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.
CFOs facing rising wholesale prices and mounting wage pressures worsened by high inflation can combat these issues by reviewing company assets and liabilities.
Finding an alternative for funding pensions, such as transferring them to annuity providers, can eliminate billions of dollars in pension liabilities for employers in the U.S.
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.
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.
1. Review Accounts Payables and Receivables
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.
2. Recover Trapped Cash
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.
3. Look for Alternatives To Fund Pensions
CFOs with meaningful defined-benefit responsibilities can use one or more of the following options to improve their forecasts:
Amendments to existing defined benefit plans
Conversion to defined-contribution plans
Adopting cash-balance planning
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.
4. Purchase What You Can at Today's Prices
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.
5. Hedge Against the Falling USD
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.
6. Pad Your Organization's Portfolio
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.
Hedge Inflation With Better Forecasting
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: