2020 and 2021 radically changed the landscape for CFOs, and things don’t show any sign of slowing down. Post-pandemic, we feel the rebound impacts, and those impacts are considerable and lasting. CFOs will be managing the dynamics of inflation, labor rates, cash flow, and automation through 2022 and beyond.
Here are the five trends we feel are the most impactful in 2022.
The elephant in the room will continue to have effects that reverberate beyond 2022. While initially assumed to be transitory and coming to an end when supply chains worked themselves out, and consumer spending shifted back to including experiences, it isn’t working out that way. Other events are pushing inflation even higher.
Predictions were for closing out the year at 5% inflation, but the war in Ukraine has challenged if that is at all possible. Inflation will likely stay high because of the war’s price impacts on fuel and the renewed supply chain issues, and China could be another issue fueling inflation should they step in to support Russia.
Materials prices will keep going up, and CFOs have the difficult task of figuring out what prices need to be in the face of increasing input costs. We all know that pricing is one of the most complex decisions to make in business and becomes even more challenging when consumers struggle during very high inflation.
Labor Costs and Availability
The unemployment rate will fall below 3% for the first time since the 1950s. Add in the change in how labor is approaching the workplace and the dramatic increases in wages, and managing for labor costs is going to be difficult for some time ahead.
With the high number of job openings, more employees than ever resigning jobs, and the incredibly low unemployment rate, an explosion in wages will only continue, even more so than in the late 90s when the wage explosion was more limited to specific sectors. This time, it is across every sector. This wage rate explosion will also foster more inflation.
With unemployment rates so low and inflation so high, the Fed has no choice but to increase rates faster. The quarter-point increase of March 2022 was the Fed putting a toe in the pool, but they will have to dive in. The subsequent two rate increases will be a half-point to cool the economy.
The most salient outcome of these increases for CFOs will be borrowing rates. Expect lines of credit to show some considerable interest rate jumps, so the cost of utilizing credit will take a bigger hit on the bottom line. EBITDA is in jeopardy from inflation increases, and post EBITDA will be under pressure from rates.
Inflation running hot, an unemployment rate below full employment and the need for more significant rate increases could mean the Fed needs to institute an 80’s style Reagan era recession to cool the economy. It’s telling that inflation is running as high as 1981’s rates. Will there be a Paul Volker-style induced recession and then the tremendous post-recession growth that came as Volker reduced rates? It’s possible.
Supply Chain and Cash Flow
While supply chains were working themselves out, the explosion of COVID-19 in China and the war in Ukraine have once again constrained them. China doesn’t just take precautions with COVID-19; they shut everything down. The fact that China has had almost no proliferation of COVID-19 due to past lockdowns means the entire country is at risk, potentially impacting supply chains throughout the year.
An inability to get materials or supplies constrains cash flow if projects can’t be completed on time. Add in the tremendous shortage of truck drivers, and getting product off the dock is an issue.
Fractional CFO like at Daaxit are planning on construction clients again struggling with increased building products prices and availability issues. Where this takes home prices and the new home market is a big question. Will we see slowed home buying despite a shortage of inventory? Slowed home-buying means other purchases start to slow as well.
There are some enormous challenges out there in 2022. Financial management won’t be easy this year, and CFOs will be the most crucial person in the organization. The one positive trend that has kept up despite everything is consumer spending, but consumer sentiment is falling quickly. It’ll be interesting to see if spending and sentiment disconnect.
May your 2022 be successful; hopefully, a few of these issues will resolve themselves more rapidly or won’t be as severe. No matter what, the CFO’s job this year isn’t just important; it’s crucial.