PEORIA MAGAZINE September 2022

G U E S T C O M M E N T A R Y

MAKING DECISIONS IN INFLATIONARY TIMES BY MATT HOUSE

A s signs of continued significant inf lat ion sur face weekly, business leaders and business owners are making decisions to guard against shrinking profitability and to protect long-term viability. Are they the right decisions? Each inflationary period has its own distinct set of pressures. Successful decisionsmadeduring2008’s inflationary periodmight not translate successfully to the next inflationary period. Even within the same inflationary period, the impacts on different organizationswon’t be the same. To actively guard against negative in flation impacts, assess and test three key areas: supply chain, labor, and pricing. SUPPLY CHAIN Supply chain strains and disruptions can be both a cause of and a result of inf lation. Inf lation impacts each organization differently. Identifying inflation in your organization is a key skill to help you make decisions to guard your margins. To identify inf lation quickly and conclusively within your organization’s product mix, know historical and current revenues, costs and margins. Track leading indicators to help identify inflationary trends early. To guard against supply chain disruptions, consider strengthening existing supply chain relationships, developing redundant suppl iers, establishing long-term contracts with suppliers, and carrying bigger inventories of key components. As costs of products and services begin to grow, knowing current spend

ing levels in key categories can aid cost-cutting decisions. Cost-cutting considerations include substituting al ternative materials or labor, assessing import versus domestic sourcing, and adjusting delivery time length. LABOR Inf lation’s impact on wages and, in turn, on the cost of labor to an organization is usually easy tomeasure and identify. However, having a pure cost approach to managing labor can have significant negative impacts to your organization’s cohesiveness. Inflation can quickly impact high-de mand and minimum-wage positions. Look for ways to reduce your depen dence on these classes of labor through scrutiny of the type and method of ac tivities performed, evaluation of prod ucts and services offered, and elimina tion or automation of activities. PRICING Increasing prices of the products or services you offer may be the most obvious decision to make during inflationary periods. The timing of price increases can have significant impacts on profitability. Leaders are frequently too slow to recognize signs of inflation in costs, and then don’t raise prices quickly enough. Price increases don’t have to be across the board. Increases can focus on your differentiating products, with a marketing focus on distinctiveness and strength of brand, while targeting less price-sensitive customers. Understanding the elasticity of customer demand for each product is important to implementing a successful

price increase. Also consider building variable pricing into contracts with customers. STRESS-TEST YOUR TOLERANCE Tomake informed decisions, run tests to financially quantify the impact of inflation and corresponding decisions. A strong financial modeling tool allows you to see the expected causes and effects of multiple impacts and/or decisions before you make them. Runningvarious“what-if”scenarioscan help you stress-test your organization’s tolerance to inflationary pressures and potential responses. Models don’t have to be elaborate, nor have a long history of use. Use a simple model that mimics true financial behavior, allows you to easily adjust key assumptions, and has buy-in from leadership. TRANSFORM THE WAY YOU DO BUSINESS Looking at how various factors may influence your future can highlight new opportunities and risks — and allow you to react and respond in real time to the opportunities and challenges on the horizon. A professional advisor can help you assess your current financial modeling approach.

Matt House has more than 25 years of experience as a financial leader in agricultural, manufacturing and public accounting industries. He is based in Indianapolis with CliftonLarsonAllen (CLA)

SEPTEMBER 2022 PEORIA MAGAZINE 97