How Well are You Battling Inflation? Are you taking the right steps to mitigate the costly effects of inflation? Find out by taking this quiz. Score 10 points for each “yes” answer. Ten total your score and check your rating at the bottom of
the chart.
Have you instituted the following practices? 1. Running periodic cashflow forecasts 2. Maintaining accounts receivable aging reports 3. Accelerating account collections 4. Stretching accounts payable, if appropriate 5. Keeping in close touch with customers 6. Identifying the most valuable customers 7. Increasing productive communications with suppliers 8. Ensuring the compliance of any bank loan covenants 9. Trimming inventory while bolstering critical items 10. Raising prices judiciously
What’s your score?
80 or more: Congratulations. You have gone a long way toward protecting your business from costly inflation. Between 60 and 80: It’s time to fine tune your financial management.
Below 60: Your business is at risk. Take action on the suggestions in the article.
Dealing with Banks By carefully managing cashflow, businesses can alleviate the profit erosion caused by inflation. In the accompanying article, experts describe how accelerating receivables, delaying payables, raising prices, and fine-tuning inventory can help preserve the bottom line.
Left unattended, a decline in profits can result in a dangerous financial condition: a breach of the terms required by loan agreements. “Banks look at covenant violations closely, so borrowers need to ensure that any squeeze in the relevant ratios—such as income to debt—will not create problems,” said John McQuaig, managing partner of McQuaig & Welk, the Wenatchee, WA, based management consulting firm (
mcqw.com). “Sometimes there is no quick fix for resolving them.”
It’s smart to be proactive. “If you know you're going to have a covenant violation, you're better off informing the bank and explaining to them how you're going to work your way out of it,” said McQuaig. “On occasion, they might change a ratio on a line of credit if you've been in good performance and they can see this is not going to remain a problem.”
McQuaig gives an example: Suppose a company experiences an increase in interest rates because of inflation. As a result, they break even in a year in which they would normally make a profit. Te company could inform the bank that their inflation-savvy customers are now willing to accept price increases. As a result, the business can increase its pricing over the coming year to resolve the covenant violation.
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The Groundwater Association
TPI Turf News July/August 2022
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