With an increase in oil prices, pandemic-driven global supply chain issues and the “Great Resignation” talent crunch, companies and consumers alike are under increasing inflationary pressure. In a recent report from the U.S Labor Department, a key indicator of inflation, the consumer price index (CPI), indicated a 7% increase in 2021. Initial effects of this increase are felt in the form of higher wage costs, increased employee attrition, higher cost of raw materials and an overall lower demand for both B2C and B2B products.
Firms that offer client advisory services (CAS) are uniquely positioned to provide clients with models, forecasts, and budgets to help them navigate their business during times of increasing inflation. Here’s how they can make an impact:
Use modern FP&A Technology to help clients model, forecast, and manage inflation impact
It’s easier to address inflation with financial planning and analysis (FP&A). Here at GrowthLab Finance-as-a-Service (FaaS), we employ an all-in-one FP&A solution, Jirav, to help clients forecast and budget, allowing inflationary effects to be taken into consideration. When it comes to FP&A, we believe that a well-defined strategy is a key first step to take prior to any tactical considerations. Once stakeholders have agreed on a short-or-long term strategy, we can get to work modeling using Jirav. We find that if you put the cart before the horse and try putting numbers down first, it makes it harder to adjust for market conditions, such as inflation. And if you do happen to make it there, it may just be on pure luck, rather than rooted in the client’s concrete goals, objectives, and countermeasures.
When helping your clients define their goals, ask the following questions:
- Where are you now? What resources (people and/or equipment) do you currently have?
- Where are you trying to get to? What resources will you need in order to hit your objectives?
By answering these questions during goal setting, you begin to weave in considerations for inflationary pressures. For example, if you conclude that you’ll need to hire 10 new staff members to increase revenue, how much will that cost and when will you bring them on? How will inflation impact the compensation for such individuals? If your client is a service-based business and driving to appointments, how many miles does an employee drive daily? This translates into how many gallons of fuel are required to service the revenue goals, which should then be adjusted based on current (and predicted future) fuel costs, for example.
While the budget consists of more than inflation countermeasures, they are a good factor to keep top of mind. Jirav simplifies this by leveraging of assumptions – for example, you can set a predefined rate for things such as fuel costs. As the model is re-forecasted as the year progresses, that assumption can easily be adjusted, up or down, to reflect reality.
Adding value as a strategic advisor
As a part of your CAS offerings, it’s important to understand how you can help your clients manage inflationary pressures but also convey what it means for their bottom line. Here are some ways to help clients navigate times of increasing inflation:
- Identify inflationary exposures to their business
- Build inflationary expectations into your plan
- Establish a cadence for a Finance Call to identify risks and opportunities to the plan
- Engage the client in a monthly Ops Call to actively adjust assumptions in the plan based on risks and opportunities
Because we have spent the better part of the last decade in a low inflationary period, many of us don't realize that inflation can eat into your cash. Client conversations should begin with, where are you exposed?
The truth is that every company is exposed when it comes to staffing costs. Secondly, you’re exposed to any expense not locked under contract such as operating expenses. Lastly, for companies that deal with inventory, your cash is immediately exposed via your inventory purchases while your COGS has a delayed exposure to your NOP.
This is where FP&A can help clients manage inflationary exposure. First off, FP&A that is done well delivers an Annual Operating Plan (AOP) to the business every year. That AOP should be actively developed to contemplate increases to expenses that are expected to go up due to inflation. It’s important to remember, not all inflation is bad, especially if you can capture pricing opportunities. Don't forget to review pricing and adjust modeling assumptions.
Each month, FP&A delivers to the client actuals-to-budget reports and analysis. These reports are reviewed during the monthly Finance Call, which is scheduled as soon after the accounting close as possible. This reporting and cadence put business owners in the driver's seat to react quickly when expenses go outside of expectations.
A second monthly client call, the Ops call, is a discussion with the business owner around how to operationally change the business based on the risks or opportunities identified in the Finance Call. The FP&A team will adjust the forecast by rolling forward the plan based on new assumptions identified in the Ops Call.
FP&A services offer a tremendous growth opportunity for CAS practices. Your role as a strategic advisor is more critical than ever in helping clients manage the impact of inflation and reinforcing the value that you bring to the table. Leveraging modern FP&A technology to build forecasts, budget, and financial models instantly is pivotal to your CAS offering.
For additional resources and strategies on how to approach FP&A meetings and advisory discussions, leverage the following CPA.com resources:
- Whitepaper: 5-step guide to FP&A advisory meetings
- Whitepaper: Guide to Annual Planning: Designing a forecasting & budgeting process to help clients achieve their goals
- On-demand Webinar: CAS 2.0 – Next-level Advisory FP&A Reports and Insights