How Inflation Affects Planning, Budgets, and Operating Reserves
Inflation has always been present at some level. When inflation is low, it lurks quietly in the corner of our minds. But when inflation is revving, the ringing in our ears will not go away. During periods of uncertainty and economic volatility, inflation tends to draw attention, often triggering regressive non-thinking reactions. Inflation needs to be treated as an economic reality to be confronted and a challenging obstacle to be solved, not as a call to action by itself.
Don’t wait for inflation to drive change. This only causes narrow reactive responses that will be too late to be truly impactful and game changing. Typical kneejerk responses include raising registration fees, scrambling to search for additional funding, and as a last resort, instituting general, across-the-board cost-cutting measures. These can be somewhat effective in the short run, however, in the long run, delivery on the organization’s value proposition will suffer.
Instead, we must learn to treat inflation as a constant but ever-changing factor to consider. Anticipation and planning are the keys to getting ahead of inflation and responding to it in a way that helps to drive assertive positive change.
Anticipation
When it comes to inflation, human nature frequently has us in a denial mindset. During periods of low inflation, we adopted a mindset that subnormal inflation will continue forever. However, during periods of high inflation, we first try to ignore the consequences. We then shift to overreaction mode, especially when the bottom line turns ugly with large deficits.
From a financial perspective, incorporating inflation factors into strategic and tactical planning and related key financial assumptions must be part of the anticipation process. This will help temper the tendency to count on overly optimistic outcomes. It will also force us to confront raising costs and hopefully trigger different thought patterns and consideration of new pathways and options.
Anticipation cannot happen if inflation awareness levels are out of balance. Balancing our awareness of inflation is as much art as science. Finding the right balance can be elusive. Aim for the middle, keeping inflation on staff’s consciousness but not making it the main, and especially not the only, factor for consideration. When inflation is low, we must work to raise awareness levels to anticipate that inflation will eventually accelerate. During periods of changing and/or high inflation we must do the opposite, attempting to temper overreaction. However, it is never too early to encourage consideration of new strategies and tactics.
Case in point: price sensitivity vs. perceived value. At some point, if your main strategy to stay ahead of inflation is to raise registration fees, the price compared to return on value proposition will turn negative quickly. Paying more for the same experience will not go over well with attendees.
Planning and Call to Action
To get out in front of inflation, we need to turn inflation-driven negative feelings into positive drivers for innovative planning and a wake-up call to action.
I recently reached out to a few CEOs of nonprofit organizations and asked them how they are reacting to inflation. Some of their responses surprised me and affected my thinking. A few comments that changed my thinking the most included, “I am not going to let fear creep into inflation discussions”; “Inflation is not going to beat us;” and my favorite inspirational takeaway: “Let’s use inflation to end R&R” (rinse and repeat).
These reactions provided a clear tactical path forward. Nonprofits must constantly innovate and evolve to deliver on a strong value proposition. They must use whatever means available to encourage new thinking and innovation. The pandemic triggered a call to action and change. Inflation can do the same. It’s not about adjusting to meet inflation; it’s about doing things differently. If current programs and activities are succumbing to inflationary pressures, then reconfigure, reposition, and change methods. Do not just raise fees and look for quick cost-cutting solutions. Throw R&R out the window and embrace innovation and change. Fears of inflation and change are not options anymore.
Planning Tip – Incorporate regular inflation sensitivity assessments into annual budget assembly and budget performance monitoring processes. Separate the sensitivity assessments into three categories: (1) labor; (2) direct program and activity expenses; and (3) other operational expenses (overhead/indirect expenses). Determine which category is most subject to inflation risks. This will help to refocus and reposition your organization’s planning and strategies. For example, if labor is most exposed to inflation risks, this will lead to considerations related to how to staff in the future, adjustments to job descriptions, retention options, and efforts to search for new competencies.
Operating Reserves
Operating reserves and inflation have a special symbiotic relationship. For me, no operating reserve is ever large enough. Inflation presents another vivid illustration of the importance of building operating reserves. The nest egg must continue to grow to ensure future financial health. Inflation is just another compelling reason to stay the course: keep adding to operating reserves, budgeting for surpluses, and building financial security.
The Path Forward
With proper anticipation and planning, inflation can be a call to action to spur change and innovation and stimulate “out-of-the-box” thinking. Avoid inflation’s potential negative impact on operations and service capacity, and return on value proposition. Remember that innovative nonprofits are not succumbing to inflation. Rather, they are responding with new thinking and moving away from old legacy programs and operating platforms.
This article originally appeared ASAEcenter.org. Reprinted with permission. Copyright ASAE: The Center for Association Leadership (October 2022), Washington, DC.
