Inflation has become too big for any enterprise to ignore. Enterprises face a double whammy. They struggle with rising input costs that erode their margins. But their customers also battle inflation and may choose to cut down on the product or service instead of paying more. Here are five strategies CFOs can put in place to navigate inflation.

1. Improve operational efficiency 

The best way to navigate inflationary pressures is by reducing waste and getting the most value for every dollar spent. CFOs could take the following leads to maximise operational efficiency:

Review enterprise spending. Analyse the company’s costs and identify cost-saving opportunities. Prices and expenses rise fast during inflation, necessitating regular reviews and action plans. 

Have a look at cost structures. Apply lean methodologies to identify and end non-value-adding processes. Legacy and inefficient methods often continue because no one wants to disrupt the status quo. When such practices become untenable, it becomes expedient to apply technology and get the tasks done with lesser costs.

Work with department heads and business leaders to identify wasteful or avoidable expenses. Many processes or cost centres may have had some use in the past. It sustains not because it continues to add value but because everyone is too busy with higher value-adding things. A cost-review exercise to combat inflation is the right time to look into such processes. 

Invest in technology to automate repetitive and time-consuming tasks. Recommending spending when trying to tame inflation may seem counterintuitive. But some capital investments could save considerable recurring costs, especially payroll costs. The investment pays back for itself fast and reaps huge savings after that. 

2. Rethink supply chain management

The direct impact of inflation at the enterprise level is on the supply chain. CFOs can adopt the following approaches to tackle rising supply chain costs:

Diversify the supply chain sources. Extend sourcing to many geographical areas and vendors. Such an approach safeguards against rising costs in any specific region or supplier. Relying on one or even a limited number of suppliers is anyway suicidal in today’s uncertain business environment.

Make long-term contracts that lock in prices for a longer duration. Such a strategy is a double-edged sword, though. It protects against immediate inflationary impacts but reduces the flexibility to switch suppliers.

Renegotiate contracts with suppliers with a win-win approach. For instance, negotiate a discount if an offshore vendor receives a windfall due to currency devaluation.

Optimise the procurement processes. For instance, cut down intermediaries and deal with the original seller. This again comes at the risk of ending relationships with partners who may bring in other benefits.

Rethink inventory levels. Accumulate appreciating, non-perishable goods and reduce the stock of perishable or depreciating goods. 

3. Manage cash flows

Inflation has a significant impact on the cash flow. As customers grapple with inflationary issues of their own, they delay payment, which affects cash inflows. Delayed inflows could mean cash flow issues for the company and missed payments. 

CFOs need to manage cash flow to ensure the company has liquidity. Proactive CFOs optimise working capital management by managing receivables, payables, and inventory levels. They:

Reduce accounts receivable and increase accounts payable to the extent possible. Delaying payment to suppliers makes sense if the dollar is worth less tomorrow than today. Ways to do so include negotiating longer payment terms with suppliers and offering discounts for early payments.

Assess the adequacy of the company’s cash reserves and consider alternative financing options if necessary. They may, for instance, open or activate a line of credit with a bank or other financial institutions.

Shift borrowing to shorter maturities to tide over the uncertainty  Smart CFOs don’t lose sight of long-term goals even when mired in immediate and short-term cash flow concerns. Inflationary periods bring about challenges but also create opportunities. They resist the knee-jerk reaction to become stingy and rather make strategic investments. The success of such proactive approaches depends on a good estimation of the potential returns or the indirect benefits on offer.

4. Adopt hedging strategies

Businesses exposed to commodities and foreign currencies often hedge to reduce unpredictable shocks. Such hedging strategies become lifesavers during inflation. CFOs can use financial derivatives to lock in future prices for these assets. But hedging comes with its fair share of risks as well. CFOs need to leverage their expertise in risk management and knowledge of financial markets to indulge in safe hedging. 

The best CFOs:

Make proactive hedging strategies that ensure financial stability for the enterprise.

Have clarity on objectives. Hedging is to avoid losses, and profits out of it are incidental. Trying to profit from hedging leads to a slippery slope of speculation.

Use the right instruments. For commodity hedging, CFOs utilise forward contracts or commodity futures to lock prices. Another strategy is investing in inflation-protected securities such as the US Treasury securities. The principal value of these securities rises with inflation and protects the deposit against the erosion of value. CFOs should make the trade-off of liquidity and returns and may consider liquid funds also.

5. Increase prices gradually

Sometimes, the enterprise has no choice but to increase product prices. Rising prices always come with the risk of reducing demand, as customers may choose not to buy rather than pay more. 

The main concern of the CFO is to increase prices without shaking trust. Deloitte estimates the rewards of price increases often outweigh the risks. The analysis finds that if a company with 35% gross margins raises prices by 5%, the sales volume would have to fall by 12.5% or more to impact margins adversely. But customers’ patience may be running thin. In the Deloitte study, 60% of consumers believe companies use inflation as an excuse to boost profits. 

Review the pricing strategy. Ascertain the price sensitivity and ensure price adjustments align with market realities. Implementing a dynamic pricing strategy that responds to changing market conditions protects profitability.

Communicate to customers the inevitability of the price hike and the steps taken to avert such a move. This can include cutting back on packaging or sourcing cheaper raw materials. Convey the reasons behind the increase and assure them of the commitment to delivering value.

Increase prices in small increments, gradually. Most customers condone small, incremental increases that do not dent their budgets much. A sudden significant increase becomes a shock and forces customers to rethink. 

Expand customers’ options. Give customers more opportunities to trade down price-wise—while remaining within their brand.

Tools such as SAP Concur expense management software connect enterprise financial data and offer insights. This is a major step, as information often lies across disparate, hard-to-access silos. CFOs can get improved end-to-end real-time visibility and take control of their spending. 

SAP Concur automated expense management processes, reducing manual effort and increasing efficiency. 

The rich ready-made insights allow CFOs to monitor and analyse spending patterns. Real-time visibility enables CFOs to identify cost increases and track spending trends. The reporting and analytics capabilities make explicit trends and cost escalation areas. CFOs can make data-driven, informed decisions. CFOs can also update and enforce expense policies and ensure compliance with new constraints. 

Inflation poses significant challenges to businesses. CFOs applying the right strategies can steer their companies unscathed through challenging times. Tools such as SAP Concur ease financial management and help the company stay agile, nimble, and ready to seize opportunities.