From the July/August 2011 issue of Treasury & Risk magazine

Inflation Threatens Profits

Price pressures could trim typical global company's profits by 9%, Hackett says.

The upward pressure on prices poses a serious challenge for corporate finance executives and could trim 9% from the profits of a typical large global company, according to recent research from the Hackett Group.

The problem is not just the magnitude of the price increases but their volatility, Hackett says. And while 61% of the companies Hackett surveyed say they’re good at anticipating price inflation, only 39% say they are successful at mitigating it.

Hackett says companies’ efforts to limit the effects of price increases are hampered by their siloed approach, with few able to link the procurement unit’s forecasting back to the company’s planning and budgeting.

While the focus has been on commodity prices, Hackett notes companies expect a pickup in the cost of external services as labor costs head higher in countries like China and India, where many companies have outsourced work.

Companies’ costs for external services rose just 1.2% over the last 12 months, but they expect an increase of 3% in those costs over the next 12 months. That compares with goods and commodities, where prices rose 4.8% over the last 12 months and companies foresee a rise of 6.3% in the coming 12 months.

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