The term “recession” is often treated like a dirty word in the world of corporate finance. That should come as no surprise, as a recession typically means higher interest rates, tighter budgets, and decreased growth opportunities. While experts aren’t predicting a full-blown recession in 2024, inflation is quite high, and it’s going to pose significant challenges to your company’s financial stability.
If you’re a CFO or controller, the shifting landscape demands innovative strategies to protect your organization’s fiscal health. Here are some practical steps you can take to steer your company through these inflationary times.
Understand the Impact
As discussed in the Controllers Council 2024 Economic Outlook Webcast, inflation caused food and housing costs to rise much faster than wage growth. These developments put your workforce in a cash crunch. Many employees will be forced to make some tough personal and professional decisions in pursuit of better monetary stability.
However, that’s not the full extent of how inflation impacts your business. It’s not just about the increased costs of goods and services — it’s also about how these costs can outpace revenue growth, squeeze margins, and affect the overall monetary stability of the business. Recognizing these challenges is the first step in developing a robust strategy to mitigate them.
Tips for Fighting Inflation in 2024
Once you’ve got a lay of the land and assessed the implications of inflation for your business, you can build a strategy to offset its impacts. While any inflation management strategy needs to be tailored to the unique needs of your business, there are some key areas that will deliver the most significant benefits. Specifically, you need to:
Revisit Budgets and Forecasts
In an inflationary environment, yesterday’s calculations may no longer hold. Revisit your budgets and forecasts with a critical eye. Update them to reflect current and anticipated inflation rates, adjusting for higher costs of:
- Raw materials
- Utilities
- Labor
Rising costs might mean tightening belts in some areas to ensure you have enough financial cushion to navigate unexpected price hikes. Adjusting your stock reserves, scaling back on marketing, and using automation to cut down on overtime can help reduce costs.
Keep the Cash Flowing
Cash flow is the lifeblood of your business. In times of inflation, effectively managing it becomes even more crucial. Look for ways to optimize your working capital. This might involve renegotiating payment terms with suppliers or clients, managing inventory more efficiently to avoid unnecessary stockpiling, and ensuring your receivables get collected promptly.
However, keep in mind that some of your downstream trading partners might be looking for more flexibility on their repayment terms. Tread lightly, as you want to ensure ARs get paid efficiently while also doing right by your trade partners.
Hedge Against Price Fluctuations
If your business relies heavily on commodities or other goods subject to volatile prices, consider hedging strategies to lock in costs. Futures contracts, for example, can help you set prices for critical inputs, avoiding unexpected hikes in the future. While not without risk, these financial instruments can be a valuable part of your strategy to manage pressures from inflation.
Remember, balancing your risk profile is key. Over-relying on futures contracts and similar price mitigation tools can shift risk too far in the wrong direction. At times, it may be wise to absorb cost fluctuations up front.
Invest in Efficiency
Inflation makes it more expensive to do business, so look for ways to do more with less. Investing in technology can often lead to long-term savings by automating tasks, improving operational efficiencies, and reducing waste. Whether it’s upgrading your IT infrastructure, adopting more efficient manufacturing processes, or utilizing software to streamline administrative tasks, the goal is to lower your cost relative to your output.
Admittedly, investing in new tech might sound counterintuitive. However, it is best to make your move while you’ve got the financial latitude to do so.
If the period of high inflation becomes protracted, you might have to cinch down on spending even more and miss your window of opportunity to upgrade your technology suite. Conversely, if you make your move sooner rather than later, you could keep costs lower and free up more capital down the road.
Reassess Pricing Strategies
While passing increased costs onto your customers is a delicate balancing act, it may be necessary to reassess your pricing strategies to maintain margins. This doesn’t always mean across-the-board hikes.
You could consider value-based pricing, bundling products or services, or introducing premium options. Most importantly, be transparent with your customers about what’s driving pricing changes. A little honesty goes a long way in maintaining trust and loyalty.
Respond to Inflationary Pressures With Decisiveness
Staying informed and being agile remain paramount in the current inflationary environment. Stay on top of economic forecasts, industry trends, and regulatory changes that could affect your business. Most importantly, be prepared to pivot your strategies as needed to maintain your financial health and performance.
Additional Resources
What Corporate Finance and Accounting Needs To Know About Inflation
