Inflation occurs from time to time as the economy fluctuates. Unfortunately, there are many negative effects of inflation on businesses, as cutting costs may result in losing manpower or output, leading to decreased productivity, ending up with decreased profits. What is inflation exactly? When trying to avoid or decrease the effects of a fluctuating economy, many businesses resort to increasing the producer price index, which increases the cost of the product borne by the consumers in the end.
Malaysia’s recovering economy that has been hit hard by the pandemic has resulted in many companies having to deal with increasing commodity prices, lack of supplies, labour shortage, and more. This results in cutting costs to maintain productivity, which in turn, maintains shareholder returns. However, there are several mitigatory steps that can be taken to lessen the impact of inflation:
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Ensure transparency in company spending
A company’s spending visibility allows a clear understanding of where its money is spent, easing expense management especially in times of inflation. Having a transparent understanding of each categorical spending allows for a better cost management effort, which lessens the impact on productivity. Besides, transparency in the cash flow of a company will increase its credibility, which will ease the process of getting a business loan if necessary.
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Differentiate strategic and non-strategic spending
It is quite common to see many businesses make decisions that jeopardize long-term goals in times of uncertainty. It is understandable, of course, to want to cut costs where necessary to keep afloat. Strategic spending management is essential at any point of time during a company’s lifetime but making broad-based cuts during challenging times will only affect the return on investment and shareholder value. It is thus essential to differentiate strategic and non-strategic spending and cut costs on non-strategic spending.
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Understand what drives the costs
Another benefit of being transparent with the company’s accounts is that there is a better understanding of what is driving the costs up. During inflation, it is important to understand which vendors offer the best quality for the lowest cost, and which important categories are that cutting costs are not advisable. Taking into factor all these, it is easier to evaluate the cost drivers and make better selections on what is to be maintained, and what needs to be cut.
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Reduce consumption
Spending visibility also is a driving factor in determining how to reduce consumption in a company. Determining the cost factors that increase the spending of the organisation, and strategically maintaining costs where it can be justified and cutting back when it is not will greatly improve the financial health of a company and optimise its spending power.
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Redesign work
If there is one thing to be learned from the global pandemic, it is that redesigning work for the hybrid world is a very cost-effective management strategy. One of the most prominent job redesign examples is the virtual office, where employees can connect to the office from literally any part of the world with a stable internet connection. This is cost-effective in terms of not having to maintain an office space, which admittedly can cost a great chunk of the company’s revenue. Going fully online, or at least maintaining a smaller office space with staff coming in on a rotational basis can help save quite a lot of money. Another way to redesign work is to eliminate it where it isn’t necessary or doesn’t really add value. This is where companies need to re-evaluate what activities are necessary and how they are performed to maintain productivity and optimise them to reduce the amount of work put out while still maintaining or even increasing productivity.
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Automation
Investing in artificial intelligence to automate workload can greatly enhance productivity and output of a company, where employees are better utilised in creating value rather than slogging away manually at what can be automated. Automation not only cuts down labour costs but also promotes the stability of a company. Many businesses that have automated their services and workflow weathered the pandemic better than those that didn’t.
Investing in cost management systems will help to greatly reduce operational and overhead costs, while also building company resiliency to overcome inflation. Read more articles here.
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