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One.. Billion.. Dollars - Yeah Baby! Inflation is back... - Apr 27, 2009

Posted by: David Kirkup in Articles

In a witty scene from one of the Austin Power's movies, the evil Dr. Evil goes back to the 1960s to hold the US government hostage to his death ray. Dr. Evil demands as his ransom...One...billion...dollars! The President and his cabinet fall about laughing, thus confusing Dr Evil. The President explains that $1 billion is an impossibly large sum in 1968, and that it probably doesn't even exist in the whole USA. After some fast-track negotiating they agree to a ransom of...$1 million dollars.

Fast forward 40 years, and things sure have changed. As CNN's doom-mongers frantically research what comes after a trillion, it looks like we have seen some pretty impressive inflation. Don’t be lulled by the current concern about deflationary appearances. If the money pump in Washington DC remains open, then we all may look forward to taking our cash home in wheelbarrows.

So...how do you manage a business in inflationary times. Drawing on lessons from Wiemar Germany, 70s Argentina, and Zimbabwe in the present day, several critical business priorities must take precedence:

Managing to pass through costs in increased customer prices.
Implementing additional cost reduction strategies to offset inflation
Maintaining close control over cash flow and understanding the time value of money
Focus on debt strategy and try to develop internal working capital
Develop inflationary adjustment for capital replacement or watch the value of your capital base disappear.
Downsize and focus on your core competency
Hold off expansion plans. The cost of credit will rise and will be an added burden to you.

All these strategies, first of all, entail being aware of your cost structure and having timely financial information, as well as an experienced CFO to stay ahead of the curve. This is when you cannot afford to rely on outdated and incomplete financial information. It’s a scary thought that companies in inflationary Argentina routinely maintained four sets of accounting books: Old currency, New Currency, US$ and Units of Production.

The most sage advice from the countries that have experienced hyper-inflation is that it develops very slowly and then explodes, and that the USA is following a well trodden path in that direction. As they say in South America: “Taking a cab is cheaper than taking a bus. You pay for the cab at the end of the ride, and by then the money is worth less!”

For unconventional thinking about how to manage and grow your business, call David Kirkup, Partner with B2B CFO^® on 770 845 6897.