LIVING WITH INFLATION
Richard E. Goff Partner, Saginaw Office
Presented before an informal group of small-business owners, Wichita, Kansas-December 1974
"You can't live with inflation" is the complaint of a current television commercial. Gold, silver, antiques, art objects and the like are being touted in sophisticated forums as the only reliable protection against inflation. Certainly, for most investors, the stock market has not proved to be a successful hedge against the loss of capital. However, ownership of a well-managed business can be a very productive investment in an inflationary economy. The following remarks explore briefly the opportunities that management has to optimize performance in the present market place.
First, let us consider cash flow. We must minimize the time between fixing the selling price and reapplying the sales proceeds. While the selling effort is being made, costs are rising; while we hold the receivable or the cash, purchasing power is declining. Second, we must maintain liquidity in order to preserve assets and avoid excessive financing costs. This will require effective forecasting, both short-term and in capital budgeting. Finally, we must hold to a minimum the tax bite extracted from the capital we can preserve.
OFFER TO SELL
Establishment of prices in advance of sale and delivery may be necessary in a business, but it results in considerable risk unless costs are fixed or very predictable. Fixed-price contracts may not be practical in periods of high inflation. Where sales are made through catalogs produced annually, or even semiannually, perhaps prices should not be included but furnished periodically
as supplements. During my experience in Brazil I observed many companies that quoted prices only at the point of sale or that revised price lists monthly or more often if necessary.
Selling prices that produce a reasonable margin based on actual cost of the inventory may not be adequate in relation to the cost of replacing that inventory. In the fifties this deficiency resulted in the demise of many small lumber companies which cut their stumpage into lumber and sold it at prices that were inadequate to finance the purchase of additional timber.
Ideally, the price should be fixed when the cash is collected. This generally is not feasible, but the period of exposure should be minimized.