5 Ways CFOs can Navigate Through Inflation with an ERP
CFOs everywhere are sitting in the hot seat.
Companies face price inflation that hasn’t been seen in four decades. Supply chains, still staggering from the pandemic, have been disrupted again by the Russia-Ukraine war.
Meanwhile, on Main Street, business shutdowns and openings due to COVID-19 have provoked tidal shifts in customer demand. Amid this turmoil, the labour force is experiencing a reset of expectations about work. As a result, the cost of hiring and keeping the best talent has gone up.
Mixed signals from the economy also keep turning up the heat on CFOs. Are we moving toward a genuine recession with higher unemployment, declining demand, and reduced profits? Or, will we have a soft landing as the inflation rate cools over the next six, twelve, or eighteen months?
These diverse economic scenarios each demand a different set of responses from finance leaders.
What’s a finance leader to do?
Fortunately, CFOs have never had so many advanced tools, powerful systems, and mountains of data to support their projections and scenario planning.
In fact, in a summer 2022 poll of finance leaders in small to mid-market companies, 73% of the respondents agreed strongly or somewhat that “leveraging the latest technologies would drive value across the organization.”
The right technology at the right time
A CFO aiming to successfully navigate these unprecedented economic waters needs to thoroughly analyze the options and possible outcomes available, then make better-informed decisions faster.
That means accessing both the real-time data of your entire operation as well as the business intelligence tools that support insight into the data.
Without access to tools like these, finance leaders are left working with static, possibly unreliable, data siloed in various business functions. These data sources will translate into slower, higher-risk decisions that may not be adapted to quick-changing business conditions.
That’s why an Enterprise Resource Planning (ERP) system is invaluable to small and medium-sized businesses seeking not only to survive but to thrive in these inflationary times.
The following five ways to navigate our inflationary times illuminate the insights and advantages CFOs can gain by working with an ERP.
1. Manage working capital while preserving sales volume
Inflationary prices from your suppliers will squeeze your working capital and oblige you to respond to business challenges such as these:
- How do we satisfy customer demand while maintaining adequate working capital?
- How much inventory should we keep when warehousing costs keep going up?
- Given the fragility of our supply chain, should we risk delaying payments to suppliers and getting our customers to pay a little faster?
- Do we increase inventory to provide a margin of safety against supply-chain issues when a full-blown recession may be heading our way?
To respond to these questions, you’ll need to forecast different scenarios based on a history of real-time data and other variables. Your ERP is ideally suited for this proactive analysis.
2. Explore options for the best pricing strategy
Your ERP system can illuminate the possible outcomes of pricing changes.
For example, working from your historical data, your ERP can provide comparison tables based on price increases to show how much prices can increase without losing sales volume.
How much of a price increase is too much? What level of price increase will reduce customer demand or drive your customer to a competitor?
ERP formulas can also derive different price lists based on selected net margins.
If you do decide to raise prices to pass on to your customers your higher costs of production, it may be useful to remember a calculation made by Deloitte: a 5%-price increase by a company with a gross profit margin of 35% can experience a 12.5% drop in sales before the price increase begins to erode profits.
Having these scenarios in hand, you can work closely with sales and marketing to better understand how a change in pricing will impact your business.
3. Improve inventory control during high inflation
Inventory represents a big slice of the capital investment pie for manufacturers and distributors. So more than ever, optimizing your inventory levels is a priority during high inflation.
With the right ERP system, you can analyze the seasonality of your products to automatically determine what the optimal inventory mix should be, and what minimum and maximum quantities to maintain by season.
For example, the analytics supporting this feature enable you to identify the goods that have:
i) the highest annual consumption value
ii) average consumption value
iii) the lowest consumption value
With this data in hand, you can make purchasing and production decisions that are more aligned with your past performance.
What are your inventory goals?
If "just-in-time" inventory is your goal, this forecasting capability enables you to reduce storage costs. It also minimizes the cost of rush deliveries for components when, at the last hour, you discover inventory shortages and backorders.
But just-in-time inventory may not be your goal.
Based on your projected sales, it may be worthwhile to buy some products in volume to take advantage of economies of scale. Can your warehouse accommodate the extra volume of goods?
Deloitte makes an interesting observation: If you project inflation to continue its upward trend and you produce appreciating, non-perishable goods, you may want to consider keeping more inventory with the goal of selling it later at a higher price.
On the downside, if a recession hits, you risk being stuck with too much inventory and low demand.
4. Analyze the high inflation in your supply chain
What do you do when supplier prices go sky-high?
Your ERP system’s analytics enables you to develop cost, efficiency, and profitability analyses for different sourcing options. As a result, you open up several avenues for negotiating pricing with your suppliers.
For example, your ERP can tell you in real-time which components in your production contribute to the cost increases (e.g., labor, transportation, raw materials, etc.). This precision enables you to prioritize the components that deserve more of your attention.
These insights may lead you to set up backup sourcing options, either with other suppliers from the same part of the world or with suppliers in other regions who may offer price breaks.
If you choose this option, remember to line up the transportation logistics that will enable you to get the goods when you decide to change suppliers quickly.
Another way to eliminate high prices in your supply chain is to eliminate an intermediary. For example, by investing in e-commerce capability, you can go directly to your customer and immediately raise your margins.
5. Keep your team up-to-date and on the same page
Before you can carry out any of these approaches to navigating inflation, you need the buy-in of your executive team.
So keep them in the loop. Show your decision-makers the real-time data revealing how inflation is impacting the company, the scenarios you’ve analyzed, and what the remedies might be in different situations.
By keeping them informed in a timely manner and getting their input, you’ll reduce the resistance to buy-in at the budget-setting time, when leadership needs to make tough decisions about changing priorities.
Successfully navigating soaring inflation takes thoughtful planning and analysis. For CFOs in the hot seat, your ERP becomes a mission-critical tool for building a business that not only survives but thrives in inflationary times.