How do you communicate the impact of inflation on your cash flow to your stakeholders?

There are three types of ways to measure Inflation. The FED's most preferred measure is PCE or the Personal Consumption Expenditure measurement, which comes from GDP data sorted by the Bureau of Economic Analysis (BEA). PCE includes an overall number, along with a "core" number that excludes energy and food prices. The Consumer Price Index (CPI) comes from a survey completed by the BLS (Bureau of Labor Statistics), which also includes an overall number and a "core" number that excludes energy and food prices. Finally, the PPI (Producer Price Index) will measure what producers (businesses) pay for goods, materials, and services that they in turn use to sell or provide to end-users (customers).

Gauging Inflation: CPI vs. PPI Inflation tracks rising prices over time. Two key indexes measure this: Consumer Price Index (CPI): Tracks price changes for a basket of goods and services typical households purchase. Published monthly by the Bureau of Labor Statistics (BLS), it reflects inflation's impact on consumers. Producer Price Index (PPI): Tracks price changes of goods and services sold by producers. Also published monthly by the BLS, it reflects cost pressures faced by businesses, which can ultimately impact consumer prices. By understanding both CPI and PPI, you gain a comprehensive view of inflation's influence on different parts of the economy.

Inflation is a very complex macro economic topic which can impact the business in multifold ways. Analysing the underlying triggers & sustainence of the inflation is very important as that would help business managers align their revenue & cost outcomes with realistic expectations. Qualitative analysis is valued more than just bare minimum quantitative analysis. Multi national businesses should take into account various geographical regious in which they operate, they should also consider geopolitical risks while forecasting inflation.

Seeing as though there are three ways to measure inflation and the FED's most preferred method is the PCE, you can adjust cashflow for inflation using the PCE measurement. The PCE measurement will provide more accurate information based on coming from direct economic data (GDP), rather than personal opinion surveys completed by the BLS.

Inflation-Adjusted Cash Flow Inflation distorts nominal cash flow figures. To see the true picture, convert them to real cash flow (constant purchasing power). Steps: Identify nominal cash flows. Select inflation rate (CPI or PPI from BLS). Apply formula: Real Cash Flow = Nominal Cash Flow / (1 + Inflation Rate) Benefits: Better decision-making across time periods. Proactive risk identification from inflation. Improved financial performance through strategic cash allocation. Inflation-adjusted cash flow analysis empowers data-driven decisions for long-term success.

Adjusting Cash Flow for inflation helps in getting a very realistic economic outcome forecasts for the business. Whenever inflation expectations change for the markets in which the business operates, the business managers should take into account sensitivities to each of the underlying factors of the inflation. Revenue would get impacted due to degraded purchasing power of the consumers, while costs can be elevated due to energy prices. Keen scenarios analysis will help in better adjusting cash flows based on historical findings to understand the path which was taken to tackle inflation in the past.

Use Visual Aids: Present graphs comparing nominal vs. real cash flow to illustrate inflation's effects. Clarify Assumptions: Explain the basis for inflation rate assumptions affecting projections. Highlight Risks: Discuss potential risks inflation poses to cash flow and business operations. Identify Opportunities: Point out how inflation can create opportunities for strategic adjustments. Encourage Feedback: Invite stakeholder input to address concerns and expectations regarding cash flow strategies.

In talks I've given on Monetary and Fiscal Strategies For Ending Inflation (based on my first book, available on Amazon and elsewhere), I have recommended that business people communicate the impact of inflation on their input costs to their customers and other stakeholders as often as necessary to avoid the impression of price gauging! Of course, your ability to raise the prices of your products or services to keep them in line with inflation will depend on their elasticity of demand and other market conditions (including the elasticity of supply of your products / services and their substitutes)...

A solid powerpoint presentation can be created to show internal stakeholders the potential impact of inflation going forward. There's a variety of AI tools on the market that could also assist with the creation of said presentations.

As a Cash Management Analysts following are some measures to ensure while communicating the impact of inflation on cash flow: 1. Always maintain updated financial projections taking into account as recent numbers as possible. 2. It should be the Finance Analysts who should proactively advice the business managers for the pricing adjustments with appropriate insights backed with data from competitors & overall industry benchmarks. 3. Finance analysts would also need to proactively advise the management for cost control measures such that the impact can be dampened a bit internally in the org before passing on the hikes to the consumers.

Communicate Cash Flow & Inflation Impact Clearly Leverage Visuals: Utilize graphs and charts to showcase historical trends and comparisons between nominal and real cash flow (adjusted for inflation). Explain Assumptions: Clearly outline the chosen inflation rate (CPI/PPI) and its source. Impact Analysis: Highlight how inflation affects cash flow projections and business decisions. Risks & Opportunities: Discuss both inflation's potential downsides and upsides for your company. Recommendations & Action Steps: Propose solutions to strengthen cash flow and mitigate negative effects. Open Communication: Welcome stakeholder feedback and address their concerns.

Inflation has become a "scary word" over the last couple of years, but healthy inflation is a sign that you have a stable and growing economy. People should be considered about Hyperinflation (an unhealthy inflationary number) and Deflation (where prices are falling very fast causing businesses to shutdown).

In the face of any external eventuality to our main activity, it is crucial to ensure our shareholders have confidence in the ability of our teams to anticipate and address any situation. Regarding the impact of inflation on our cash flows, it is imperative to explain in detail our forecasts and the strategies we have developed to mitigate or capitalize on these variations. Drawing on our information, studies, and experience in the markets in which we operate, we are prepared to efficiently adapt to any scenario that arises.