HomeAnalysisRevenue optimisation in an inflationary environment

Revenue optimisation in an inflationary environment

Misheck Dera
INFLATIONARY pressures have re-emerged and businesses are on the edge again. The higher inflation environment demands that businesses quickly adapt so that they are not caught unaware, sell at uneconomic or uncompetitive prices, and fail to restock, thereby destroying value to the detriment of all stakeholders.

In its April 2022 Global Economic Outlook Report, the International Monetary Fund (IMF) noted that global inflation is expected to rise and remain elevated for longer than previously forecast.

Data from the United States Bureau of Labour Statistics showed that the US All-Items Consumer Price Index for May 2022 was up 8,6% year-over-year and was the largest 12-month increase in 40 years.

The April 2022 rate was 8,3% whereas the March 2022 rate 8,5%, and there were notable double digit increases in food and fuel prices. Back home in Zimbabwe, the all-items annual inflation rate picked up from 131,7% in May 2022 to 191,6% in June 2022, as shown on the Reserve Bank of Zimbabwe (RBZ) website.

Whereas economists now fear that the surge in inflation in the USA and Europe is now more persistent rather than transitory, in Zimbabwe we should recognise that our inflation is now persistent.

The problem with persistent inflation is that it feeds on itself and this has its own challenges on companies introducing or employing the appropriate strategies and systems to ensure business survival.

Déjà Vu
Moderate, single digit inflation is generally a sign of a good economy and is good for increasing output from businesses. However, higher inflation rates may result in an arbitrary redistribution of wealth from one group to another and a rapid loss of confidence.

If there are inappropriate responses to the higher inflation, this can result in lower output as business takes a short-term view rather than a longer one and some companies may even go out of business.

Although I could talk about the central bank and government policies on inflation, employment, and output, I would rather dwell on businesses and what they need to do to survive and still thrive in this high inflationary environment.

Although government is forecasting positive growth rates, there are fears that certain responses to the higher inflation now being experienced may lead to low or negative growth rates resulting in more people being worse off economically, increasing poverty and failure to realise objectives of creating a larger middle class in the economy.

We have been here before; in the decade up to and including 2008, gross domestic product (GDP) for the Zimbabwean economy contracted whereas inflation rose to rapidly unsustainable levels resulting in several companies going out of business.

As local production fell, we became more exposed to imported inflation and changes in exchange rates once we adopted our local currency. This is not a good position to be in.

Having resilient businesses to boost local production is very important for the health of the economy. For businesses not to be found in a situation where they experience significant distress resulting from rising inflation, management in businesses need to re-examine their operating models, notably on pricing, revenue optimisation and credit control.

Revenue optimisation
The price of the product is set so as to cover costs and provide a return on capital invested or provide funds to be reinvested in the business to maintain or grow the business operations.

A business needs to update product prices when it experiences an increased cost of inputs, such as raw materials and labour, or where there is a change in customer demand.

In addition to covering the increased costs, competitors’ prices need to be considered when updating prices.

Where competitors have lower prices, the sustainability of those lower prices, product positioning and resultant potential changes in demand also needs to be considered. Failure to properly update prices can result in low revenue, failure to cover costs, failure to properly remunerate and retain labour, generating inadequate returns and cash flow challenges.

Most businesses maintain a price list that is periodically updated as required. It is important to have clearly laid down procedures on who has the responsibility to initiate a change in the prices, and when or under what circumstances the change in prices is necessitated.

Timeliness is of utmost importance in effecting price changes in a high inflation environment because delays may result in selling at uneconomic prices.

Because of the importance of pricing decisions to the business, senior management need to be part of this process and sign off on all price changes before they are effected.

Many things can go wrong in updating prices. With high inflation, there is more frequent updating of prices and thus the risk of making errors also increases.

Incorrect price lists may be uploaded into the system resulting in selling at wrong prices. Even though the correct prices may have been uploaded into the system, the outdated price lists may not have been blocked and may still be available to be used to sell products at the point of sale.

The salesperson or teller may select the incorrect price, through fraud or it could be a genuine error, and if the invoice is not checked and the error detected, this may result in lost revenue for the business.

The business should ensure that it employs supervisory and information system controls to ensure that the correct prices have been uploaded in the system and all outdated price lists have been blocked.

Where the business practice is that quotations are first sent to customers, fixed price quotations may not be ideal in a high inflation environment. When the customer eventually accepts the quotation, the price may now be outdated, resulting in challenges in providing the products.

Where fixed price quotations have to be sent to customers, there is need to consider the most appropriate quotation validity period and specify this on the quotation.

Challenges may arise in cases where the potential customer’s request for quotations require a fixed price and a longer quotation validity period. Management would not want to be seen quoting ridiculously high prices just to hedge against possible or expected higher future prices.

If there is a possibility of negotiating to have variable prices instead of fixed prices or to shorten the quotation validity period, then these would be better options.

Frequent, loyal and major customers usually know when prices are due for revision due to inflationary pressures.  Employees may also have knowledge of impending price adjustments.

This may result in increased orders being made at the yet-to-be-adjusted price in anticipation of an increase in prices by the business. Before considering additional sources of capital, the business may fail to restock to the same levels if it sells most of its stock at very low prices when the business’ own suppliers have increased their own prices.

The situation may be worsened if those orders and sales at low prices are credit sales. This would be similar to providing free money, being low or negative real interest rate financing to the customers to the detriment of the business.

Businesses that frequently re-examine their policies and practices on revenue optimisation aspects of pricing of products, acquisition, expansion and retention of customers will always have an upper hand and thrive even during the high inflationary environment.

In our previous high inflationary environment (pre-2009), we had empty shelves in supermarkets, indicating the inability by businesses to keep up with demand.

The bar was set very low to those businesses that could requite this demand. The general sentiment is that we will never go back to this situation again, and I hope we are now wiser and indeed we will not be found in this situation again.

By having resilient businesses, we will ensure that we do not go back to this situation. Revenue optimisation is just one of the areas requiring constant review for building resilient businesses that can weather the impending storms and even thrive, thus ensuring that our economy grows for the benefit of all.

Conclusion
In its article titled Accountants at the Centre of Responding to Inflation and the Supply Chain Crunch, the International Federation of Accountants identifies insights into the other implications and responses required of chief finance officers and their finance teams.

The war in Ukraine is a trigger to high inflation and there are high chances that it will result in a number of economies across the world experiencing distress.

Our Zimbabwean experience is that structural disruptions to production output require structural re-adjustments to arrest the increase in inflation, with an emphasis on ramping up production to address the supply issues.

Every economy is different and the mix of factors obtaining at each particular time are different.

However, if the roles of business, government and central banks are well understood and aligned, then we will conquer.

  • Dera is a chartered accountant (Z) and a chartered financial analyst charter holder. He is a financial management, investments and audit consultant and is a manager at Instinct Risk Advisory. — mishdera@gmail.com

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