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How Can Businesses Weather Inflation

    Amid the post-pandemic recovery from COVID-19, the high producer price index (PPI) has severely setback many companies around the world. The current inflation has been causing businesses to scramble to deal with the increase in supply constraints, commodity prices, and wages. 

    Many companies will counter inflation by pushing through price increases in tune with PPI and cutting costs to boost productivity, but they’re not enough. Increasing top-line revenue, decreasing dependence on volatile labor markets, and enhancing employee retention are also necessary. Here are five ways to achieve these strategies to control inflation. 

    Businesses Weather Inflation

    Increase Visibility of Spending

    Spend visibility is the cornerstone of any expense management capability and all other productivity efforts. It’s a company’s level of oversight and real-time understanding of where corporate funds are going and who spends them, enabling the right level of accountability throughout the enterprise. 

    A company’s spend visibility requires real-time tracking and monitoring of business expenses, spend analysis, and purchase lifecycle optimization. Generally, it should imply a detailed and organized system of records by:

    ● Cost category

    ● Business process

    ● Function

    ● Business unit

    Overall, spend visibility prevents operational losses and identifies cost savings opportunities. Additionally, it benefits organizations by increasing their efficiency, strengthening cost structure, and optimizing other business processes, such as vendor management and procurement. 

    However, spending visibility isn’t particularly valuable if companies can’t track spending easily and make smart financial decisions. Hence, it must be used properly, especially in an inflationary period. It should be repeatable, end-to-end, and actionable, ensuring all business decisions are made knowing the full impact on the profit and loss statement (P&L). 

    Distinguish Strategic and Nonstrategic Cost-Cutting

    In any disruptive environment, many companies, especially small and mid-size enterprises (SMEs), tend to make broad-based cuts that aren’t aligned with their business strategy. Consequently, these choices don’t yield an optimal return on investment (ROI) nor maximize shareholder value. Even worse, they jeopardize their companies’ long-term goals. 

    What companies should do is differentiate between strategic and nonstrategic cost-cutting. The rule of thumb is to invest heavily in strategic spending but ruthlessly cut nonstrategic costs. Moreover, companies should identify the following:

    ● Which investment to pull back; 

    ● How to realize cost savings; 

    ● What costs to trim to better the return on operating costs; and 

    ● Where to boost growth by considerably investing in the strategic capabilities needed to get differential results.  

    Finding the right balance between strategic and nonstrategic expenses will result in a sustainable cost management system. This enables companies to make better decisions on deploying increasingly scarce resources to fuel their strategies. It also helps them maximize shareholder value and out-invest competitors despite economic disruption. 

    Identify Real Cost Drivers 

    In addition to having a clear sense of how costs align with strategy, it’s crucial to unpack the drivers of spending in an inflationary environment. Cost drivers set a basis on which a specific cost is to be allocated between the different departments. As direct causes of a business expense, cost drivers can be easily identified in improved spend visibility. 

    Companies should analyze their underlying drivers for crucial cost categories, consumption (quantity or volume), and rate (prices paid). This enables them to create granular, trackable initiatives related to unique drivers of broader cost categories. It also helps companies ensure that their production costs don’t exceed their earned revenue, as well as deliver real, near-term savings. 

    Get Rid of Work 

    Companies have to eliminate work itself as labor costs and shortages continue to become rampant. They can reset how work is done by using zero-based redesign. Having a clean-sheet mindset forces organizations to dissect what and how activities are performed, with specific levers to get rid of unnecessary work. 

    Each company across industries should reexamine its work. They should identify which has the most significant importance and adds the most value. This doesn’t only help companies to realize cost savings. It also allows them to deploy funds and scarce labor resources, helping them grow amid looming inflation. 

    Automate at Scale

    One way to eliminate work is to automate it. Recent technologies like intelligent document processing or robotic process automation (RPA) can do menial, recurring tasks and free up workers. If employees can do more strategic activities instead of clerical work, they can be more effective at creating value. This would give companies labor cost savings. 

    One research showed that companies who invested in automation before the COVID-19 pandemic had weathered the crisis better than others. They encountered fewer disruptions to the supply chain, workforce productivity, and demand. Another report also found that automation adoption had helped US and UK companies improve growth and resilience against economic disruption.

    However, digital transformations can be expensive for many businesses. The good news is that there are many credit products that are easy to get and specifically tailor-made for SMEs and start-ups. There are digital options you can use such as virtual cards Philippines wherein you can use this to pre-assign funds for your expenses and the best part is that you can track them real-time. Unlike before, financing is no longer a problem. Plus, recouping initial expenses won’t take too much time, thanks to automation’s faster turnaround times. 

    Final Thoughts

    Orchestration is a critical element in weathering inflation. Companies shouldn’t only implement the five solutions above, but also make sure they have the right plan in place to roll them out. As long as companies play things right, combatting inflationary pressures is within one’s reach, and this could be a very profitable year.

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