No matter how you slice it, inflation is here. Growing freight prices, rising raw material costs, labor shortages, and increasing wages are all strong indicators that inflation isn’t receding anytime soon. Following a 6.8% rise in the consumer price index from November 2020 to November 2021 and a 9.6% increase in annual unit labor expenses in Q3 2021, 2022 has officially been designated as the year in which businesses must be more cautious with their spending decisions.
Forecasting is an art form for all business leaders, but in today’s turbulent market, projecting the next few months can feel like an exercise best left to a fortune teller with a crystal ball. Fortunately, there is a way for businesses of all sizes to effectively “predict” the future with the help of planning software.
Incorrect Predictions are a Big Issue Right Now
Rapid inflation is one of the most concerning economic events for businesses. Inflation not only causes consumers to fear and act impulsively, but it also creates a precarious situation in which consumers analyze their chosen vendors’ post-inflation responses attentively — and severely.
It is reasonable for these responses to touch on a wide range of key financial items, including:
Revenues
Many companies are feeling compelled to raise prices in response to inflationary pressures, yet price rises can have a significant influence on customer attitudes and purchasing patterns. Customers are likely to actively seek out your competitors if you raise costs too much, too rapidly.
Salaries & other employee-related expenses
Companies are discovering that increasing employee compensation to match rising cost-of-living prices is a useful strategy to keep existing talent during the “Great Resignation,” but employee costs may quickly pile up when you also need to increase your offers to attract new talent. Seeing as employees are already a company’s largest expense, and labor expenses are approaching double-digit quarterly increases, accurate labor forecasts based on workforce planning tools are crucial for long-term business success.
The social media world is quick to criticize mass layoffs, adding to the complication. To avoid public chastisement, your company should precisely “predict” future staffing requirements and balance those costs with projected revenues.
Supplies & transportation costs
Inflation, combined with persistent supply chain and logistics challenges, is likely to result in substantial price increases across the manufacturing sector, distribution, and other industries with significant supplier expenses. This further raises your prices for anything from supplies to shipping to employee essentials like laptops – but determining how to distribute those costs across your products and services can be challenging.
It’s important to remember that inflation doesn’t necessarily affect every part of your business. With the pandemic as a factor, inflation may have no impact on certain aspects of your budget. Travel and entertainment expenses, as well as office rent, are two significant examples, a result of reduced corporate gatherings and entertainment activities, as well as the continued popularity of the work-from-home trend. It is critical for your company to have a complete understanding of the genuine consequences of inflation in order to make effective forecasting predictions and strategic planning.
How Planning Software Aids in “Forecasting” the Future
In a world heavily influenced by social media, consumers will be quick to respond to any changes you make to combat inflation, from price increases to “shrinkflation” adjustments, in which you practice reducing the size of a product while maintaining its sticker price. Unfortunately, one unhappy customer can quickly turn into an online mob, wreaking havoc on your quarterly profits and shareholder confidence.
Fortunately, calming the “mob” can be as simple as maintaining an agile response backed by the confident decision-making that comes from having real-time access to accurate, reliable data.
Comprehensive planning software with extensive modeling capabilities is included in today’s leading financial planning and analysis (FP&A) solutions, making it easier to automate and manage planning activities during times of uncertainty.
Of course, each company’s demands are different, but here are some examples of how organizations use various planning tools to develop and fine-tune their inflation-response strategies:
Driver-based planning
Companies like to use a current FP&A tool to isolate inflation as a driver when it comes to items like inflation, which can affect a huge number of financial line items in a budget. Because they can modify a specific driver in a single spot, company executives can save time and easily answer “What If” questions on the fly. Their planning software can then automatically and instantly update any line item affected by the driver.
Scenario planning
Create and analyze numerous scenarios, such as High/Mid/Low inflation rates, to easily save time and map a course through all of your possibilities in today’s fast-changing economic landscape.
Rolling budgets and forecasts
In a fast-moving situation, it is a waste of time to spend limited resources on manually comparing reports and forecasts. A better alternative would be to employ interconnected Profit & Loss and Balance Sheet planning models that offer automated cash flow planning. This keeps managers informed about the company’s liquidity and cash position, preventing problems and highlighting potential inflation-related business opportunities.
Top-down forecast model
Bottom-up forecasting can take a lot of time for your team, especially if done ad hoc, monthly, or quarterly. Top-down forecast models enable a single individual to make accurate financial forecasts for the entire firm automatically, considerably reducing decision-making time.
Now’s the Time to Think about Planning Software
In a period of growing inflation and persistent uncertainty, your Finance team is likely to face a variety of unforeseen circumstances that will necessitate a flexible, quick, and decisive response across the organization.
Your company will have its own “crystal ball” that helps simulate future predictions and scenarios if you use current FP&A software solutions with extensive planning features. This will assist you in being prepared for anything that comes your way.
