to meet payments and reach profit targets. Holding onto too much cash, however, may result in its value decreasing due to inflation. A good way to maintain an optimal balance is by reporting cash flows on a regular basis and monitoring the working capital. This will help business owners to have a good understanding of where cash is coming and going, and ultimately enable them to make more informed financial decisions. As inflation rates go up, it can cause an increase in the cost of goods and services. Hence, holding onto assets that can be converted to cash down the line would be a smart choice, as they are likely to gain value over time. As Kavan Choksi UAE mentions, in manufacturing segments, keeping higher levels of stock might also be a good choice as the cost of goods may go up.
Understanding the cost of borrowing is also vital to deal with inflation. In an economy experiencing inflation, borrowing money may come with certain benefits. When the cost of goods and services goes up, the relative value of the debt owed may diminish over time, making it appear less of a burden. However, financial institutions and lenders adjust to inflationary pressures by increasing interest rates to protect their returns. As a result, borrowers must remain diligent about their repayment obligations to prevent additional costs from accumulating.
As inflation rises, banks and other financial institutions often tighten their lending conditions, which can result in stricter borrowing limits. To navigate these challenges, borrowers should regularly assess their borrowing levels, compare them with projected cash flows, and ensure compliance with financial agreements. This proactive approach can help steer clear of breaches of loan terms or financial instability caused by fluctuations in income and expenses.
