Andreas Simon, Regional Director MEA, Jedox, speaks to us about how businesses can tackle inflation with a strong financial strategy and analysis.
Few economic indicators have received as much attention over the last year as inflation. It has dominated headlines and been pointed to as one of the key factors contributing to current economic conditions.
Yet, it is encouraging to see that the Arab Gulf region is once again outperforming the rest of the world, this time on inflation. While the US saw an 8.5% inflation rate in September 2022, having peaked at 9.1% in June 2022 and the UK recorded a September rate of 8.8%, which is slowly rising, the GCC’s economic landscape was nowhere near as chaotic.
The Central Bank of the UAE projects inflation to be 5.6% for 2022, and Qatar’s rate is 6% as of September. Other Gulf countries show even lower rates. Inflation is a little above 4.1% in Kuwait, Bahrain sits at 4%, Saudi Arabia’s rate is a healthy 3.1% and Oman’s is as low as 2.4%.
But this does not mean that Gulf organisations can rest easy. For example, the UAE’s inflation rate may be lower than those in Europe and the Americas, but it is the nation’s highest since 2016. This presents a challenge for regional professionals in financial planning and analysis (FP&A), who have already had to rapidly adapt to a global pandemic, energy crises, climate change, cyberattacks and the rise of the hybrid workplace.
So, as inflation starts to be reflected in the region’s rising costs of labour and raw materials, all industries must absorb shrinking margins. With the new year on the horizon, this will be the time for businesses to reflect on the year gone by. In looking forward to 2023, they might find it challenging to predict what prevailing economic conditions will be – but this can be a frustrating if not futile endeavour. Instead, it would be better to assume that uncertainty is the only certainty and with this business, stakeholders must move beyond the management of inflation. They must plan for it.
Not business as usual
In recent years, FP&A professionals have had to adapt to seemingly endless volatility which has driven a need for an increase in the number and cadence of the forecast. Yearly plans have little place in a world where tectonic shifts take place overnight, warranting a complete overhaul of outlooks and strategies. FP&A professionals have had to factor in a greater number of external data points, coordinate more closely with other business stakeholders and rapidly model multiple different scenarios. As the risk of economic uncertainty rises, FP&A professionals can adapt to inflation in three main ways to help their organisation remain resilient.
1. Business partnering
FP&A professionals must become strategic advisors, building relationships with people across other departments and thus play a key role in the management and planning of inflation. They should review the organisation’s product portfolio and assess each for its profitability, dropping non-viable items and bundling others and increasing prices to maximise revenues. Planners should also consider a zero-based budgeting process and set stricter policies on expenses while collaborating with the appropriate colleagues to develop cash management strategies that will maximise working capital.
2. Predictive planning technology
As with most challenges faced by organisations in the 21st Century, Digital Transformation can help. According to the FP&A Trends Survey 2022, 39% of business stakeholders rated their satisfaction with their forecast capabilities as either good or great. But for those using a cloud-based solution, high satisfaction went up to 50%, and up to 63% for those using Artificial Intelligence (AI).
Additionally, a recent BARC survey on the use of predictive planning technology found that 94% of respondents already benefit, or expect to benefit, from predictive planning technology.
Such advanced technology must become part of a wider process in which it can enable organisations to unite their own rich data sets with third-party information such as real-time commodities pricing. In the world of hybrid work, cloud-based planning platforms enable smoother collaboration across all departments, supported by external drivers, AI and Machine Learning.
3. Sensitivity analysis and scenario planning
When FP&A professionals apply a key input to discover its impact on a key driver, they are conducting sensitivity analysis. For example, a construction contractor in Dubai might examine the cost of lumber for its effect on overall profitability. Sensitivity analysis allows FP&A professionals to determine financial health by following interrelated indicators from an initial externality, such as the effects of inflation on the prices of raw materials. FP&A departments could focus on the top three to five expense drivers and trace them back to their inputs to see how inflationary pressures permeate the organisation and impact the overall balance sheet. By doing this analysis ahead of time, organisations can better manage cash flow, either by raising more funds or increasing their prices.
Point estimates and static budgets simply do not stand up in the current economic environment. Sensitivity analysis covers multiple scenarios and allows organisations to formulate more comprehensive plans for action given the advent of any one of those scenarios.
The guiding light
The role of the FP&A department must undergo inflation of its own to prepare for the murky horizon. Collaboration on information gathering is required, followed by Digital Transformation that allows insights to be drawn from that information, culminating in an extensive interrogation of the information suite through thorough sensitivity analysis and scenario planning. This is what the FP&A professional brings to their organisation. They can, as trusted advisors, help organisations navigate inflationary terrain by following the three steps laid out here.
There are significant opportunities ahead for the finance function and its FP&A subfunction to deliver impact across their organisations and make them, to some extent, uncertainty-proof. Amid this impact, financial planners will be elevated from back-office theorists to boardroom strategists.
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