In today's fast-paced and ever-changing business world, finance departments are facing significant challenges that are impacting their ability to thrive. One of the most pressing issues is the cost-of-doing-business crisis, which refers to the increasing costs businesses are facing with their daily operations.
In this article, we'll dive into more detail around the impact this economic climate is having on finance teams, along with the measures they can put in place to address these issues. We’ll cover the specific financial factors businesses should be aware of, while also explaining the benefits of Cloud technology in pursuit of survival.
With this information at hand, finance teams should be better equipped to both understand and navigate this crisis successfully.
What is the cost-of-doing-business crisis?
The cost-of-doing-business crisis is a significant issue facing companies across various industries. It refers to the rising rates businesses are having to contend with when simply trying to complete their daily operations. If you factor desired growth into the equation too, this can really stunt any expansion plans they might have.
These rising costs are related to a number of central operational needs, including energy prices, labour costs, and a regulatory environment that is becoming ever more complex. It’s worth noting that it’s not just small companies being affected by these conditions. Large organisations are feeling the strain too.
Our Finance Trends Report highlighted that 78% of finance professionals are concerned that economic conditions will impact their organisation’s profitability over the next 12 months. This shows that those working in finance departments are well aware of the challenges on the horizon, as well as the key role they’ll play in steering their business to safety.
The cost-of-doing-business crisis is different from the cost-of-living crisis, which itself is typically caused by factors such as inflation and stagnant wages. While the cost-of-living crisis can impact the ability of employees to maintain a decent standard of living, the cost-of-doing-business crisis can make it difficult for businesses to remain competitive in their respective field.
Despite this differentiation, the two terms are deeply intertwined and will influence one another. If individuals are struggling to pay for commodities like food and electricity, then the economy likely has a similar feel for companies too.
Businesses that are not able to manage their costs effectively may struggle to maintain profitability and could be forced to reduce their workforce or cut back on investment in key areas. This can have a ripple effect and lead to a downward spiral within the organisation, leading to decreased employee morale, lower customer satisfaction, and ultimately a less healthy bottom line. CFOs should do all they can to avoid cutting costs in the wrong ways.
One of the key challenges facing finance teams in addressing the cost-of-doing-business crisis is the need to balance short-term cost savings with long-term strategic goals. While cutting costs may provide immediate relief, it may not be sustainable in the long run. They must take a more nuanced approach which considers the unique needs their business has.
Is the cost-of-living crisis a bigger threat to businesses than the pandemic?
When it comes to threats in the business world, the pandemic was certainly one of the most significant challenges in recent memory. It had a profound impact on organisations globally, disrupting supply chains, reducing consumer demand, and forcing many to close their doors permanently. However, it's important to note that the cost-of-living crisis is also posing a significant threat, especially when it comes to maintaining a stable workforce and managing cash flow.
It is a complex issue that has many facets to it, including rising house costs and an increased price for everyday goods. When employees are struggling to make ends meet, they may demand higher wages to counteract this. If you fail to give them this, they may go elsewhere. This outcome could arguably be more financially damaging than giving them the pay rise they seek.
Another catch-22 scenario is the increased cost of goods/services. Businesses may be forced to increase their prices to accommodate these changes, but this could lead to lower demand from their customers and therefore decreased profitability. It’s important that your financial processes are optimally efficient in these situations so you can adapt as much as possible.
While the pandemic was certainly more of an immediate threat to businesses, the cost-of-living crisis will arguably have longer-term implications. In some cases, companies could weather the storm of the pandemic with government support or by pivoting their business model. But the cost-of-living crisis doesn’t have the same widespread focus, so can slowly eat away at a company's bottom line if the right actions aren’t taken.
It's worth noting that the pandemic and the cost-of-living crisis are arguably interconnected too. There was a long chain of events, including the likes of Brexit and the pandemic, which likely played a part in creating the economic conditions we’re experiencing as a society today. So, finance teams may be able to use the experiences they had during the pandemic to formulate a response to this new threat.
It's also wise for businesses to keep up with the latest government cost-of-living insights, as this will help them to gauge what their spending may look like over the coming months, how others within their field are being impacted, and any support they might be eligible for.
The most recent government insights published highlighted that the cost of goods/services has been rising month on month, while also listing a breakdown of other specific costs that have been on the rise. Simply having visibility of these details can help with putting proactive measures in place.
Factors for finance teams to consider during a cost-of-living crisis
There are a number of considerations finance teams should bear in mind when they’re going through a cost-of-living crisis. Here are a few of the key factors that will have an impact:
Energy costs can have a significant impact on a company’s bottom line. When the cost of gas and electric increases, businesses must adjust their budgets accordingly to account for these higher utility bills. In some cases, they may need to explore alternative energy sources or adjust their operation to reduce energy usage.
When inflation is high, businesses may struggle to maintain a healthy cash flow. They’ll perhaps need to adjust their pricing, negotiate better payment terms with suppliers, or explore financing options to ensure continued lines of credit and constant access to fluid money (which is needed to remain operational).
Employee retention is always a critical consideration for companies, but it becomes even more of a challenge during a cost-of-living crisis. Businesses must ensure they understand the changing needs and expectations of their employees if they’re to hold on to their best talent.
Heavily linked to employee retention is the aspect of labour costs. As the cost-of-living increases, employees may demand higher wages to maintain the standard of living they had before. Businesses may need to adjust their labour costs, consider flexible work arrangements, or explore automation to reduce costs. But again, this needs to be balanced with paying staff fairly and keeping their most skilled workers.
Regulatory requirements are always evolving, and they are always a factor finance teams should focus on if they want to remain compliant. But regulations can become even tighter when conditions are tough, as the government tries to remedy the wider economic climate. Businesses may need to comply with new legislation aimed at protecting workers or addressing inflation, which could impact their operations and bottom line.
How the finance function can survive the cost-of-doing-business crisis
During a cost-of-doing-business crisis, finance teams must be proactive to protect their organisation from financial shocks. Here are some measures they can implement to achieve this:
Develop a contingency plan
They should develop a contingency plan that outlines how the business will respond to crises like this going forward, so they’re in an agile position when these cycles come back around. The plan should include strategies for managing costs, adjusting budgets, and reducing expenses. It should also identify key risks the business might face during the crisis (as well as detailed steps for overcoming these risks).
Monitor cash flow
Finance teams should closely monitor cash flow to ensure they have enough cash on hand to meet their financial obligations. They should regularly review cash flow forecasts and take steps to improve cash flow health if it appears to be taking a turn for the worse. This might include finding ways to collect accounts receivable more quickly or reducing unnecessary inventory.
Identify cost-saving opportunities
The team should work together and with other departments to identify cost-saving opportunities. This might include renegotiating better terms with suppliers, streamlining processes, or using resources more efficiently. Finance teams are best placed to analyse the data and see where spend can be cut without negative repercussions.
Diversify revenue streams
Companies should consider diversifying their revenue streams to reduce reliance on a single product or service. Those in the finance function are in a good position to highlight which products generate the most income, which can potentially be dropped, and where there are gaps for a new offering. This might also involve exploring new markets or developing new partnerships.
Invest in technology
Technology can assist with all these measures, improving efficiency and reducing costs in the process. CFOs should explore new technologies that can help their department to automate manual processes, improve data accuracy, and reduce errors. Cloud technology can help finance professionals to work smarter and collaborate in a more cohesive manner.
Benefits of Cloud tech during a financial crisis
Cloud technology is a game-changer for finance teams, particularly during a cost-of-doing-business crisis. Many businesses shifted to remote working during the pandemic. Cloud-based accounting systems enable updates to be communicated more seamlessly and provide access to critical financial data from anywhere.
With instant access to real time data, finance teams can quickly analyse this and use it to guide decisions, which is particularly important during testing economic times. Cloud accounting ensures they can get more involved with strategy, as they are equipped with both the capacity and resources to do this.
This technology facilitates cost savings through streamlined processes, better visibility of spend/general performance, and actionable insights from powerful reports. During a cost-of-doing-business crisis, companies must find ways to cut costs in the right ways. With the Cloud, they can eliminate the need for expensive on-premise systems along with the associated maintenance costs.
Cloud-based accounting software such as Advanced Financials provides flexibility and scalability. During a financial crisis they may need to rapidly scale up or down (depending on the circumstances). This would be a stressful and expensive process with traditional accounting solutions but is easily achieved with the Cloud.
Advanced Financials ensures the whole department is working towards the same goals. All activities within the finance function are brought together in one digital space, thus creating a single version of the financial truth.