Finance tools to be used
Maintain tight control on costs and focus on managing costs.
Need to ensure cost control is embedded across whole organisation and not just in finance
Focus and bear down on unnecessary spend.
Align costs with business strategy, objectives, and goals.
Implement a strategy to manage costs.
Understanding your purpose and knowing your operating model can help to create a cost-conscious culture
Cost management can be thought about in three ways:
Efficiency: The ratio of outputs to inputs. Doing more with less.
Economy: Acquiring necessary inputs at lower costs.
Effectiveness: Ensuring that all inputs are necessary and complete for outputs.
We have the Scenario Planning Tool
This can be used to consider the multiple variables that inflationary factors are going to impact and review these through your:
Annual strategic plan
Operating business model
Financial forecasts and budgeting
Investment activity and planning
Reserve policy
Tax panoramas
Understanding of your customers’ needs and motivations right now
Supply chains and supply routes
Sustainability reporting and planning
Competitive edge and competitive drivers
Talent management budgets
Use it to map these inflationary press points in your business model
Scenario planning should be from board level down to operational level.
A scenario plan should look at all areas of the business and how they might respond to different inflationary and market conditions.
The plan should also be focussed.
Not all data for a scenario plan must be qualitative. Consider expert opinion and differing views to help drive informative and robust scenario plans.
Economic article five Geopolitical riskConsider looking at a global map of such countries. See what other factors might influence the location of supply chains, such as corruption, dictatorships (governance), or local regulation/local content regulation.
Learn the lessons of those significantly impacted — countries in Europe with close to 20% inflation, because of energy dependency, also Sri Lanka and few other countries with similar profile
Transportation cost of supply chains from further afield.
Skills in your supply chainLook at country regulations that help reduce supply chain pressure points on economy
Look at major companies’ investments in ways to ease bottleneck (see example)
In the technology arena, some could argue that the pandemic simply “unveiled” an existing supply chain issue (with the digital acceleration suppliers were already struggling to keep up with increased demand – ex. chip production)
To help manage your supply chains, there are some simple steps all finance teams can take:
Understand the strengths and weaknesses in your supply chain. You cannot fix problems you don’t understand. Speak with key teams and individuals within your organisation to understand and evaluate your supply chain.
Test the resilience of your supply chains.
Create emergency plans.
Collaborate.
Stockpile inventory.
Put systems in place to spot challenges early.
Links to Interesting sources:
US bill on semiconductor production
US Congressional Research Service report on China’s semiconductor policies
Investment in European chipmaking industry
Good forecasting around inflation can improve financial planning and help spot and predict longer-term impacts of inflation
Review forecast every quarter and look to long-term forecasting
Look at forecasting not just business-wide, but individual business units, teams, and functions too
With good forecasting, the business may be able to spot opportunities to remove costs or reduce cost and may be able to take investment decisions over a longer period of time.
Linked heavily to scenario planning.
Stress testing the different scenarios, wider business strategy, financial plans, and business model is key in a high inflationary environment.
Make assumptions based on extremes.
Remember to test combinations of assumptions. It’s possible that all unlikely scenarios occur simultaneously.
Engage operational decision-makers since they are experts in their areas.
Helps you get a better holistic understanding of where your vulnerabilities lie so you can then start to make plans or mitigations to address them.
Process mapping helps provide a framework that shows all the core processes of your business and the relationships between each step and the key decision points.
Through process mapping, finance teams can get a clear overview of processes within their business, identify areas for improvements or cost savings, identify opportunities and risk areas, improve communication between teams and different parts of the business, and, if done in the right way, can open new ways of working.
Hedging can support decisions around inflation mitigation.
By undertaking hedging, businesses can ensure they are protecting their investments from loss of value during inflationary periods.
Need to understand the market before engaging in hedging.
Do not fix when a price has gone too high.
Hedging can help provide cost certainty.
Inflationary environment is a good time to review pre-existing contracts with suppliers.
Also review contracts you are delivering.
When looking at contracts, see if they can be improved and optimised to get more value.
Look at fixed-price contracts for key goods and services. You can lock in at today’s values and provide cost certainty.
See if you can lock in debt at today’s interest rates to provide certainty.
Sometimes you may have to pass on some costs to customers in an inflationary environment; it cannot be avoided in some cases.
Before raising prices, you should give it careful consideration. What are your competitors doing in terms of prices? What is your sector doing? What is your market position? How loyal are your customers? How long ago did you last raise your prices? The answers to these questions can help inform your pricing strategy going forwards.
Once you have decided to raise prices, it is important to work out how these increases will affect your customers, and scenario planning around these different options can help.
These increases should be tracked to ascertain the effect they have on your sales volume and gross revenue. If the price increases are set at the right levels, and customers have not dropped or dropped significantly, then the increase is still helping with financial viability and sustainability.
These steps will help you find your ideal price point.
Communication with customers around price increases is key.
Product substitution — can be used as a tool to help find other products that are cheaper.
Efficiency and productivity — find new ways of doing things to reduce costs, become more productive, and add more value. Next section goes into this in more detail.
Times of work — In some sectors think about when production takes place as there may be cheaper times of the day to operate.
Innovation — Use the inflationary challenge to think innovatively around the issue to come up with solutions or new opportunities.
