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As the saying goes, "a rising tide lifts all boats." But what happens when the tide starts to ebb?

A possible economic slowdown can be a daunting prospect for any CFO. However, by taking a proactive approach and identifying innovative solutions, it is possible to navigate uncertain waters and come out on top. Addressing supply chain disruptions, finding easier ways to budget, or streamlining accounting practices can help a company thrive.

Below we outline three innovative ways CFOs can approach a potential economic slowdown. By keeping these considerations in mind, you can steer your company through a potential economic downturn and emerge even stronger on the other side.

Taking Advantage of LIFO

In any business, inventory is a crucial component. It represents an investment of time and money and must be carefully managed to maximize profits. One of the most favored methods when accounting for inventory is first in, first out (FIFO). The internationally-approved approach appeals to many businesses because it is a straightforward process, allowing the oldest inventory items to be recorded as sold first.

However, in times of record-high inflation, businesses may want to consider the last in, first out (LIFO) accounting method, as it can more clearly reflect current income by valuing inventory at its current market price. Under this method, a business records its newest products as the first items sold. LIFO is beneficial for any company facing rising costs because the method allows companies to report lower net income and lower book values due to the impacts of inflation, often resulting in lower taxation.

The tax benefits of LIFO grow as inflation increases and if inventory quantities remain steady or increase. As a result, companies using LIFO may see their cash flow improve in the short-term and long-term, especially if inflationary trends continue. This makes LIFO an attractive option for companies looking to maximize their cash flow in periods of high inflation.

Focusing on Driver-Based Budgeting

A well-oiled machine has many moving parts that work together to achieve a common goal. If one part is not functioning correctly, it can throw the whole system off balance. The same is true for an organization: to run smoothly, its parts must work in harmony. Unfortunately, many organizations do not have their budgeting processes aligned with their strategic framework, leading to less-than-optimal decision-making and inconsistencies.

With costs rising and margins shrinking, CFOs are now reevaluating their budgeting strategies. Under normal circumstances, CFOs have typically taken a more static approach to the budget, focusing on long-term planning and goal-setting. However, with disruption being the new norm in today's business landscape, companies must take a more agile focus in responding to new opportunities or challenges. 

Driver-based budgeting can be a way to adapt quickly during potential disruptions, such as economic volatility. The budgeting method links your organization's resources and activities to the financials in the budgeting process, which provides a clearer picture of where money is being spent. This approach allows organizations to better understand how their activities impact their bottom line and make more informed decisions about where to allocate their resources. It can also help improve communication between different departments and ensure that everyone is working towards the same goal.

Embracing the Reshoring Trend

In the age of globalization, most companies have come to rely on overseas suppliers for their raw materials and components. This dependence on foreign suppliers has left many companies vulnerable to supply chain disruptions, which can devastate operations. In the wake of the pandemic, companies have faced supply chain challenges due to geopolitical unrest and prolonged COVID restrictions, forcing many to reevaluate their sourcing and manufacturing strategies.

In recent years, however, more and more companies are turning to reshoring to improve resilience in the face of disruption. Reshoring is the process of moving production back to the country of origin. By reshoring their supply chains, companies can reduce lead times, improve quality control and increase responsiveness to customer demand. In today's uncertain world, reshoring is becoming an increasingly popular option for companies that want to protect their bottom line. In fact, American companies are expected to reshore almost 350,000 jobs this year — a 25% increase from 2021.

Many products being reshored are high-value or high-tech, requiring a specifically skilled labor force. One example of the reshoring movement is the semiconductor chip resurgence. Although semiconductors were invented in the United States, only 12% are produced domestically. Incentivized by the CHIPS and Science Act of 2022, several massive corporations — such as Samsung, Intel and Micron Technology—are boosting microchip production in the U.S. with new plants and factories.

The trend of reshoring will likely grow even more in recent years as more and more companies realize their competitive advantages. Because reshoring is not just about addressing the immediate supply chain concerns facing companies today, it offers many long-term benefits, such as reducing reliance on foreign suppliers and creating new jobs in the United States. Reshoring could be crucial to rebuilding the American economy and ensuring it remains globally competitive.

For more information on how your business can implement innovations in the face of uncertainty, connect with our experts.

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