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FINANCE

How finance leaders can turn the inflation challenge into opportunity

How finance leaders can turn the inflation challenge into opportunity 44

How finance leaders can turn the inflation challenge into opportunity 45Q&A with Varun Dewan, Director and Financial Reporting Advisory practice lead at Protiviti UK

As inflation soars, the rising cost of doing business is a concern for finance leaders. But a period of high inflation also creates opportunities for innovation. Varun Dewan, Director at Protiviti UK, explains how a negative economic outlook can be turned into opportunity.

Managing the impact of inflation is not new, so what’s different now?

UK inflation reached a 40-year high in the summer of 2022. Double-digit price increases haven’t been seen since the early 1980s, when unemployment was at record highs, and interest rates reached 15 percent amid a huge spike in oil prices. This time, a 100-year pandemic event has been compounded by Russia’s invasion of Ukraine, hitting energy prices, food supplies and transport costs at the same time. Businesses are much more global than they were four decades ago and there are also more jobs available than people to fill them. Importantly, many finance leaders are managing their operations through high inflation for the first time.

What are finance leaders saying about inflation today?

In conversations I am having with companies, inflation is becoming an increasing concern for them. In addition, according to Protiviti’s 2022 Global Finance Trends Survey, 69 percent of chief financial officers and vice presidents of finance ranked inflation in the top 20 priorities to manage over the next 12 months; for non-CFO/VP-of-finance respondents, inflation ranked as a top 10 priority to manage in the next 12 months. The challenge of inflation isn’t going away; in fact, it’s growing by the week (indeed, the survey referred to above was taken in June and July, and there would arguably be a much greater focus on inflation today than even just a few months ago). Finance leaders feel a sense of urgency to respond, and most are looking at cost optimisation strategies, and are spending money judiciously.

How do you think businesses can best respond to the inflation challenge?

It is not easy to predict the future, but businesses can navigate through these challenging times successfully. One way is to develop the right pricing strategy. It might be compelling to boost pay and bonuses to stave off competitors’ attempts to recruit, but it could also have a knock-on effect on profits and shareholder sentiment. Passing on higher costs might also please shareholders, but not necessarily customers. Both are possible, of course, but there are limits on how far these steps can be put in place, especially with the threat of a global recession.

Businesses need to understand their ‘breaking point’ for price increases – when prices for a product or service become too high and customers start spending less. Most customers will likely expect prices to go up in the current market, but finance leaders can use the customer data they collect, along with scenario planning tools, to help them understand how these prices increases will be tolerated.

Based on my discussions, I understand that some of the market-leading businesses are planning to communicate their pricing plans with customers. This is an innovative approach and gives them a platform to explain the reasons behind the increases and to engage with people regarding questions and concerns. It’s part of a wider trend towards closer engagement with customers, especially for regulated businesses, but something that really matters when it comes to pricing strategies.

How can they turn the situation into a positive?

Finance leaders are naturally optimising the cost of their operations to help tackle the impact of inflation, alongside approaches to pricing. Inflation triggers the need to find newer, more economical ways of producing goods, procuring products and offering services – so it can be a source of new thinking and innovation. This can be very positive for businesses.

Here are three examples: A business reducing its packaging will spend money upfront but will experience the benefits long into the future, alongside its customers, with reduced costs per unit and shipping prices – and a reduced carbon footprint; a business sharing its manufacturing operations with others could gain new, ongoing revenue streams and potential partners; and a business collaborating with other companies will help to negotiate better bulk discounts and shipping costs on raw materials.

High inflation can cause businesses to put off making investments. But the investments they make now will help them in the future. This was true with technology and remote working platforms during the pandemic and is true now with steps to improve economic and environmental sustainability.

There is a significant focus on ESG. Do you think inflation will adversely impact ESG commitments?

ESG is a focus for companies, regulators, stakeholders and the community at large. It is going to be the way of life and one of the biggest transformational changes in businesses for decades. Inflation may have short term impact – especially in sectors like energy – but in medium to long term, I believe that ESG commitments will grow, and cannot be ignored. In fact, businesses are combining their ESG commitments with inflationary pressures to innovate.

What do you want finance leaders to do now?

The first piece of advice is related to data and technology. Data from internal and external sources, such as partners, suppliers and customers, can be used to help finance leaders understand the cost of raw materials, pricing decisions and labour costs, for example. Data from forecasting activities and scenario planning can help them assess customer breaking points as well.

Then it’s about looking at the operating structure of the business, exploring managed services and similar models to become more efficient; keeping boards and key stakeholders up to date with changing inflation response plans, alongside the investment community; and, importantly, measuring the benefits of any innovations being put in place.

Thanks very much. It sounds like inflation could actually prompt innovation in some cases…

Absolutely. I believe that we will look back on this period in history, perhaps in another 20 years, and realise that successful businesses were those that not only created value but focussed on innovation through a period of high inflation.

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