As students, we are taught to relentlessly strive for straight A’s. Even if we fall short, our pursuit of “best” increases success. When it comes to outsmarting inflation, we find ourselves in the same spot.
Inflation is the highest in 40 years (8.2% at the end of September 2022). While we may not be able to change that, we can outsmart inflation with the same strategic prowess chess prodigy Beth Harmon uses in the popular Netflix mini-series “The Queen’s Gambit.” I call it the Straight-A Strategy: adapt, adjust and accelerate. As we explore these, you’ll see why this moment in history is actually your greatest opportunity to create a stronger company and win the game.
The Big Picture
First things first. Just as knowing how the rook moves before you castle is important, it’s important to see the bigger picture: the economy’s impact on your organization.
It is volatility. Besides inflation, there are many other unpredictable variables in play like the pandemic, geopolitics, war, politics, fiscal policies, supply chain disruption, consumer trends and extreme weather, to name a few.
It is a mix. One measure of inflation is CPI (consumer price index) where three “baskets” of goods and services (housing, energy, food) have different dynamics and volatility. This makes challenges more complex. For example, international ocean shipping costs skyrocketed in 2021, during the height of the pandemic, and eventually came back down to earth (comparatively, it cost $20,586 for a container on a ship from Asia to the U.S. West Coast compared to under $3,000 in October of this year).
It is resiliency. Businesses have been accustomed to a stable and predictable environment with low inflation and robust growth. The long-term average for inflation is 3.27%. In fact, there’s a whole generation of people, like many of the young tech start-up founders I work with, who have never experienced inflation. A change of mindset, while necessary, is understandably daunting.
Truth be told, if it was only inflation, we could deal with that. It is much broader. Knowing this, let’s make some calculated moves on the board with the Straight-A Strategy.
The Straight-A Strategy
Straight “A” Strategy #1: Adapt
Inflation and the higher cost of capital is creating a new normal (yes, yet another one) so the first “A” is to adapt. Let’s break this down. There are four components of working capital:
Inventories. The goal is to reduce lead time, practice early ordering and lessen dependencies on high-cost suppliers. It’s a great time to review supplier terms and consider the most strategic suppliers based on geographic locations as well as cost.
Accounts receivable. Focus on high-value products and services, lock in more long-term contracts and connect customer performance with payments. Take advantage of data and analytics. Use technology to set alerts for credit and counterparty risks and to reduce human errors on invoices.
Accounts payable. Monitor purchases, logistics and general expenses. Increase scrutiny of spending and anomalies. Proactively remove internal waste and reduce the cost of delivering value. For example, consulting firms can reduce travel to make engagements less costly but still highly profitable.
Cash. The financial implications of increased transportation, energy and material costs on working capital means understanding the cost of money. Small things add up: interest payments, credit, interest income, variable vs. fixed rates, and investment opportunities.
Here’s a real example from my work with a manufacturer in the automotive industry. We redesigned its product and service offerings. Analytics helped identify the most valuable and high margin products and services. We removed features dependent on parts in short supply and reviewed the supplier landscape, reducing dependencies on high-cost suppliers.
Companies with a global footprint must take it even further and cope with the foreign-exchange effect. From a financial perspective, converting adjustable-rate debts to fixed loans can reduce costs. The good news is that digitalization will play an important role.
Straight “A” Strategy #2: Adjust
When you adjust, you look at everything.
Revisit your products and services portfolio, your customers, your supply chain partners. What is essential versus nonessential? What goods and services add to your customer’s success and deliver the most value? Can you reduce features without reducing value?
Consider workforce capacity. You might need to move more people into customer service to differentiate your brand or shift engineers from one product to another.
Rethink packaging, loading of the packaging, shipping. Perhaps outsource packaging operations or private label your product. Add scenario modelling to end-to-end planning.
Real-time analytics and scenario modelling make adjusting possible and allows the decision-maker to use different drivers.
Straight “A” Strategy #3: Accelerate
Technology leads to seeing your operations with real-time visibility. This accelerates your decision-making process and accuracy throughout your operations and scenario modelling.
Not only that, but you can also accelerate workflows, so your internal team collaborates more efficiently and with less redundancy.
Technology is key to outsmarting inflation because it arms you with insight. When you can collect on your balances faster, cash flow becomes accelerated. When you can monitor logistics and expenses and focus more on essential spending, investments become accelerated. When you remove internal waste and redundancy, efficiency becomes accelerated.
Inflation Fighters: CFOs and Other Leaders
In the last 10 years, the back office has taken a backseat. Now, they are positioned to drive the future and, to be honest, the investment is long overdue. When interest rates were down to the twos and the market wasn’t fluctuating, it put all of us in la-la land as though it was going to last forever. If you don’t optimize what you do, you don’t improve. Operational excellence should always be a priority.
Now, with a broader picture, we are forced to see business from multiple lenses: customers, suppliers and our own internal team. The people safeguarding us from inflationary whiplash lead from a variety of seats.
Today’s CFO is charged with adopting a new mindset, from reactive to proactive course-correction. Apply higher visibility across the organization’s end-to-end business operations and use of working capital. Take advantage of data and analytics and employ fast and reactive measures and proactive actions to get in front of the storm.
The procurement leader will also play a role when it comes to supply chain efficiency. Leverage the partner ecosystem to achieve efficiency.
With technology and curiosity, the entire finance team will take forecasting to another level with weekly cash forecasting, variance analysis and proactive management. Use scenario analyses on available cash balances by applying percentage trend changes, shocks, simulations based on real-world scenario, and random increases/decreases using a multiple of historical balances volatility. Performing scenario analyses on liquidity availability reveals the overall impact from projected credit tightening, elimination of uncommitted borrowing sources and investment market value changes. Look for patterns, biases, and misses by comparing actual vs. forecasted variances.
Investing in the future means value creation initiatives like upskilling, too. This invites human resource leaders to look at workplace efficiency, talent optimization and how automating repetitive tasks might free up time for greater innovation.
As for CEOs, while saving money is tempting when times are tight, resist the urge to slash. While it’s more costly to invest strategically, those who invest in the future will be strong market leaders.
Welcome to Boot Camp
In the past decade, it was an easy ride for financial leaders. Companies grew. The market reacted positively. Interest rates were low. Now, the perfect storm has landed. The Straight-A Strategy asks us to adjust our mindset and take action.
We are in bootcamp. If you’ve been in the military or know someone who has, then you know bootcamp breaks a person down to rudimentary parts and rebuilds. From a strategic use of working capital to outsmarting inflation from every corner of the company, the one known outcome (and there aren’t many) is that you will come out of the storm a stronger leader and a more prepared leader for future adversity.
You might even take inflation’s king.
As I see it, inflation gives us a real opportunity to take our companies to a new place. If you’re looking for a deeper dive into outsmarting inflation, register for “Outsmarting Inflation: Best-Practice Working Capital Strategies” hosted by SAP. I’ll be on the panel, joined by IDC analyst Kevin Permenter and Thomas Mehlkopf from SAP. The moderator is Paul Saunders, chief evangelist cloud ERP from SAP. We will be getting real so bring your questions as we explore ways to keep profitability and margins up amidst a changing economic climate.
Adapt, adjust and accelerate to take your Straight-A Strategy all the way to the dean’s list of operational excellence. You’ll not only remain standing amidst economic storms, you’ll be standing taller, prouder and stronger.