Inflation can be problematic for CFOs to overcome, but a strategic outlook can help mitigate the challenging aspects of changing economics. CFOs must remain focused and consider all options when preparing for unexpected price spikes. From re-analyzing spending habits to employing new procurement techniques, a wisely chosen approach allows business leaders to remain agile and weather the inflationary storm with an eye toward ensuring future stability.
Here are three strategies CFOs can use to help their organization counter rising inflation.
Increase Spending Visibility
In times of economic uncertainty and high inflation, spending visibility is paramount for an organization's financial health and success. Seeing an organization's purchase cycle in real-time allows leaders across each department to understand how funds are being allocated, who is spending and precisely what they're spending on. Having that control, transparency and awareness help organizations make informed decisions that improve their bottom line. It also prevents them from going over budget, spending funds they don't have, detecting overcharges or making unnecessary purchases.
How can you increase spending visibility? Let's look at a few steps you can take:
- Assess Your Needs: Analyze your current spending patterns and assessment process. Does your organization tend to hit or miss its return-on-investment goals? How does your organization currently gather and analyze its spending data? What could your organization accomplish with more accurate data?
- Track Spend Management: Establishing a baseline for each purchase category is crucial to keeping your company's funds in check. Take note of commonalities in the types of products and services being purchased, and understand trends related to what's being bought. Also, determine which employees at your organization are authorized to make purchases and who manages purchases with each vendor.
- Implement the Right Technology: Automation is a valuable tool for spending visibility. Analytics and spending management software can collect and organize your company's purchase data to show a story behind the numbers. Procurement software can streamline the ordering process, and a centralized payment system can make spending, tracking, and saving money easier across the board.
- Make Data Accessible: Of course, the most critical step is to ensure your organization's spending data is distributed to the employees who need it. Your organization's internal website or documentation hub is the best place to keep it.
Differentiate Between Strategic and Non-Strategic Cost-Savings
Disruptive environments can be overwhelming for company leaders as they attempt to make choices that will safeguard the company's long-term success. However, in times of economic uncertainty, they may resort to temporary cost-cutting measures without considering their impact on the organization's strategic direction. While these indiscriminate budget cuts may bring short-term respite, they are unlikely to lead to any optimization of return on investment or shareholder value in the future.
To ensure its long-term success, organizations must clearly define strategic versus non-strategic cost-cutting initiatives to make the right decisions for their organization's forward-looking strategy and financial performance. Minimizing budget cuts — and even increasing spending to further strategic goals — during times of high inflation offers organizations a competitive advantage in the long run.
Enhance Procurement Strategy
Companies struggle with various challenges in this economic environment — rising costs for materials and labor, disrupted supply chains and shortages of skilled workers. Fortunately, procurement can help alleviate the effects on a business's bottom line.
Let's look at a few procurement strategies to soften the inflationary blow:
- Assess Your Risk: The first step is determining your organization's vulnerabilities by determining which categories drive the most inflationary risk. These may include categories with prices tied to commodity indexes, products with high commodity value, products likely to face supplier requests for price increases, and products where the price cannot be easily passed to the customer.
- Hedging Can Help: Hedging is a vital practice used in procurement to protect organizations against inflation and other market volatility. Two common hedging methods are a buying hedge and the just-in-case strategy. A buying hedge involves purchasing goods or services at a set price in advance, providing a buffer from future market fluctuations and the potential for higher prices. The just-in-case strategy is where companies keep extensive inventories on hand, which can develop flexibility in the supply chain and pricing.
- Supplier Negotiation: With Inflation on the rise, suppliers look to increase the costs of their goods and services. While this may be a necessary measure on their part, it can have detrimental effects on customers. To combat these issues, work with procurement to negotiate lower prices with suppliers while maintaining their margins.
At CBIZ, we understand that navigating inflation isn't easy, especially during a moment of compounded economic uncertainty. That's why we have developed a specialized resource center to help you and your organization cope with the obstacles economic turbulence brings. Our solutions provide a comprehensive approach to ensuring your organization is prepared for whatever lies ahead.
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