Contributing to the Global Economy

Accountants at the Center of Responding to Inflation and the Supply Chain Crunch

Stathis Gould | April 29, 2022

These are unprecedented times. At a critical moment for the climate agenda, the current business environment is characterized by high inflation and supply chain challenges and geopolitical and macroeconomic uncertainty. At its March meeting, the IFAC Professional Accountants in Business Advisory Group shared insights on the implications of these realities for CFOs and finance functions.

Inflation rates and inflationary pressures in most major economies have reached levels not seen in 40 years or more. Once in a generation challenges present new market realities with risks and opportunities arising from:

  • Legacy supply chain and capacity issues from the pandemic and systematic lack of investment in many commodity and supply chains;
  • Inflation leading to an increase in prices of goods, services and assets in many economies. Price pressure is driven by:
    • De-globalization shifts arising from war in Ukraine and its impact on global supply chains including the effects of recent sanctions;
    • Energy security, independence, and transition to low-carbon economies; and
    • Significantly rising input (materials, commodities) prices and employee costs.

These trends and issues are greatly impacting market dynamics on the demand and supply side and are likely to be sustained for the short to medium-term at least. CFOs and finance teams are at the center of addressing these challenges that are impacting:

  • Profitability,
  • Supply chain resilience,
  • Product/service quality,
  • Interest rates and cost of borrowing, and
  • Financing and investment.

For CFOs and finance teams, responding to inflation and current market challenges is a priority that requires connecting different parts of organizations and providing insights that enable a business to continue to create and protect value.  Their co-pilot and value partner role can be captured in four key areas.

1. Understanding and keeping track of market dynamics

External data is needed for planning and forecasting to provide predictive insights that support strategic and operational decisions and involves the CFO and finance function leveraging:

  • Market research, external advice (e.g., bank economists), knowledge from across key functions in the organization and from key relationships such as with customers and suppliers.
  • Relevant third-party and external data to enhance understanding demand and supply-side fundamentals and calculating what things cost today and what they may cost in the future, for example helping to assess:
    • Where prices are increasing, by how much and how permanent the increases are likely to be.
    • The knock-on effects on consumer demand such as the substitution effects from higher prices e.g., customers seeking substitute products to deal with higher energy bills and using less leading to lower demand for some products.
    • Insights on supply-side market dynamics including supplier risks and economics to enhance dialogue with suppliers, and with procurement colleagues.
2. Relationship management and collaboration

Being seen as a trusted value partner involves building relationships with relevant teams and external stakeholders. It requires relevant actionable information and tools in supporting:

  • Sales to identify additional revenue opportunities and offer the right incentives to customers.
  • Procurement to deal with supply-side challenges and breaking down siloes between pricing and procurement functions to ensure clarity on pricing opportunities, and where to pass on cost increases to protect margins.
  • Human resources to plan responses to wage inflation and put in place strategies to attract and retain the talent and expertise needed for the organization to compete. For example, the value of the overall employment offering including flexibility and other benefits can be important aspects of retention and recruitment.
  • External stakeholders to understand the context of economic, industry and company-specific factors that impact pricing and supply issues, for example customers being aware of the drivers of increasing prices.
  • Dialogue with banks and credit rating agencies to find innovative ways to maintain a reasonable cost of funding. 
3. Managing the impact of volatility

The CFO and finance team provides information and predictive insights to allow flexibility and agility. There is a heightened focus on improving forecasting and using predictive modeling analysis. Key actions include:

  • Providing insights on the interconnections between key financial performance drivers and critical value drivers in relation to consumer demand and supply of materials and other resources as a basis for making good decisions and driving the right discussions with customers and suppliers.
  • Increasing the frequency of forecasting to boards and management to provide timely visibility and insights. The speed at which cost changes and price adjustments can be made is critical to making the best decisions and responding to market changes.
  • Providing accurate and timely insights into profitability and margins as input and sales prices change, and reflecting potential macroeconomic changes to interest rates and commodity prices.
  • Understanding costs from a product, channel and customer perspective to target actions to increase value and reduce cost-to-serve.
  • Deploying AI and digital tools to enhance the tracking of underlying transaction data and translate the insights into proposed actions on pricing and procurement.
4. Procurement and supply chain challenges and reconfiguration

CFOs must work closely with their procurement and supply chain teams on targeted changes, reviewing existing contracts, and ensuring involvement in opex and capex decisions early in the process. The role of CFOs and finance teams in procurement is becoming more strategic and includes:

  • Evaluating strategic priorities for supplies and the value chain to meet business and customer needs.
  • Addressing strategic priorities for supply chain management and considering alternative sources of supply and lifecycle strategies including circular business model options to increase resource efficiency.
  • Ensuring that procurement teams receive the right information such as through value chain mapping and analytics for key materials, markets, and suppliers.
Climate Action in the Current Environment

Inflation and supply chain pressures have arrived at a time when climate action to meet net-zero commitments and climate goals have been gaining significant momentum. The political commitment in many countries to support the energy transition to low carbon will continue as will the focus on enhancing the quality of information on climate-related reporting. The SEC’s proposed new climate disclosure requirements in the US, the International Sustainability Standards Board’s draft sustainability standards including climate-related disclosures, and the development of EU sustainability reporting standards all continue global and regional efforts to significantly enhance the quality of sustainability information.

The energy transition to support net-zero commitments will likely occur under duress and drive higher energy prices in the short term. However, it provides an opportunity for a medium- to long-term shift to decarbonization. In response to current challenges, and to leverage their role in managing climate risk, CFOs need to seize the opportunity of sustainable procurement and supply responsibility so that business and sustainability goals can be achieved in tandem. In considering energy supply, it is also the moment to consider renewable and low carbon supply sources and conservation measures to reduce costs and achieve climate commitments and emission reduction targets.

 

Stathis Gould

Director, Advocacy, IFAC

Stathis Gould heads up the development of international services for professional accountants working in business and industry at IFAC. A key element of his work is developing thought leadership and guidance in support of finance professionals and their roles facilitating sustainable organizational performance. Before moving to IFAC, he was at the Chartered Institute of Management Accountants (CIMA) responsible for planning and overseeing a program of policy and research. Prior to serving the accountancy profession, Mr. Gould worked in various roles in the private and public sectors in the UK. See more by Stathis Gould

 

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