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IMPACT OF INFLATION ON BUSINESS STRATEGY. Page:117-118. Benefit that a business may have if the rate of inflation is low:. a company that has a large amount of debt in proportion to its equity.
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IMPACT OF INFLATION ON BUSINESS STRATEGY Page:117-118
Benefit that a business may have if the rate of inflation is low: a company that has a large amount of debt in proportion to its equity • The Cost Increase is usually passed on to the consumer by increasing the price of the Good or Service. • The ‘Real Value’ of debt owned by Business would most likely fall. Reason being that since the ‘value of money’ falls the ‘debt’ is repaid with money of less value than the original when the loan was taken. So a ‘highly geared’ business would see a fall in the real value of their liabilities. Gearing, also known as leverage, is an indicator of a company’s ability to service its debt. Gearing is usually expressed as a percentage and is calculated by dividing the company’s debt by its equity. Gearing shows the degree to which a firm’s activities are funded by owners’ funds versus creditors
If the price increases then this would have a direct effect on the ‘assets’ of a business. Meaning that the value of the ‘fixed assets’ such as land and building would increase. This in turn would INCREASE the value of the business itself. Meaning that business would become more financially ‘secure’ on the balance sheet. • A common advantage of having a low increase in inflation for businesses that trade in only ‘Goods’ is that when stocks are bought in advance and then when inflation takes place the price of the Goods increase thus giving the business a higher ‘ Profit Margin’
Disadvantages of high inflation on a business: • Employees would start demanding an increase in salaries. • Consumers would most likely start looking for cheaper Goods and Services. • A higher rate of interest might be set by the Government. • A cash flow problem may cause businesses to struggle to find the ‘money’’ to pay the high cost of materials. • Inflation causes a high level of ‘stress’ on the economy causing panic amongst citizens.
So does this mean deflation is good? • Deflation may have a negative effect on businesses as well such as: • Consumers such as ourselves would wait for prices to fall even further down in order to buy the Good or Service. • Business with long term liability (Loans) would be paying more money back to banks since the value of money has ‘decreased’ • As prices start to fall for Goods and Services investment in Research and Development would be seen as discouraging. • Stocks that a business already has in storage their value would start to fall thus reducing the working capital of the business.
