How Your Business can Mitigate Inflation with Alex Fieldcamp

One of the most discussed challenges in the business community today continues to be the surge in inflation.  With inflation suddenly on the rise after decades in a historically low and narrow range, companies across all industries are evaluating and implementing strategies to mitigate the effects.  We talked to financial strategist and investment banker Alex Fieldcamp about what initiatives companies can take to combat rising prices.

There is a concept called zero-based budgeting in which expenses must be re-justified periodically, rather than a more typical approach that assumes an expense is justified and simply carries it forward from the previous budget period, Alex Fieldcamp explained.  “Companies that have not yet adopted this approach may want to consider it,” said Fieldcamp. “Well-run companies should take a hard look at all of their expenses to eliminate any unnecessary or wasteful spending.”

However, cutting costs without consideration for the consequences on long-term goals and strategies can end up hurting a business in the long run.  “Managers and financial controllers should be careful not to lose sight of the big picture and cut spending that is necessary for growth,” continued Alex Fieldcamp, “in fact, they may want to take a fresh look at all of their forward-looking projects and analyze them with an updated inflation scenario, which may actually increase the return on some investments.”

“For example,” explained Fieldcamp, “investment in automation, which would reduce labor input into a company’s products, can have an increased ROI in an inflationary environment.”  This is due, he says, to wages being one of the drivers of inflation, as employees will demand higher wages in anticipation of price increases.  This feedback loop, which economists refer to as inflation expectations, is a significant driver of future price increases.

Long-term supply contracts are another place companies can look for cost savings, though with some downside, says Alexander Fieldcamp.  “In a period of low inflation, or with components that have tended to have falling prices over time, such as computer chips, the buyer tended to have the upper hand over suppliers.”  

That dynamic may change in an inflationary period, and Alex Fieldcamp companies should have a greater incentive than ever before to try to lock in prices through long-term supply contracts, which could result in suppliers having more negotiating power than before.  This makes it crucial for managers to thoroughly review input costs and attempt to reduce unnecessary or excessive spend before they negotiate those longer-term contracts with suppliers.

There are additional measures companies can take. Larger organizations may recognize redundant or wasteful spending only when they take a step back and look across units that are traditionally siloed and potentially resistant to working together. Addressing this often entails creating a cost-control group that analyzes expenses to find synergies in cost savings. And all organizations, large or small, manufacturing or service-oriented, can benefit from reviewing processes to eliminate unnecessary expenses, particularly labor.

The future path of inflation is not yet certain, according to Alexander Fieldcamp, but by effectively differentiating between essential and non-essential costs, companies will be best prepared to handle any potential inflation environment.  “Decisions must be made with a full understanding of the impact on cash flows, both short-term and long-term,” says Fieldcamp.  

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