We’ve read about it. We’ve heard about it. And we feel it. Inflation is at a 40-year high in the United States. And it’s not incremental. It’s substantial and profound. What’s causing such unprecedented inflation? Well, there are two primary forces driving it: the global pandemic and Russia’s invasion of Ukraine.
The onset of the global pandemic led to factory shutdowns and labor shortages, which, in turn, resulted in severe supply chain disruptions. An interesting example is the North American lumber industry. At the beginning of the pandemic, the risk of contracting COVID shut down lumber mills large and small across the U.S. and Canada. As businesses figured out how to mitigate the risks of COVID, the mills started to reopen. However, mill workers did not immediately return to them. The lack of labor affected production capacity and, ultimately, supply. As the relationship between supply and demand was turned on its head, the price of lumber skyrocketed.
The war in Ukraine has had many repercussions on the global economy. As economic sanctions have been imposed on Russia, including the boycott of energy products, global oil and fuel prices have surged. The war has also had a significant impact on Ukraine’s agricultural industry. Ukraine is considered the breadbasket of the world, supplying wheat to dozens of countries. Paradoxically, Ukraine has plenty of wheat, but Russia has cut off shipping routes used to transport it to its customers. Ukraine’s inability to export wheat to its global customers is contributing to the global surge in food prices.
Inflation impacts us personally at the gas pump and the grocery store. At home, we react to it by making small and sometimes significant adjustments. We buy generic products instead of brand names. We postpone a long-awaited vacation because fuel prices are making travel too expensive.
And inflation, of course, is impacting us at work. Suppliers are increasing prices for the products and services we consume from them. Labor shortages are leading to wage inflation in order to retain and attract employees. And customer procurement departments are demanding price and payment term concessions to protect their company’s profitability and cash flow.
Business leaders need to understand the drivers of profitability to anticipate and respond to the impact of inflation. Broadly speaking, there are several specific skills they need to understand profitability:
- knowing how to read a profit and loss (P&L) statement
- understanding how the relationship between revenue and expenses affects P&L
- understanding profitability at a more granular level including reading individual line items on an income statement to determine how they can be managed to improve profitability
For example, if a company’s production costs are increasing, how can a leader respond to them? Why are production costs rising? Is it due to rising materials costs? Higher manufacturing labor expenses? More expensive tooling or facilities costs? Which of these can be contained or reduced? And if none of them can be, do prices need to be increased to customers? If prices are raised, how will customers react?
Without basic business acumen skills, leaders will not have the skills to understand let alone respond to the inflation crisis we are facing.
An Insight Experience business acumen simulation experience can help business leaders better understand the drivers of profitability and how economic forces, such as inflation, impacts them. During a simulation, an Insight Experience facilitator introduces leaders to financial concepts and then asks them to apply and practice them in a risk-free environment. We can modify our simulations to reflect a variety of economic conditions, allowing leaders to experience and practice responding to them.
If your business managers need to improve their business acumen to be better equipped to lead their organizations through periods of change, consider scheduling an Insight Experience business acumen simulation experience for them.
