As inflation drives higher in today’s markets, many business owners find themselves in unfamiliar territory, struggling to make sense of an ever-changing puzzle. However, with guidance and strategic planning led by an experienced CFO, organizations will be well equipped to weather the storm.
The CFO—either a full-time CFO or a Fractional CFO embedded in the leadership team—has a critical role in response to the current inflationary cycle and the resulting uncertainties. It all boils down to data-driven analysis, scenario planning, communication, collaboration, and—just as important—coordination. A skilled CFO will coordinate how all the pieces of the organization’s inflation risks and responses click into place.
This is explored further in a February 2022 article in Forbes Magazine.
Key Challenges, Regardless of Industry, Include:
- Working capital management pressures: High prices raise pressing questions concerning working capital: How much inventory are we willing to carry as warehousing costs increase? What’s our breaking point? What’s our exposure to rising interest rates? How do we balance working capital management requirements with the need to satisfy customer demand? What’s the optimum cash position needed to support operations and take advantage of discount opportunities given the deterioration in purchasing power?
- Trading partners’ credit risks: Customers and suppliers grapple with the same inflationary pressures and working capital management challenges, which can create a drag on their profitability. Moreover, these issues can impede a customer’s ability to pay and a supplier’s ability to deliver.
- Pricing strategy: Businesses have the option to pass along higher costs of manufacturing and talent to customers by raising prices. This response can work well—until it doesn’t. When prices become too high, customers reduce purchasing activity, eating into profit margins. Or they may choose to take their business elsewhere. CFOs face a tall task in pinpointing the breaking point in price increases. Also, there is the challenge of aligning sales management with pricing strategy and concessions, not to mention keeping the strategy current with changing inflation rates.
- Workforce risks: Inflation is an equal opportunity risk in that it affects everything with a value assigned to it, from the purchasing power of monetary assets to the cost of commodities and raw materials to defined benefit plan performance to the cost of talent. When annual compensation increases 3-5% but inflation hovers at 7-8%, employees are effectively experiencing a pay cut—this is less than optimal during a long-term talent crunch which has given substantial leverage to employees.
- Procurement strategy: Persistent inflation necessitates different approaches in negotiating pricing with suppliers. For example, proposed price increases should be traced back to specific inputs (including labor) and raw materials, product design should be evaluated to optimize cost builds, and price negotiation strategies should vary depending on whether long-term purchasing contracts are indexed to inflation. If hedging strategies are in play, they should be coordinated enterprise-wide.
A Plan of Action
To ensure that our clients are well-equipped to address challenges sparked by mounting inflationary pressures, FocusCFO associates work with organizations to:
- Get (and make sense of) the data
- Elevate scenario planning
- Help find (and keep) finance talent
- Communicate and collaborate – both internally and with external partners
Learn more about how a FocusCFO’s Fractional CFO services can help your organization with strategic planning.