Preface: The Fed indicated in mid-December that plans to wind down stimulus would be accelerated after U.S. consumer inflation hit a 39-year high.— Joe Mcdonald, 6 Jan. 2022
If Inflation Conditions Where Will Your Business Be? (Segment II)
As the gradual economic conditioning of the Pandemic continues, leading to perhaps stark increases in input costs from trucks, cargo vans, fuel, wage competition, tools, repairs, maintenance, and the corresponding vendor shortages of available and necessary supplies, keeping up with rises in the producer price index is an increasing challenge for most entrepreneurs. Further, these growing financial entrepreneur challenges are before the possibility of the complexity from government implemented inflationary price controls, to reference the Murray Sabrina quote earlier.
Entrepreneurs who have invested in effective ERP software to manage inventory costs and price changes for manufacturing batches or other input variables will see those efforts pay significant dividends in a persistent inflationary environment. On the contrary, businesses that lack user expertise, necessary ERP training, or perhaps an up-to-date ERP infrastructure should be particularly concerned about the ease of maintaining decisive profit margins. Especially if inflationary conditions take root and pricing variables turn increasingly complex.
In a rapidly changing business environment with product or service costs required to conduct business, particularly inventory intensive and manufacturing businesses, historical reliance on price stability will result in sub-par financial performance and act as a quasi price control measure that will burden profitability. The necessity of practical ERP systems functions is not a solution in its entirety. They are only an element of a more comprehensive mechanism to managing inflationary conditioning in the marketplace.
Research provides a clear precedent that watching financial metrics and implementing financial accountability throughout an organization is an activity of most businesses successfully navigating inflationary conditioning. This comprises that every dollar management spends approved with a measured effect to its leverage on the enterprise’s profitability.
We suggest diligent entrepreneurs read the following article—
https://deloitte.wsj.com/articles/the-inflation-outlook-preparing-for-the-unpredictable-01642097150
Excerpt: For many executives, a key question entering the new year is how to prepare for the threat of inflation. For much of last year, economists debated whether rising prices were a temporary phenomenon or a troubling signal of difficult times ahead. The mainstream position, shared for much of 2021 by U.S. Federal Reserve Chairman Jerome Powell, was that they reflected short-term pressures that should soon ease—i.e., that inflation was “transitory.”
But as higher prices spread across the U.S. economy in the fourth quarter of 2021, economists and policymakers shifted their stance and acknowledged that inflation could persist for longer than previously expected. As 2022 gets underway, there is growing concern that we could be entering uncharted waters. The ongoing COVID-19 Pandemic has led to supply- and demand-side shocks, with disrupted supply chains, unprecedented levels of government fiscal stimulus, shifts in consumer spending, a decline in labor force participation, and persistent business uncertainty. Adding further complexity, inflation has been uneven across industries2 and countries.
The outlook for inflation is also on the minds of many executives: Deloitte’s fourth-quarter 2021 “CFO Signals” survey found inflation to be a top concern, with more than three-fourths (76%) of surveyed CFOs indicating their organizations will raise prices for a substantial portion of their products and services to offset recent input cost increases.
Furthermore, financial measures do not necessarily need to be all cost reductions. Still, they should be primarily focused on achieving the organization’s strategic objectives while minimizing spending on items that have minor effects on the long-term successes of the enterprise. Entrepreneurs should give particular executive focus on the long-term sustainable enterprise vibrancy. This must include, among other features, both training for team members and necessary capital expenditures to update aging assets. The financial decisions of allocating operating cash flows into investing and financing activities should be a continual strategic activity.
Additionally, some businesses will find that amidst wage competition and vendor shortages, an effective management tool is scaling lower the scope of enterprise activities and perhaps discontinuing low-margin activities or those with a minimal contribution margin that sap the available resources from core business functions.
Examples include:
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- Reducing options on manufactured products or certain customization features;
- Discontinuing certain enterprise services;
- Or more proactively — selling off an entire department;
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The purpose of any such one of the above examples is to free your crucial enterprise resources to focus on the profit centers that drive the best performance. This, in turn, will also help to strengthen your team with additional bandwidth for improved service or production capacity on the crucial tasks at hand. Automation solutions and other strategic performance investments should also be weighted for return on investment.