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Top tips on dealing with inflation as a CFO

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Inflation has hit a 40-year high and shows no signs of slowing. This creates a climate of increased uncertainty for businesses and their Finance Directors.

In this article, we provide three practical tips that every finance professional can take to prepare their company.

Overview

In the UK, reported inflation is 8%, the highest rate in 40 years.

While both the Bank of England in the UK (and the Federal Reserve in the USA) have promised that inflation will fall in 2022, there are no signs of this, and the recent interest rate increases in both the UK and USA are a slightly ominous sign.

My personal prediction is that we will see inflation exceed 12% in the UK this year, perhaps even reaching 14%. Practically speaking, this means that goods and services will cost at least 12% more in a year than they do today. So, what steps can a Finance Director take to ensure their company is prepared?

Tip 1: Collect money upfront.

Issue annual contracts where possible and collect money upfront. The value of cash to you today is worth 10% more than it will be in a year (assuming that my prediction is correct – 🙂 ).

Historically, some Finance Directors have been reticent to accept upfront payments due to the accounting admin associated with deferred revenue.

ScaleXP invoice line description

New technologies – including the ScaleXP automated deferred revenue functionality – eliminates these headaches by fully automating the allocation of revenue per month, using nothing more than the data on the invoice. Our technology which is built using complex algorithms ensures that every company benefits from upfront payments with none of the downside. It works for invoice terms of any length, from 10 days to 10 years, across currencies and geographies. 

As a pragmatic solution, we suggest setting a clear target with the sales team to move, say 20% of customers, to annual contracts. Even a modest amount can create a natural inflation hedge.

Collecting money upfront is our top inflation busting tip. 

Read more about we automate Deferred revenue here ->

Tip 2: Ensure all contracts have a COL clause.

Review your customer contracts & ensure that you can pass on a cost of living increase each year. This is a standard clause in most contracts. It is best practice to tie the price increase to a well-publicised figure (say the Bank of England base rate).

Tip 3: Reconsider the cost of capital

All businesses have a cost of capital, which is designed to reflect the cost of financing.

This rate is theoretically constructed from the weighted cost of debt and equity for that particular company. Over the last several years, due to the very low Bank of England rates, this rate has been low. With inflation and interest rates on the rise, now is the right time to reassess the cost of capital, setting a rate that is reflective of the economic climate going forward.
 
In reality, most companies will see their cost of capital (be that debt or equity) rise over the coming months. Reflecting this in your cost of capital calculations now is a simple step to help the company prepare.

Summary

These three simple stops will create a natural hedge against inflation, ensuring every business is better positioned to cope with higher inflation and increased economic uncertainty.

Next week, we will publish a second article with some practical pointers on costs.

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