Category: Accounting Strategy

Inflation, the labor shortage and the challenges of hybrid work—these are just three factors that define today’s economic landscape and challenge today’s finance professionals, particularly accountants. How can organizations respond? We spoke to two accounting professionals from the accounting, consulting and technology services firm Crowe to find out.

Forecast For The Effects Of Inflation

It seems that no sectors are immune from inflation. Prices for food, energy and trade services rose by 0.9% in January alone, and raw material costs have gone through the roof. Large changes in demand and supply have created supply chain challenges in seemingly every facet of the economy, contributing to rapid swings in prices and overall inflation.

Inflation’s volatility makes it harder for finance and accounting professionals to see into the future. Specifically, accurately forecasting cash flow—never a simple task—becomes even more difficult when prices can change so significantly and rapidly.

“Cash flow forecasts are a critical input to a variety of accounting and financial reporting elements,” says Ryan Walker, who works in accounting advisory at Crowe. “Inflation can result in changes to cash flow forecasts or can even cause uncertainty in forecasting, both of which could in turn affect asset impairment assessments, fair value of assets and going concern analyses.”

To avoid surprises, Walker says, accountants should think about how inflation might affect their forecasts—particularly if a business can’t pass increasing costs along to its customers.

Another option is renegotiating contracts to counteract inflation. “If they’re able to, some companies might want to modify their contracts with customers so that they can pass some of those costs on,” Walker says. Finance teams should tread carefully, however.

“We also saw this a lot during the early days of the pandemic. Companies were facing struggles and modifying their contracts, such as revenue contracts or leases, but they lacked detailed knowledge of the relevant accounting guidance and financial reporting implications,” Walker says.

The stumbling block for many companies is a lack of experience on an organizational level.

“Many companies don’t deal with these issues all that frequently,” Walker says. “Companies should carefully assess any contract modifications in order to ensure the correct accounting models are applied and the resulting financial reporting impacts are appropriate.”

In addition, Walker stresses the importance of frequent and thorough communication with key stakeholders across an organization. “Often, sales teams will modify contracts without communicating the changes back to the finance and accounting department,” he says. “When there isn’t good cross-functional communication, the impacts might not be accounted for accurately or in a timely manner.”

Separately, if companies can’t modify long-term revenue contracts, inflation could render some contracts unprofitable. In these instances, Walker notes, companies should carefully assess the accounting and reporting implications, such as when such a loss should be recorded.

Factor In The Labor Shortage

Compounding the current economic disorder is a tight labor market.

“With the Great Resignation, a lot of departments are short-handed, and they’re finding it very difficult and expensive to hire folks,” says James Hannan, managing director in accounting advisory at Crowe. “Just having the people in place to do what needs to get done, especially at companies that have experienced tremendous growth, has been challenging.”

That’s why focusing on retention is so critical. One strategy that can help reduce turnover is clear: Raise salaries.

“Companies should take a close look at what they’re paying folks and make sure that salaries are consistent with the market,” Hannan says. “Waiting until the end of the normal yearlong cycle to make adjustments is not a wise approach because organizations can be pretty sure that other companies are actively recruiting their staff and often are willing to pay a hefty premium to attract them.”

Money doesn’t solve every problem, of course. There’s also the issue of job satisfaction. Hannan suggests more automation to help reduce repetitive work. Automation is good for the company, too. When employees focus on higher-value work, overall efficiency increases, which improves organizational resiliency.

Another strategy many companies can employ to mitigate the challenges of staff turnover is to outsource some of their accounting processes. Outsourcing can fill critical roles, and it also helps organizations gain access to best accounting practices and advanced technology.

Optimize For Hybrid Work

Finally, there’s the work-from-home phenomenon, which has implications for accountants.

When the pandemic began, many companies had little choice but to close their offices and equip their workers to do their jobs at home. “As people transitioned to work-from-home environments, organizations required new equipment and had to pivot to a paperless system,” Hannan explains. Then, an interesting thing happened: “Many leaders learned that their people can be effective and productive while working remotely.”

Employees recognized this, too. What’s more, they found that “working from home has given them the flexibility to balance family, personal needs and work, and they don’t want to give that up. Working from home has become essential to maintaining their well-being,” Hannan says.

While some businesses have insisted their employees return to the office—further fueling the Great Resignation—others have been reevaluating their on-site needs. “Companies are finding that they might not need all their office space,” Hannan says.

But downsizing office space can’t be done overnight. For renters, business leases are often lengthy and rigid; for property owners, unused space equates to wasted money. So while it’s tempting for executive leadership to look for savings in less square footage or by subleasing, the accounting department must be part of the conversation, as they’ll need to consider any complex accounting issues that may arise.

Walker explains these could include accounting issues related to lease modifications, long-lived asset abandonment and long-lived asset impairment. Another path forward that some businesses might consider is evolving office spaces instead of closing them. “Being physically present and interacting in person can yield a lot of benefits,” Hannan says. “And, of course, customers often need someone to be there in person.”

The ultimate takeaway? There is no one-size-fits-all approach. “Each company needs to get input from all stakeholders to find the model that works best for them to balance all these needs and remain flexible to respond to a rapidly changing environment,” Hannan says.

Tatiana Walk-Morris is a Detroit-born, Chicago-based freelance writer specializing in business and technology.