Controlling Costs in an Inflationary Environment

Bonfire Capital Advisors
Feb 14, 2024
2 min read

Updated: May 31, 2024

Key Insights

Rising inflation and supply chain challenges can significantly impact profitability.
Ensure reliable management information is available to make informed and measured decisions in real-time.
Plan for “what ifs” due to supply chain delays, shortages and unavailability.

Why It Matters

Rising inflation and supply chain challenges have the potential to significantly increase expenses and in turn impact profitability. The timeline for economic recovery remains unclear and therefore taking steps to counteract these pressures is critically important. One of the most effective strategies is to focus internally on cost-controlling measures and place a renewed emphasis on ensuring operations are as lean and efficient as possible.

Cost Control Strategies

Reliable and Timely Management Information – The most effective tool for managing costs is to ensure that management information is reliable and available in real time. Ideally, this includes per-unit and per-customer profitability analysis. Numerous cloud-based ERP systems vastly improve accounting efficiencies, provide tailored dashboards, and often integrate with other systems. There are solutions for businesses of all sizes ranging from sole proprietors to Fortune 500 companies.

Operational Efficiencies – There may be limited scope to negotiate raw material and other direct costs. Where available, early payment discounts or bulk purchases should be considered and balanced against the availability of working capital. Resource and production planning can often drive operational efficiencies and improve margins. This area is often overlooked during times of economic prosperity, but a renewed focus could yield significant benefits. Considerations may include asset and resource utilization, outsourcing, automation and discretionary repairs and maintenance.

Review Overhead Costs – Consideration should be given to eliminating non-essential overhead expenses. Larger overheads such as insurance, occupancy and overhead wages should be carefully reviewed as there are often opportunities to reduce these costs.

Detailed Budgeting & KPIs – Establishing a formal budgeting process and developing a suite of Key Performance Indicators goes hand in hand with good quality financial information. These provide a benchmark to measure against actual financial results and quickly identify areas requiring immediate attention.

Contingency Planning – Planning for the “what ifs” due to supply chain delays, raw material shortages or parts unavailability can significantly reduce business interruptions and help maintain strong relations with customers.

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