Impact of Inflation on the Finance and Accounting Industry

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At present, the US and UK markets are experiencing an inflationary period, with the inflation rate in the US sitting at 8.3%, and the inflation rate in the UK recorded at 9.9%, as of August 2022. In fact, inflation rates have been on the upward trend since the Pandemic, which officially began in March 2020, and certain analysts have deemed this to be the worst inflation that the US in particular, has seen in four decades.

Despite the fact that the prevailing economic conditions are expected to improve in the near future (it is projected that 2025 will see a decrease in the inflation rate - to 2% in the US , and to 1.9% in the UK ), it is critical that companies maintain a minute focus on investments and expenses during inflation, in order to manage unstable market forces as well as possible, and emerge favourably after the period ends.

The finance and accounting industry enables businesses to perform these functions efficiently. Read on to know how businesses can optimise finance and accounting support and thrive in an inflationary market.

An Introduction to Finance and Accounting during an inflationary period

Inflation creates market volatility by widening the gap between actual costs and market prices. Depending on the current rate of inflation, prices may rise or fall, which leads to the risk of unrealised gains on investments made by companies. This makes it crucial to record unit sale prices accurately and often, in order to effectively manage investments without incurring unanticipated losses.

GAAP (Generally Accepted Accounting Principles) lays the groundwork for such operations, and acts as a benchmark for the finance and accounting industry. These principles were established in the aftermath of the 1929 Stock Market Crash and the subsequent Great Depression, to aid companies in making accurate comparisons within the market, which up until that point, yielded unreliable results. Today, GAAP compliance is legally required for publicly traded companies, and competent finance and accounting professionals adhere to it in order to help businesses stay abreast of market volatility, while also providing invaluable advice, meant to prevent malinvestments from occurring.

Here are some of the wider consequences that inflation can have on the financial sector as well as the job market, along with the kind of operations that finance and accounting professionals can be expected to perform.

Consequences of Inflation on the Finance Sector

During an inflationary period, there may be significant shifts in credit allocation processes by banks, in order to stimulate specific sectors of the economy, or to provide financial aid for at-risk sections of the population. This may lead to a lack of financial support for the sectors that a company focuses on. Inversely, this may also create new and valuable investment opportunities. For example, if the US Federal Reserve Bank adheres to the currently favoured Keynesian model, it may attempt to increase the amount of money in circulation by lowering interest rates for investments into sectors that were previously deemed unprofitable. Finance and accounting professionals can identify these investment options, enabling companies to emerge ahead of the competition.

Consequences of Inflation on the Job Market

As inflation diminishes the purchasing power of money, expenses will also outpace income, both, at a macro (business-wide) level, as well as on a micro (individual) level. For employees, this will lead to a negative impact on wage growth, and an increase in living costs and consumer goods prices. For example, look at fig. 1 below.

Source: US Bureau of Labour Statistics

Over the 12-month period ending in May 2022, average hourly earnings (nonfarm payrolls) increased by 5.2%, while the average price of consumer goods rose by 8.6%.

If inflation persists, economic recession will hit, and industrial activities shall stagnate. This will tighten finances across macro and micro levels, creating an increase in the unemployment rate. In such a scenario, finance and accounting professionals can assist companies in creating both, comprehensive hiring strategies and new salary schemes that are adapted to the prevailing economic conditions, in order to ensure that business operations continue to flow as smoothly as possible.

Along with identifying valuable investment opportunities and assisting in the creation of new hiring and salary schemes, finance and accounting professionals can also continue to manage regular day-to-day financial operations, such as maintaining income statements and balance sheets, and providing regular ratio analyses that are critical in understanding the financial health of a company. But, as mentioned, an inflationary period brings with it a shortfall of capital, which may make the hiring process for new finance and accounting professionals difficult. There are also the added miscellaneous costs of new equipment, technology, onboarding, training, and overall infrastructure that are a part of workforce expansion, which must be considered.

Such a situation promotes partnerships with outsource finance and accounting firms, as they enable companies to avail financial services that are at par with industry standards, while keeping their costs and overhead as low as possible.

How Outsourcing Combats Inflationary Pressures

Outsourced finance and accounting services are increasing in demand, as they provide the key benefits of:

Reducing the need for permanent, in-house staff, and drastically cutting the aforementioned added costs.
Improving business efficiency through the services of financial experts that are trained to match industry standards.
Following the Best Practices for accounts-keeping, ranging from GAAP compliance to operating accounts software.
Aiding in business growth by freeing up employees that can be spent on generating new ideas, scaling-up strategies, and strengthening customer relationships.

Additionally, outsourced finance and accounting services can help in analysing a thorough list of parameters in order to predict inflation rates, while simultaneously adapting their services to match the business models and operational scales of their clients.

Conclusion

Finance and accounting professionals perform a variety of tasks geared towards improving business efficiency and managing market forces. Partnering with outsource finance and accounting firms is a valuable investment for companies operating in an inflationary market, as this keeps costs low and frees up the employees who can focus on core business functions and strategic growth.

Get in touch with IMS Decimal to discover how our outsourced financial and accounting services can aid you to sail through this tough inflationary period.