Economic uncertainty and planning for resilience

The ripple effects of inflation, uncertainty, and staff shortages continue to drive economic challenges for businesses. And finance teams are spending a large segment of their time dealing with the consequences and challenges of inflation, according to a new report, which recommends ways that organisations and their finance leadership can better navigate a downturn.

Recent data released by the UK government underscores the issues facing businesses: Inflation is high, GDP forecasts are being lowered, and a tight labour market is set to continue throughout 2023. For many companies, costs may exceed revenue, while high prices continue to put pressure on goods, services, and other operational demands. A new AICPA & CIMA report recommends that businesses prepare for a range of outcomes to stay resilient.

The report, Cost of Business — Inflation's Impacts and Role of Finance, discusses the strategies leaders can use to regain control of the shifting economic landscape. Business leaders are focused on building resilience for the future, the report said. Some businesses' finance teams are spending as much as 40% of their time dealing with the consequences and challenges of inflation.

This report's findings are based on interviews and focus groups with 21 members across the US, the UK, Europe, and Africa between June and September 2022.

"Throughout the research phase of this report, the value of good management accountants and finance teams has been a consistent theme," the report said. "… [T]he skills and experiences of finance professionals were supporting their businesses as they face a high inflationary environment."

While businesses must take what they can control into account, more government support is necessary for many organisations to stay afloat, particularly small and medium-sized entities (SMEs), which are often hit hardest by financial shocks, the report said.

Making data-driven decisions

The AICPA & CIMA report said that strong businesses will always plan for a range of scenarios.

Where businesses are facing operational difficulties from energy costs, talent shortages, inflation, and other external factors, it is important that leaders continue to build resilience and focus on the areas within their control, the report said. From focus group insights, the report found that scenario planning and margin analysis has been crucial for businesses to operate profitably through inflation.

One participant in the study explained how the role of management accountants and finance teams was essential to this process by identifying the most efficient time to operate in regard to the impact on business viability and the pricing of goods, the report said.

Another participant explained that management accountants in their company were able to document where costs of raw materials and production costs were rising, from the finance team's analysis work on current and projected production costs, the report said. Finance teams continue to play a key role in helping businesses manage against inflation.

Economists' views

About four in ten UK businesses reported a rise in the price of goods and services, and 30% of trading businesses plan to put their prices up in January 2023, mainly because of energy costs, according to data from the Office for National Statistics (ONS) between 28 November and 11 December 2022.

However, consumer spending continues to fall because of the cost-of-living crisis, with 65% of UK adults spending less on nonessential goods, according to the ONS.

Alpesh Paleja, the lead economist for the Confederation of British Industry (CBI), said that inflation should fall further towards single digits, as global price pressures ease and an economic downturn takes some of the heat out of price setting.

"Despite this, the cost-of-living crisis will continue to be a very real problem for both households and businesses, as price pressures remain high in the short term," Paleja said. "… If the government is going to solve these twin problems, then it needs to continue supporting measures like the Energy Bills Discount Scheme, while enacting a series of pro-growth measures to spur the economy."

Glassdoor research found that in November and December 2022, negative business outlook amongst UK workers in the technology sector spiked to levels observed at the start of the pandemic.

"Recent mass layoffs in tech have sparked concern, but it's unclear how much they'll continue to impact the UK-specific redundancy rate, given their global scope," said Lauren Thomas, Glassdoor's UK economist. "Regardless, it's clear from Glassdoor data that tech employees are growing increasingly nervous about the future."

The redundancy rate in the UK increased to 3.4 per 1,000 employees in September to November 2022 but remains low, according to the ONS.

— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.