Fatihah Ramzi, DigitalCFO Asia | 2 August 2022
With inflation probably here to stay, companies will need to take certain measures to ensure their business operations remain successful.
It is becoming more and more obvious that this inflationary period is not short-lived as consumer prices and global energy costs rise. Supply-chain-driven price rises will continue for the majority of this year, at least, according to economists and industry leaders, with stickier increases related to labor perhaps becoming permanent. Nevertheless, companies can take steps to improve their financial situation. For executives aiming to not only endure this inflation rise but also position themselves for success in the new normal of expenses, here are 4 strategies they can take.
Revise FP&A Process And Cash Flow Projections With An Emphasis On Agility
Because inflation is frequently unpredictable, businesses must be equally nimble. Businesses should utilize their financial forecast to execute “what-if” scenarios to examine the potential effects of inflation in order to respond swiftly and appropriately to changing situations, such as:
- For critical positions, salaries rise by 15%.
- Some raw resources have price increases of double.
- Inventory builds up and revenue delays due to supply chain interruptions are 25% or larger
Companies should respond to the following strategic questions in order to gain the benefits of anticipating each what-if situation:
- How will each scenario affect cash flow?
- What evasive actions are possible in each situation?
- Can dangers be reduced by taking precautions?
- What signs should be kept an eye on to anticipate these events?
Businesses can proactively work toward desired goals and recognize the current trends that have an impact on their industry by planning for a variety of potential impacts. Not all businesses are affected equally by disruptive forces. For instance, during the epidemic, sales rose in several industries. It’s also appropriate to review longer-term scenario planning exercises, particularly if the most recent revision occurred at the height of the pandemic.
Diversify Supply Chains As Much As Possible
A supply chain cannot be made inflation-proof in the current environment, but mitigation measures are nevertheless prudent. Worldwide supply chain disruptions brought on by the epidemic are a major problem. Therefore, dealing with such a large shock, accompanied by global inflation and unpredictability, is not a simple task. A lean and cost-effective supply chain is still more susceptible to economic shocks, as many businesses discovered the hard way. Sustainability frequently prevails over trade-offs in the long run.
Investments in the sustainability and resilience of the supply chain can take many different shapes. Businesses can maintain output by diversifying their suppliers, using domestic alternatives, and having more essential goods on hand. Some actions, such as storing hypersensitive to inflation goods, will assist mitigate the effects of price increases. Other decisions are more focused on being able to deliver what clients want, when they want it, even if it means paying more.
Just like inflation, switching to domestic vendors or distributing orders among several sellers instead of going with the lowest cost option may result in margin erosion, thus experts advise also experimenting with price increases. To better prepare for supply-induced inflation and strike the correct balance, consider supply chain stress testing and look back on strengthening steps that may have been considered a year ago.
Use Inventory As A Physical Hedge
In order to combat the rising costs and longer lead times involved with sourcing and stocking goods, several businesses have claimed strategic stockpiling as their go-to approach. It is a wise use of money to gather materials that are crucial to the sales or movement of significant products given the lack of respite for inflationary pressure. Companies should prepare to leverage their working capital for inventory expenditures because it is anticipated that product prices will rise. Track indicators like average days in inventory and inventory turnover ratio, which indicate how long it takes for a company to sell an item once it has been purchased, to determine how effective strategic hoarding is.
Having enough inventory on hand to fulfill client orders can enable businesses to be smart with pricing, which can also reduce expenses and provide them a competitive edge. To ensure availability and capture supplier costs concurrently with or in advance of client orders, businesses have frequently been forced to make large working capital investments in their raw material inventories. This stage does come with a warning, though: Finding warehouse space now comes with a lot more trouble and expense. Companies who want to accumulate goods will need to have the necessary capacity or extra space in their brick-and-mortar retail locations; otherwise, storage will be challenging and expensive.
Reduce Labor Costs With Automation
It is a good time to consider strategies to lower labor costs because businesses are currently being impacted by skill shortages as well as increasing salary and benefit prices. Streamlining the company’s product line may reduce demand, but management must also carefully consider the labor expenses connected with the products that remain given the pressure on wages to rise.
Perhaps now is the right time to start that automation project that has been talked about but put on hold in previous years. Investing in automation and technology is a common strategy for reducing inflation. Businesses that do not follow the trend risk falling behind. Automation results in a decrease in the amount of labor required to run activities. Additionally, it will allow employees to concentrate on strategic value-added tasks, which will help the company and boost retention. Whatever the situation, raising productivity is always the most effective and long-lasting approach to fight inflation.
Businesses may minimize the possible effects of rising inflation so they can continue functioning with the least amount of interruption by adopting a proactive approach to it. This will enable businesses to weather the potential storm and emerge as a thriving enterprise.