How inflation affects accounting and finance teams

Despite sweeping action by the Federal Reserve, high inflation continues to wield power over the U.S. economy. The rate of inflation remains at 5% — well above the Fed's 2% target. Ongoing supply chain disruptions, the Russia-Ukraine war and the lingering effects of COVID-19 stimulus spending are among the factors undermining attempts to stabilize the economy.

Soaring interest rates and lingering inflation have made it more difficult for businesses to remain competitive and profitable. Companies face higher costs for raw materials, distribution, payroll and other operational expenses — directly threatening their bottom lines. As buying power diminishes and risk grows, it's vital to have a clear picture of an organization's financial health. During periods of high inflation, however, that is more challenging than ever.

Under normal circumstances, businesses face immense pressure from stakeholders to drive growth and maximize profits. When inflation is high, simply maintaining the status quo can be an uphill battle. Inflation can easily distort a company's financial performance and overall health — adding to the complexity facing accounting and finance teams. Amid a volatile economy, industry professionals must continue to deliver sound data, financial analysis and projections to keep their organizations afloat in the short and long term.

Accounting for inflation: reporting with less reliable data

Inflation can have a major impact on financial statements, such as a company's balance sheet. While GAAP indicates how inventory is measured, high inflation inherently causes market values to fluctuate. This instability makes it more difficult for accountants to assess inventory assets accurately.

Even current cash flow can be deceiving. When a business increases prices on its products or services, it may appear that profit margins are healthy or even growing. However, that growth must be weighed against the higher cost of doing business.

Accountants also face added challenges when it comes to financial decisions for future growth. While they typically rely on data from the prior year, that historical data is irrelevant when inflation is high. Accounting professionals must shift to alternative strategies that allow them to adjust for inflation.

Finance during inflation: balancing stability and growth strategies

Finance professionals, such as financial analysts, often influence major company-wide decision-making. During periods of high inflation and stock market volatility, the speed of change and lingering uncertainty can lead organizations to take a more conservative financial approach. This could mean cutting production, delaying business investments, implementing a hiring freeze or even laying off employees. But, as the old adage goes, sometimes you have to spend money to make money.

Finance experts play a key role in helping business leaders determine when spending is mission-critical. Being strategic about investments like filling key roles or implementing new technologies can position companies more competitively when economic conditions improve.

Employee well-being and retention also at risk

Individuals in corporate accounting and finance roles tackle complex, demanding and fast-paced work. They frequently inform and guide financial decisions that can make or break a business. In this high-stress industry, workforce burnout and high attrition are major risks. A recent survey showed that 88% of accountants crave a better work-life balance, while 71% of respondents expressed the need for employer-driven mental health services. Understanding evolving accounting and finance workforce challenges and trends is key to navigating a high-inflation economy. 

Prior to surging inflation, companies faced a growing shortage of accounting and finance professionals. An exodus of baby boomers from accounting and finance roles, fewer people entering the field and misconceptions about the industry are partially to blame. Turnover throughout the Great Resignation has compounded the issue. Between 2020 and 2022, more than 300,000 accountants and auditors quit their jobs.

Despite a lack of trained talent, accountant and auditor jobs are projected to grow steadily at 6%, while financial manager positions are expected to increase by 17% between 2021 and 2031. A recent Aston Carter jobs report found that accounting and finance skill set demands for data analysts, operations managers and directors of risk management are each 30% higher than pre-pandemic levels. While accounting and finance expertise is more crucial when inflation is high, it's also much harder to find.

Answers lie in inflation accounting and employee retention strategies

This is not the first time the U.S. has experienced high inflation. During the Great Inflation beginning in the mid-1960s, for example, the average rate of inflation reached a staggering 18.5%. The Consumer Price Index has measured price changes in the U.S. economy for more than 100 years. Historical data, including inflation increases, patterns and trends, can help accounting and finance professionals use lessons learned to navigate the current economy.

When inflation is high, industry professionals turn to inflation accounting strategies to increase accuracy in financial analysis and reporting. Some leverage the current purchasing power method to adjust price levels from historical, pre-inflation rates, while others apply the current costs accounting approach. Accountants using the latter method value assets at fair market value instead of historical cost. Employing professionals with experience in high-inflation environments and with knowledge of inflation accounting gives companies a distinct financial advantage. 

Companies also benefit from prioritizing employee satisfaction and retention. Businesses that have an effective strategy for finding and retaining accounting and finance talent are better positioned to ward off attrition. 

Organizations that overlook the importance of retention face a costly dilemma when employees leave: rehire at inflated salaries or leave critical positions vacant.