The Dynamic CFO
If mutations, murder hornets, and metaverse manifestos don’t have you signing up for life on Mars, consider inflation! The topic is causing increasing concern both domestically and internationally, while businesses try to prepare for what comes next (without exactly knowing what that is). A solid plan is key to surviving, or even thriving, during inflation, and, for this, finance and accounting professionals are essential. Let’s consider the situation and some sound business strategies that can help mitigate the impact of inflation.
Canada’s Inflation Situation
According to StatsCan, Canada’s inflation rate was 4.7% in both October and November.1 This represents the highest such figure in nearly two decades, and the situation is not unique to Canada (the US experienced 6.8% inflation in November). Rather than a singular factor, the spike is being attributed to a long list of issues, including supply chain constraints, labour shortages, pent-up post-lockup demand, stimulus payments, and more. Needless to say, this leaves most businesses vulnerable to a financial shake up, at least in the short term.
Cost Management and Long Term Agreements
Of particular concern to businesses large and small is the unpredictable price of doing business. Companies are taking a closer look at all expenditures in an effort to offset unavoidable increases in key areas by trimming fat elsewhere.
Long-term contracts, when possible, are your friend. Suppliers, landlords, and others that are willing to enter into such agreements will provide you with much needed stability if the inflationary trend continues.
“The effect is the same as early borrowing- locking in pricing that will drop in real terms after inflation,” says James Cassel, chairman and cofounder of investment banking firm Cassel Salpeter.2
“Consider all aspects of your operating costs,” advises Yahoo Finance. “Is it possible to source raw materials elsewhere for a better deal? Can you set up a contract with a fixed rate to protect against increases in the near future?”3
Securing these deals, of course, is easier said than done. With supply chain vulnerabilities aplenty, businesses must also consider risk mitigation, which does not always go hand in hand with favorable terms. For this reason, finance and accounting professionals must work closely with others, including operations and procurement specialists, to establish an optimal big-picture plan.
Raising Your Prices During Inflation
On the other side of the ledger, companies will look to offset their increased expenses by raising their prices in turn. Their ability to do so will depend largely upon their competitive environment and the flexibility of their own commitments. Companies that have established a strong brand presence, or a perceived sense of uniqueness, will be better positioned. Finance professionals will be tasked with establishing the likely results of such moves and will want to understand the elasticity of demand connected to their goods and services.
Companies who are able to minimize the impact on their operating costs will find themselves in a position to benefit from inflation.
“Every business affected by inflation will be tasked with passing on the price increase to their customers,” writes LJ Suzuki for CFO Share. “Even if you are not eventually impacted by inflation, strengthening your pricing power improves your competitive market position.”4
Re-evaluating Investments and Strategy
With prices and interest rates both set to climb, now is not a bad time to put some capital into the betterment of your business. Automation, in particular, may prove to be a beneficial investment if it alleviates future labour costs.
“With the tight labour market, and wages already increasing substantially for job hoppers, we will soon see rising wages to match inflation,” predicts economist Tu Nguyen.1
Moving excess cash into interest bearing accounts is a consideration, as is investing in real estate. Product offerings or planned future projects will also be worthy of re-evaluation as circumstances change, with strong input from the finance department playing a key role. The Harvard Business Review advocates for a well-rounded plan. “As they prepare for higher inflation in this new environment, companies will need to make moves that not only cut costs but also build more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities.”5
Recruiting and Retaining Finance and Accounting Professionals
Like other capable individuals in today’s labour market, finance and accounting professionals are highly sought after. Competitive wages are obviously essential to recruiting and retaining such talent, but salary doesn’t tell the whole story. Work-life flexibility, career development and training opportunities, company culture, and the chance to make meaningful contributions are all important to qualified candidates.
In turbulent economic waters they are an essential component of the decision making process and, therefore, must be highly valued by forward-looking companies.