Are Liquidity Pressures Foreshadowing Hyperinflation?
Working Capital Impacts Are Everywhere!
Looking to Q4 of 2021 and on into 2022, liquidity pressures are the primary concern of companies and their lenders. These impacts are magnified by the combination of these factors:
Stimulus money targeting businesses has been deployed and, in most cases, fully utilized.
Inflationary impacts increase costs to produce.
Labor shortages and skill issues increase costs and disrupt production.
Supply chain issues impact working capital investments and financial performance.
Commodity prices continue to fluctuate and impact sectors.
The headwinds businesses are experiencing today are definitely unique. In the past there would be one or two of these issues that would impact for a period of time. But the combination of these issues today - and the potential length of the impact – are both new.
The level of stimulus money targeted toward businesses as a result of Covid-19 had never been experienced in the economy prior to the CARES Act in 2020. Inflation as measured by the CPI is at the highest level since 2007/2008, and as measured by the PPI is at the highest level in at least 10 years. Labor shortages are more significant than those experienced since at least 2006. Supply chain lead time indexes are at the longest level since the index began being tracked in 1987. Commodity prices continue to fluctuate and many key commodities are increasing. For example, oil is at a price level not seen since 2014 and steel rebar is at a price level not seen since 2011.
Business owners and managers today may not have previously experienced any one of these impacts, much less seeing these impacts all together.
Hyperinflation is defined as periods of time when prices rise by 50% or more for a period of time. Fear of hyperinflation causes people and businesses to hoard goods which further exacerbates the situation. The US economy is certainly stressed and teetering toward more problems.
How do companies survive?
If the management of a company has not experienced this type of disruption, they may be ill equipped to successfully lead the company through to the other side without careful analysis and planning, and a willingness to change as needed. Reading our articles and making use of our resources may help a business become well equipped regardless of experience level.
In previous articles, we have addressed best practices for cash flow management and working capital management. Here are links to those articles:
We also discussed the need for risk management via a change agent, disputer, or risk manager. This link to our recent podcast addresses these issues.
Best practices for sensitivity analysis, price volume variance analysis and other tools that have not been needed for years should be redeployed. This link will take you to webinars addressing the negative trends being experienced and ways to focus on sensitivity analysis and data analytics that are necessary.
Challenges for the rest of this year and into 2022 are real and severe. The tools above will help evaluate which companies and industries are at the most risk for poor performance.