Inflation and talent: 2 top headwinds facing business in 2022

New challenges are emerging for businesses in the United States and old challenges are persisting, according to finance decision-makers in a recent quarterly survey. Ken Witt, CPA, CGMA, and Mellissa Reed, CPA, explain some of the headwinds and also the reasons for optimism in the future.

What you’ll learn from this episode:

• An overview of the latest results of the Business and Industry Economic Outlook Survey.
• The percentage of optimists compared to pessimists about their own businesses.
• A zoo executive’s outlook for her organization’s 2022 revenue and budget projections.
• A summary of news related to the SEC, the IRS, and the employee retention credit.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.

Transcript:

Neil Amato: Welcome to the Journal of Accountancy podcast. This is your host, Neil Amato. In this episode, we take a more in-depth look at the fourth quarter Economic Outlook Survey, which paints a pretty good picture of the challenges finance leaders are facing for 2022. We’ll talk with a survey expert and also with one of the survey respondents about the reasons for optimism and concern in the new year, and that’s all coming up after this brief word from our sponsor.

To listeners of the Journal of Accountancy podcast, they should know the name Ken Witt. Ken is a CPA who holds the CGMA designation. He’s our in-house expert on the Business and Industry Economic Outlook Survey. He’s an associate technical director for management accounting research and development. Ken is here to talk about that survey and some of its firsts, as I like to call them. Ken, welcome back to the podcast.

Ken Witt: Thanks, Neil, good to be here. I always enjoy this.

Amato: Ken, in this survey, the one that was released on Dec. 2, I believe that two firsts emerge and when I say firsts, I mean since 2009 and readily available data. One is that inflation now tops the list of challenges faced by finance executives. Two is that the projected increase in salary and benefits costs for the coming 12 months went above 4% for the first time. What do you make of those developments?

Witt: Well, I think you can read it in the press. What we’re hearing a lot about is inflation seems to be running higher than it has ever, and that’s reflected in the fact that, as you said, it’s become the top challenge on our top 10 list of challenges. It’s the first time it’s been on the top of the list, and actually it hasn’t appeared on the top 10 list except for recently in the second quarter was the first appearance on the top 10 list.

That is a big deal. If you take a look at some of the other components of the top 10 list, they also relate to cost increases, and manufacturing, supplies and equipment costs are number 3, employee and benefit costs, number 4. Domestic economic conditions is the fundamental problem there. As you said, the big deal is the employment costs and the salary and benefit expected costs are now expected to increase at a rate of 4.3%, up from 3.7% in the third quarter and only 2.9% in the second quarter. It’s really at a peak.

Amato: What do you think about the hiring outlook? It seems like a lot of people want to hire, but clearly they’re having trouble hiring.

Witt: Clearly. It’s a good news/bad news situation because that’s one of the things that has lagged behind in the recovery is the staffing and the hiring has been slower than some of the other components of spending. Even the key components of the industry — manufacturing, retail, trade, construction, the kind of core components of our industry sectors — all have plans to increase their hiring.

The problem is, can they find the people? We ask, as we usually do within the survey, about specific problems that are presenting themselves. We ask about the challenge of hiring and 25% of our respondents said they’re having an extreme amount of difficulty filling their positions, so they’re offering a lot of incentives and adopting a lot of strategies to address the problem of not being able to get sufficient staff.

Amato: Now, obviously, we’ve talked a lot about challenges and the obstacles in their way, cost increase concerns, but clearly the news is not all bad. The overall CPA outlook index remains firmly positive at 74 on a scale of 0-100. About their own businesses, I believe it’s 58% are optimistic versus 10% pessimistic. So when the optimists outnumber the pessimists, nearly 6-1, if my math is right and I think it is, there’s still plenty of good.

Witt: Yeah. No, I think we have reason to believe that our economy will continue to grow. And in spite of some of these challenges, all of these sectors, for the most part, they may be a little less optimistic than they have been in recent quarters, especially recovering from the shutdown and the downturn that was associated with that.

But most of our industry segments do project increases in the expansions in their business.The cost and the hiring challenge are going to need to be, those are the headwinds that we have to face right now.

Amato: Coming up in our next segment, we’ll have an in-depth look at one finance leader’s approach to those headwinds. It’s Mellissa Reed, who’s a CPA and the chief business officer and senior vice president for the Akron Zoo in Akron, Ohio. Ken, before we get to my interview with Mellissa, anything you’d like to add in closing?

Witt: I think one of the things that I found interesting about the survey this quarter was, since the first quarter of this year, we have been asking about when companies expect to be able to resume to pre-pandemic levels of operations based on the vaccine rollout.

The first quarter, the numbers were not very strong, you know, that we only had 24% saying that they were at pre-pandemic levels are higher. Now we’ve got half of our respondents saying they’re at pre-pandemic levels. It’s interesting that even in this final quarter, the ones that are projecting who expected will be in the next six months or next 12 months or longer than a year but less than two years, each of those have ticked up a little bit. We really have been impacted over time by the pandemic, and it’s going to continue to have impact with more businesses pushing out past 2022 when they expect to be back in full business. That was an interesting finding. That’s a longer-term impact from the pandemic.

Amato: Ken, thank you very much.

Witt: You’re welcome.

Amato: Mellissa Reed is our guest on this segment. Mellissa is a CPA and the chief business officer and senior vice president at the Akron Zoo in Akron, Ohio. Mellissa, first, welcome to the podcast. Tell me how long you’ve worked at the Akron Zoo.

Mellissa Reed: I’ve been at the Akron Zoo for five and a half years now. Previous to that, I spent 17 years in public accounting and specialized in nonprofit organizations.

Amato: Tell me some of the good things of running an organization such as a zoo in a pandemic and then some of the not-so-good.

Reed: Well, some of the good things when we reopened is that we’re primarily outside. We were an organization that was fortunate to bounce back a little quicker than many other organizations. Because people felt comfortable knowing we were outside and they could space appropriately, and our attendance numbers bounced back pretty quickly. Now some of the negatives were, of course, we were shut down for three whole months.

Because we were a zoo and we still have animals that need to survive and be fed, we could not just shut down operations as a result of being closed to the public. So continuing costs while no additional revenue was coming in.

The other is finding employees that were comfortable working with the public. We did have some issues finding people that wanted to come in and actually work when we were reopened. Many of our administrative staff members spent time working out in the field and being pulled away from their usual day-to-day operations.

Amato: I can imagine that would be really tough. Expansion plans or maybe new habitats for animals and existing spaces, did they get put on hold?

Reed: We were in the midst of a new habitat that was being built and it didn’t completely be put on hold. But what we did is really slowed down the timeline. We noticed we had issues with shipping animals during the pandemic and supply chain issues. While we intended to open in 2020, we slowed down the process and ended up opening that exhibit in 2021.

Amato: Was that habitat for a specific group of animals?

Reed: Yes, the habitat brought in Sumatran tigers, red pandas, and white-cheeked gibbons.

Amato: Wow, you work at a zoo, you’ve obviously got to have a love of animals. Do you have any favorite types at the zoo?

Reed: Right now, it would have to be the white-cheeked gibbon. They are such a charismatic animal and so interactive with the guests, and just the different levels they have in the habitat we built for them is amazing. Just to see them swinging in the treehouse and around, and right up in a window and interacting with guests is just really fun. I can watch them for hours.

Amato: You are going to be quoted in our coverage of the quarterly Business and Industry Economic Outlook Survey. One of the things that survey asks CPA decision-makers such as you, is your outlook for the next 12 months. Looking ahead to 2022, what would you say is the outlook for your business?

Reed: We’re being cautiously optimistic. In 2021, our attendance numbers have jumped back up to our pre-pandemic numbers, which are from our most recent normal year would be 2019. When the state allowed us to go back to full capacity, our attendance numbers jumped right back up to where we were. However, we are not budgeting for that increase in attendance. We’re still budgeting a little below that in 2022, simply because there’s not enough data to support whether that is sustainable.

Are people coming out because they’ve just been unable to do things for so long that they wanted to come out and do something? People haven’t been going on vacations so they had some additional funds that they might want to come out and spend. It’s not yet determined whether people are coming because of that or if it’s just as sustainable we’re back up to our normal numbers and we can count on that.

We’ve budgeted about 8% below where we would be in a normal year. Hopefully we’ll be ahead of that, but we’re maintaining that conservative approach.

Amato: On that budgeting topic, could you talk some about the idea of budgeting for contingencies and that process taking the emotion out of business decision making in the moment.

Reed: Sure, when we we’re working on our budget for every given year. At the same time, we always identify a contingency that at any point in time during the year, we identify we are not performing where we’re expecting to be.

We can implement that contingency immediately. Really, it’s one of those things kind of similar to car insurance. Something that you purchase and hope to never use. It’s similar to that. We put together a pretty well-defined contingency plan.

We know exactly what line items in our operating budget we would cut hoping to never have to implement it. Obviously, we had to during the pandemic. Already having those identified, then you’re hoping to never use it, there’s no emotion behind it.

It’s much easier than being very panicked, there’s a lot of anxiety, different departments trying to determine whose expenses are more important. It’s much easier to do that upfront.

Amato: Mellissa, this has been an excellent interview. Is there anything you’d like to add in closing?

Reed: I don’t have anything to add, but thank you for having me on the broadcast.

Amato: Thanks again to Ken Witt and Mellissa Reed. We will link to the Economic Outlook Survey results in the show notes for this episode.

In other news, we’ve talked some recently about the early sunset of the employee retention credit as a result of recent legislation, Now, employers that received an advance payment of the ERC or reduced their employment tax deposits in anticipation of receiving the ERC for the fourth calendar quarter of 2021 may repay or deposit the taxes without penalty under guidance issued recently by the IRS.

Also, the SEC is increasing scrutiny of issuers whose auditors aren’t PCAOB-inspected. The commission recently announced rules that create new disclosure requirements for companies that issue public securities in the US but are audited by firms that are not subject to inspection by the PCAOB.

And finally, e-signing of certain forms and tax compliance documents has been extended through October 2023. The temporary pandemic-related procedures are reauthorized, according to IRS memos, for some paper returns and other documents.

That’s all for this week. A reminder to rate and review the Journal of Accountancy podcast. We’d love to hear your feedback. Thank you for listening.