Many medium and large businesses are beginning to worry about their financial position in the market following inflation in the UK being at a 40-year high, the National Insurance rise, a cost-of-living crisis, and hints of a recession. As demonstrated throughout the pandemic, many businesses will again be turning to their CFOs for support and guidance to navigate through these turbulent times.
The cost-of-living crisis has caused confusion and uncertainty for many businesses, which is particularly challenging for finance teams using outdated on-premise legacy systems that are more susceptible to errors and errors going back to the C-Suite. A turbulent economy, the long-term effects of the pandemic, and rising costs for businesses all make it difficult for employers to offer a real 'cost of living' increase to their employees. As wages rise in recent months, they have largely been unable to keep pace with inflation.
Tackling one of these factors alone would keep CFOs and financial professionals awake at night. Yet when they all play out at once, protecting your business's financial health becomes more crucial than ever. In times like these, it's easy for the mind to stop/start without really putting down any concrete solutions for belt-tightening, reassessing, ship-steadying, and fresh thinking that the current climate requires.
In light of the ongoing cost-of-living crisis, we have written this article to help steer finance departments in the right direction.
How does the cost-of-living crisis affect businesses?
According to a bi-monthly survey of 500 leaders of medium-sized businesses carried out by BDO almost a fifth (18%) of businesses believe the cost of living crisis and rising inflation has or will have a more negative impact on their business than the COVID-19 pandemic. Warnings from the Office for Budget Responsibility outline that inflation could hit 10% by the end of 2022 which is also a serious cause for concern, with more than half of businesses (60%) having only planned for an inflation rate of 6% or less this financial year.
Meanwhile, businesses are battling with the impacts on recruitment and retention efforts resulting from the rise in National Insurance, which came into effect in April. A third (33%) have raised wages in a move to absorb the increased contributions facing their employees, while 31% of businesses are struggling to pay the higher cost to them as employers. Just under a third (30%) have paused or reduced hiring as a direct result.
Preparing your finance team for the cost-of-living crisis
Finance teams continue to operate in an ever-changing world, a world they can help define, as we enter uncertain territory. Like a game of chess, each business change must be well thought-out to ensure each move made counts. Therefore, finance professionals, leading from the front, now have a pivotal opportunity to shape the future of business as we continue to navigate through the cost-of-living crisis.
Some key chess moves finance teams have in their arsenal include carrying out financial planning and analysis (FP&A), scenario planning, cash flow management, and staying on top of legislation via financial management software in the Cloud.
Embracing a digital-first approach through the adoption of Cloud finance management technology will allow businesses to implement clear financial guidelines as well as streamline employee and customer experiences to remain relevant in an ever-changing market. Considering the pain points addressed, CFOs and finance teams have a unique opportunity to enable their organisations to achieve the right degree of agility with the right tools to provide visibility, insight, control, and measurement.
Preparing your finance team for the cost-of-living crisis is by no means an easy task. The human element of the business, your employees, need to come first if you want to ensure business continuity both now and in the future.
We understand that CFOs and finance managers are in a very tricky situation where they’re trying to help employees who are struggling and facing financial difficulties whilst their business is also facing price hikes, which is why it’s important to emphasise that empathy, balance and discretion are all absolutely key.
Here are some ways to support your finance team during the cost-of-living crisis
- Implement a financial wellbeing policy that feeds into your overall wellbeing strategy to support your teams' financial situation. Make sure your staff are aware of all the benefits the business currently offers.
- Support in-work progression to retain talent by giving employees a clear path to follow, access to the right training and a supportive line manager.
- Increase your focus on mental health and employee wellbeing amongst your team by having a plan for dealing with potential issues and offer training so managers understand how to spot signs of depression or anxiety.
- Consider organising a social event in the office to provide your team with a cost-effective way to engage with one another outside of work hours.
- Embracing flexible working can improve career progression options as well as reduce travel costs and childcare fees by working from home.
- Provide bike storage and charging points for electric cars.
- Look into secure spaces for bikes, scooters and charging ports for electric cars so your team can reduce the amount they spend on fuel.
Mitigating financial risk for your business
Although there is no silver bullet to mitigate the impact of a cost-of-living crisis, there are still steps that finance departments can take to ensure business survival and continuity.
Retain talent and outsource where it makes sense
Nurturing employee development and growth is another way to mitigate turnover risk during testing teams. Start planning now to make sure the right professionals are available for your finance department. This is an opportunity to ensure employees know that they are valued, feel safe, and can progress in an environment where they can continuously learn.
Revisit existing contracts and arrangements
Renegotiate debt interest with lenders, or market test alternative solutions. It is also worth re-examining existing contracts to explore whether they should also be renegotiated.
Use metrics for every decision
Businesses that know what metrics to use and what they will measure will be able to successfully manage uncertainty and reduce risk when making decisions. This leads to a more prosperous business as more confident, long/short-term decisions can be made proactively. Understanding your key performance metrics such as product profitability, cash flow, customer preferences, staff productivity etc. will play a crucial role when it comes to weathering the storm of the cost-of-living crisis.
Identify areas where automation would be beneficial
The role of the finance department will continue to grow and evolve in terms of responsibility and agility. Examine what of your existing processes or operational finance activities can be automated to create more efficiency and help your team provide greater value. Therefore, it's time to upgrade outdated finance systems with Cloud financial management software that can streamline day-to-day processes while also providing data that is valuable to the business.
Carry out regular Financial Planning & Analysis (FP&A) reporting
Strategically identifying what values drive success in your business is key. FP&A can give you a single unified view of your finances - past, present and future. However, it's not enough to just predict desirable outcomes; a rigorous, well thought out plan needs to be developed to achieve them. Using Cloud financial management software can help finance departments evaluate more accurate forecasts and realistic budgets and develop new and creative methods for the business to generate profits and reduce costs.
Keep a close eye on cash flow
Although a seemingly straightforward strategy, getting your cash flow strategy right has a huge impact as it allows finance teams to predict how much money will be available to the business in the future. It also helps identify how much money is required to cover debts such as paying employees and suppliers on time.
Moving forward, finance professionals will need to be aware of potential pitfalls so they can prevent business outgoings from becoming greater than money coming into the business through sales and financing activities. Keeping track of cash flow will also help to spot trends, and when used in conjunction with forecasting, can prepare for future changes, tackling any cash flow problems in good time.
Get the right tools in place
For finance departments peering into the uncertain future, they need to think beyond traditional bottom-line metrics and put purpose and trust at the forefront of their strategies. The time is now for them to take the initiative to transform the finance function into a strategic and value-driven powerhouse both now and in the future.
Our Cloud financial management software Advanced Financials helps finance teams manage processes more efficiently, save on costs and access real time data analysis to help plan for and navigate the next few years mitigating as much risk as possible.
From real-time metrics and reporting to automation and self-service capabilities to access from anywhere, you can easily streamline all accounting functions, such as general ledger, accounts payable, credit management, bank reconciliation, and more, to give you more time to focus on cash flow, FP&A, forecasting, scenario planning and reporting using real-time data.
If you want to protect your business from the negative financial repercussions of the cost-of-living crisis then get in touch with us today.