The CFO’s Fight For and Against Inflation

In the past inflation worries sent shivers up the spines of CFOs.

That makes sense, because in the past CFOs were primarily responsible for cost control and inflation takes the control out of costs.

Today, with CFOs and their teams more integrated in above the margin activities like price setting, procurement, and supply chain management CFOs are recognizing inflation can also be an opportunity.

Here is an example. A company I have been working with made a strategic decision last summer to build inventory in one of their core products. For years they had practiced lean inventory management, so this was a major departure from their business model.

This change addressed a key concern of management - supply chain disruptions that would create stock outs. Management also anticipated prices could spike due to shortages. They realized the combination of more units of inventory at higher per unit prices could put significant stress on their working capital requirements.

In response, the CEO and finance head worked diligently to expand their credit facility. They made the time to explain their business model to a number of banks which paid off in a bigger line at more favorable terms. They were able to procure record inventory to secure supply for their customers. When prices rose 50% last fall they had the liquidity to withstand the increase. They are now reaping the benefits as competitors are caught short of product. The company is growing market share and kept their loyal customers in business – getting rewarded for both with higher margins.

Rather than saying ‘No!’ to a strategy that required a new and enhanced banking relationship, the finance lead understood the opportunities and risks of the new procurement strategy. They were an integral part of securing the required funding and improving margins. By using a creative and agile approach to a business challenge, they were able to turn a significant issue into a value creating opportunity.

The following 5 inflation challenges and their solutions were inspired by a Forbes article written by Jim DeLoach, How CFO’s Can Solve The Inflation Puzzle1

  1. Working Capital: Supply chain issues have driven companies to extend their inventory hold timeframes – JIT out, grab it when we can is in. This new paradigm arrives in the face of rising prices. A double whammy for working capital. Help your leadership team understand the value of your working capital not just the cost. Use the Cash Velocity Calculator as an aid to your teaching:
  2. Counterparty Credit Risk: Everyone you are working with is sharing your inflation pain. Give special due diligence to late payments, late shipments, late anything. Add “past due” to your data and analytics modeling and learn What Data You Should Track To Optimize Your Business Performance?
  3. Pricing: Never in my career have I seen price increases so readily accepted. It’s not clear how long trading partners will accept these price increases but in the short run your choice is to raise prices or lose margin. In the long run your customers will expect increased value for higher prices. Learn more about The Role of the CFO in Pricing here:
  4. Talent Depletion Risks: Your employees are feeling the impact of lower purchasing power - just like the company is. Not keeping up with salary inflation puts you at risk of losing talent. To put this in perspective, use the Cost of Employee Turnover Calculator to model turnover increasing at your company. Another important step is to gain understanding of the Human Capital Net Worth of Your Business.
  5. Procurement Becomes a Team Sport: The purchasing department can no longer survive successfully as a stand-alone department. Supply chain issues, price and demand volatility are too much for a singular focused department to manage without deep connections with sales, operations and finance. In a Volatile Economy, Purchasing Practices Need to Change

Most economists suggest higher inflation and supply chain issues will be with us for a while, so, securing capital and inventory, widening margins, retaining talent and protecting your cost structure - all while serving our customers - are top priorities in the CFO Suite.

How are you fighting for or against inflation?

1How CFO’s Can Solve The Inflation Puzzle


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