Ed Winterschladen

09 March 2022
Topics in this article
  • Cost Optimization
  • Inflation

Many of the Chief Financial Officers (CFOs) I speak to have not been this worried since March 2020. Certainly, the ‘Long Pandemic’ phase from May 2020 to the end of 2021 presented its challenges. But as we emerge, CFOs are in some ways more concerned about business prospects than they have been over the past 18 months. I am picking up on four main reasons for this concern.

Number one is being discussed in every boardroom at the moment – inflation. Costs in the supply chain have been rising for some time now and, more worryingly, those increases show little sign of abating, particularly given the ongoing events in Ukraine. This makes the planning and budgeting process tricky and is putting increasing pressure on operating costs and balance sheets.

Secondly, as costs are rising, many businesses have also responded to the risks presented by the pandemic and geopolitical tensions by moving parts of their supply chain from a ‘just in time’ model to a ‘just in case’ model. CFOs know they cannot afford disruption in their supply chains, but the reassurance that the ‘just in case’ model provides comes at a cost by investing in additional stock, or capacity.

Thirdly, the macroeconomic response to inflation has seen the Bank of England start to raise interest rates adding further pressure on costs and balance sheets as the cost of servicing debt increases. Keen observers will have noted that some members of the Bank’s Monetary Policy Committee were minded to raise rates even higher at their last meeting, so there could be further pain to come in the months ahead.

Finally, there is an issue that dates back to before the pandemic – the changing expectations of consumers in relation to sustainability. This is forcing businesses to make substantial investments to embed more purposeful actions into how they operate, and often in particular drive CO2e reduction. These types of programs are exciting for employees, investors, and customers, and there will be an upside. But getting started is another expenditure to bear. Further, there is significant inflation appearing in “green supply chains”, as short-term demand outstrips supply.

For a CFO facing a quadruple whammy on their operating costs and balance sheet, what can be done?

Firstly, every CFO should get to know their supply chain. They should be working closely with their procurement teams to understand where costs lie, what that expenditure does, and if there are any creative approaches that can identify new or alternative solutions.

Sometimes these solutions come from reducing waste, or simply stopping unnecessary spending, but often solutions will come from working in a genuine partnership with suppliers. The modern CFO is not looking to the business just to do things how they have always been done. They are looking for measurable cost, revenue, or productivity improvements. In inflationary markets that means thinking differently about specification – how things are done, and if they could be done another way to the same or a better outcome.

With finance cutting across all areas of the business, there is a role to play in bringing business stakeholders together. CFOs will be or should be facilitating closer working between procurement, operations, and sales forecasting so that any changes to demand are reflected in operational and purchasing decisions. At a time when operating costs and balance sheets are already under pressure, the last thing businesses need is shortfalls, process waste, or excess inventory.

There is also a watch-out for all organizations as costs increase – cutting corners. For example, if you are changing supplier you should be absolutely certain the required due diligence and ongoing assurance has been undertaken – it might seem cheaper not to, but the financial risk to your business of poor quality, reputational damage, or cost increases elsewhere in the value chain (as a result of buying cheap) could far outweigh the short-term savings.

These are certainly challenging times to be managing the financial health of a company but by understanding the pressures and then leveraging procurement to find solutions, it is demonstrably possible to alleviate some of the pain being felt.

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