Inflation has dominated the news in recent months, as costs for items such as gas, food, and other staples have increased by percentages unseen in decades. A recent study shows that three out of four economic forecasters believe that inflation is causing a wage-price spiral this year. In January alone, the consumer price index (CPI) rose at a 7.5% annual rate. Clearly, there is a need for companies to protect themselves in the face of rising wages, supply chain bottlenecks, and shortages of materials.
To shelter businesses from the effects of inflation, senior leadership will need to account for it during the financial forecasting and budgeting processes. Statistics show that 72% of CEOs plan to pass on the rising costs of transportation and labor to their consumers. Smaller companies plan to do the same, with expectations of price increases at a percentage higher than at any time since 1974. However, CEOs should also consider other inflation containment measures. A few strategies to consider are provided below.
1. Understand Where Money Is Being Spent
In less rocky times, companies may have the luxury of spending on items that don’t immediately benefit them. They can use excess funds for research and development purposes, expanding their staff, and seeking new investment opportunities. However, when expenses rise, companies must adjust their budgets to ensure that they remain profitable and in alignment with stakeholder expectations. The best way to do this is to take a clear assessment of their expenses.
Senior leadership should be familiar with all of the company’s expenses. They are in the best position to decide when an expense has become unnecessary and should be reduced, especially when overall costs have increased. Taking an overall inventory of expenses is the first step in understanding how to reshape the company’s financial situation to meet future needs.
2. Know What’s Strategic and What’s Not
All companies have a strategic plan designed to lead the company in a growth-oriented direction. Such a plan may include creating new products, expanding to different locations, or seeking new investment or collaboration activities. During uncertain times, it’s important for executives to distinguish between what is strategic and what is not. This means continuing to analyze the strategy for the company and making sure it still makes sense.
As an example, imagine a company that was considering expanding its operations to Ukraine or Russia. Due to the current conflict between the two countries, that expansion may no longer make sound business sense. Instead, the company may want to consider other options for expansion or put its plans on the back burner. Leadership may want to concentrate on other areas designed to improve the company’s profitability.
A company that is focused on creating new products should consider the potential impacts that the supply-chain disruption may have on its ability to manufacture them. If there are parts that must be available to produce a good, access to them should be assured before continuing. Otherwise, the strategy may no longer be viable for the company.
3. Understand the True Drivers of Inflation
Not all expenses that a company incurs will be subject to inflation. Thus, it’s important for a business to understand which ones are and how much of an impact they have on the company’s financial situation. Senior leadership can ask their finance team to identify which vendors have increased their costs and how reliant the company is on those merchants. It is not unreasonable to shop around for alternatives to minimize expenses.
Another method of cutting expenses involves understanding the costs involved with the software used to run the core functions of the company. Oftentimes, companies will take on many software options in the hopes of gathering better business insights or meeting specific needs. However, these options may not all be necessary. If the company has a lot of software programs, costs can quickly add up. Executives should assess the applications that they have and make cuts when software isn’t used often or doesn’t impact the strategic direction of the business.
4. Eliminate Work that Isn’t Necessary
During good times, companies often engage in hiring sprees designed to fulfill business needs and spread work among a wide range of employees. However, during times when a company may be facing rising costs, it is important to identify the types of work needed to run the company, what adds value, and what does not. In many cases, work can be realigned among employees and certain tasks completely eliminated.
In the course of a realignment or company restructuring, your business may need to lay off individuals whose tasks don’t align with the strategic direction of the company. If the company prefers to avoid layoffs, it can phase out or automate tasks that don’t add much value. Individuals who perform those tasks can be refocused on another area that has greater significance.
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