This year, CFOs have had to adapt quickly to the biggest price spikes we have seen in more than 30 years. The Consumer Price Index rose to more than 6% annual rate and the personal consumption expenditures price index rose 4% in September 2022.
These record-breaking numbers are prompting CFOs to raise wages. However, increasing labor costs during an inflationary period is also risky. Yet, in a candidate market, job seekers are less likely to take a salary they struggle to live on.
Responding to labor shortages, many companies have increased compensation. The percentage of small-to-medium-sized businesses that increased their wages last month was the highest in 48 years, with many companies planning to do so in the next three months.
Hedge against the falling dollar by considering a currency swap with overseas suppliers. Also, pad your organization's portfolio by investing in TIPS and other lower risk investments.
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Source: BBC
With labor shortages and the threat of a recession, what can CFOs do to fight against inflation while maintaining a workforce--and affording other operating expenses--to maintain production and boost revenue?
Let's discuss the ways savvy CFOs are leading the fight against inflation for their organizations.
CFOs can review the company's payables and receivables from the previous year to free up cash for investments, dividend payments, debt reduction and mergers and acquisitions.
Slow billing, early payments to vendors, weak collection policies, inefficient payment processes and out-of-market conditions can slow down and tie up cash conversion cycles.
Careful analysis of accounts payables and receivables enables you to review each transaction for ways to fight inflation. It usually reveals gaps in processes and undesirable or unnecessary payment or contract conditions with buyers and suppliers. It also allows you to scope out other short-term opportunities to increase working capital.
Working capital might lie dormant between joint venture partners or foreign subsidiaries when there is no operational or tax-efficient way to spend it.
Since partnership dividends are subject to delay, careful balance sheet analysis can help identify partners making late payments or with outstanding balances. This analysis will allow you to set terms for more favorable distributions and payments from these partnerships.
By optimizing overall cash management, CFOs can reduce the number of unplanned cash transfers per year and help the organization remain within its budget. Careful balance sheet analysis also gives you more confidence in your numbers when making critical business decisions.
CFOs with meaningful defined-benefit responsibilities can use one or more of the following options to improve their forecasts:
For instance, a retail giant in the U.S. could eliminate several billions of dollars in pension liabilities for its employees simply by transferring that liability to an entity that provides annuities. Those retiring will not see a benefits reduction and the retailer would avoid market volatility.
Since inflation erodes purchasing power, CFOs should consider purchasing goods and services they believe will be needed in the future.
If you expect a price increase of 15% or more over the next two to three months, you may want to take a long position. This approach should be for long-lasting inventories, commodities, products and processes.
The CFO must balance the anticipated pricing increases with the financing and additional inventory holding costs. This strategy ignores many companies' longstanding efforts to free up cash by reducing inventory.
Consider currency exchanges for combatting the fall of the USD.
CFOs whose businesses involve international shipping or rely heavily on earnings from imports might consider using currency swaps or similar financial instruments to limit losses from dollar depreciation.
However, economists warn that the treasury manager needs to consider transaction costs and ensure that the secondary currency is also not subject to inflation.
Economists say CFOs should consider moving part of their company's investment portfolio into an inflation buffer, such as Treasury Inflation-Protected Securities (TIPS), precious metals or funds that track basket commodities.
Finance executives must also remember that no investment can completely hedge against inflation. Gold does not generate income, and prices for oil and other commodities are often volatile and vulnerable to geopolitical tensions. So, it requires diversification and those who move first in hedging gain greater advantages in the short term.
CFOs may have limited control over the effects of inflation, labor shortages and rising prices and interest rates. But there are things you can do as a CFO to fight inflation and protect your organization from rising costs, even during volatile market conditions.
When we focus on what we can control, we do more to hedge inflation and even boost profits. Better balance sheet analysis is necessary and Vena's Excel-based Budgeting and Forecasting Software delivers valuable insights to improve your forecasting accuracy so you can make more informed decisions.
Learn more about hedging inflation. Check out these articles:
Cut cycle times with our intuitive budgeting and forecasting tools that save time and ensure more accurate analysis. Plan with confidence and simplify your FP&A processes. See Vena in action.
Melissa Howatson, Chief Financial Officer at Vena, has a wealth of experience in financial and consulting roles, ranging from EdTech, automotive and Big Four accounting firms. She was CFO and board member at D2L—a global learning technology company—and led its successful initial public offering in 2021. Prior to that, she held finance leadership positions at Bend All Automotive, Qwalify and Primal. Melissa is a CPA-CA, having obtained her designation while working in KPMG's assurance practice. With her combination of scale-up and start-up experience, Melissa has an impressive track record of building and leading successful finance teams that drive the business forward.
