It has been a long time since business has had to contend with high inflation, but it looks like we’re heading back to the 1980s.The US has now posted its highest inflation rate since 1982.
I have been conversing with clients about the implications. While no one expects 20% interest rates again, an increase is certainly coming. Comparative to the level of debt, high inflation will have an impact on business.
For deal making
There have been record levels of mergers and acquisitions because cheap money generally increases valuations. However, as interest rates go up, the overall cost of capital goes up. That has an inverse effect on the value of businesses – decreasing the value.
The other impact on deal making is maintaining cash flows as inflation goes up. Cash flow maintainability depends on how business managers adapt and manage through the changes that are approaching.
For managing businesses
Maintaining profitability and cash flow in a higher inflation environment requires adjusting the levers in the business. Understand your business’s cost structure and ensure you keep increasing prices in line with your cost increases.
Given it isn’t easy to pass on cost increases, efficiency improvements and restructuring how you do business are avenues to maintaining profitability and cash flow.
This Harvard Business Review article identifies key areas to monitor: https://hbr.org/2021/09/6-strategies-to-help-your-company-weather-inflation.
The authors suggest six strategies and expand on each:
- Get spending visibility
- Differentiate between strategic and nonstrategic spending
- Unpack the drivers of spending
- Reduce consumption
- Eliminate work
As always, with change comes opportunity.
All the best