The last time inflation was this high – in the early 1980s – Margaret Thatcher had been prime minister for two years. Channel 4 had just launched, and if you were aware of inflation at all, it was probably because the Wham! cassette you wanted to buy at HMV was a pound more than you expected.

Since then, inflation has rarely exceeded 4%. Generations of British and European finance professionals have spent whole careers making forecasts – where inputs and outputs were relatively stable most of the time. But that’s over now. Today, with Sterling and Euro zones’ inflation already running above 7.5% and no cooling in sight, monetary stability seems to be something else we lost during the pandemic – and adapting to this new reality is now a concern for chief financial officers (CFOs) and finance transformation leaders. 

What should you keep in mind?

This is a crisis with your name on it

The 2020s aren’t the 1970s reloaded. For CFOs and other finance leaders, managing this round of inflationary times is likely to be even more challenging.

The reason is that today’s CFOs have a broader mandate to help shape corporate strategy, supply chain resilience, pricing and procurement, as well as maintain a keen interest in the level of staff attrition in the business. As a finance leader, you may well be positioned to understand what is happening, but have you considered how finance should partner differently with the rest of the business?

Inflation is a five-alarm fire

Inflation will affect your firm, your employees, and your shareholders – but not everybody will be attuned to the dangers, and many may be underestimating the toxic effect of stagflation (i.e., inflation without growth). Your first job will be to convince everyone that mitigating its impact is a high priority. Unless your financial modelling capabilities are ready to simulate the limit of passing on any price increase to customers and contain input price hikes, inflation may not just hurt margins for a quarter or two, it may hurt your company’s profits and prospects longer term. Whether the challenge is procurement, outsourcing, pricing or hiring, you need a finance transformation and continuous improvement strategy, and that strategy should be executed based on proven best practices.

Prices and costs are moving targets

The costs of labour, materials, transportation, energy and other expenses are all increasing, but not necessarily at the same rate. To handle inflation, you will need a deep sense of the moving parts of your cost structure – particularly if a period of stagflation ensues and the growth slowdown limits your ability to raise prices. Enterprise-wide, too, it’s important to remember that inflation affects different businesses differently. Organisations in the hospitality business may be very concerned with foreign exchange risk, while industrial manufacturing organisations will likely be worrying more about the cost of raw materials and logistics. It goes without saying, of course, that working capital management will need even more emphasis. If you need to cut costs, do it intelligently. Benchmark your costs to look for opportunities and take another look at the benefits of digital transformation, which many companies today are finding to be a highly effective way to scale capabilities while reducing expenses.

The most valuable people in your team may be revising their CVs

In a very real way, inflation is a pay cut for your staff. If you don’t make it worth their while to stay, your best employees will leave. Keep this in mind as you draw up your own hiring and retention plan. Replacing finance professionals will be expensive, particularly because for many firms, proactive inflation management will require hiring more analysts. The shortage may turn out to be quite serious: we know of one company that is expanding its planning and analysis team by 40% and doubling its indirect sourcing and procurement staff so it can handle the added workload generated by additional price and cost modelling and more frequent contract reviews.

Refocusing the services of the finance business partners becomes paramount

Unfortunately, for many finance organisations, the activities of the finance business partners supporting management decisions may still be consumed by the wrong types of activities and priorities. High-performing organisations are instead revisiting the role that finance should play to help adapt the enterprise to this new reality, focusing on important questions: What is the breaking point where price increases begin to adversely impact demand across your products, services and channels? How much inventory are you willing to carry as warehousing costs increase? What is your exposure to rising interest rate differentials? How do you balance working capital management with the need to satisfy customer demands? What is your optimum cash position to take advantage of discount opportunities? What is your supplier credit risk? Do you understand the working capital drag created by the increasing cost of capital on our overall profitability?

The increasingly strategic role that the finance function plays in high-performing companies over the last decade gives legitimacy to the evolving role of finance. For instance, we foresee an enduring role for finance professionals in educating and coaching other leaders in navigating this challenging environment. This role will be supported by the unmatched analytic insight – an understanding of how the company’s value chain fits together, including research and development, commercial operations, and other enabling functions. As challenging as the rest of the 2020s may be for the prepared finance executive, they are also likely to be years of extraordinary opportunity. 

About the author: Gilles Bonelli is an Associate Principal at The Hackett Group’s Finance, Enterprise Performance and Business Intelligence Advisory Practice in Europe.