What are the Effects of Inflation for Companies?

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What are the Effects of Inflation for Companies?

What is the impact of increasing inflation on companies? I've already found 4 categories:

I. Effect on Liabilities

Higher inflation has POSITIVE effects in the liabilities side of the balance sheet, as it diminishes the present value of monetary liabilities such as long term loans.

II. Effect on Assets

But this advantage usually does not fully compensate the NEGATIVE effects that higher inflation has in the assets side, such as the loss of value of cash and receivables, and deviation of calculated depreciation among others.

III. Effect on Earnings

To counterweight the effects of increasing inflation, companies should not only PASS ON the full cost of inflation to the customers, but also have to INCREASE EARNINGS at a rate higher than the inflation percentage in order to fully compensate for the lower depreciation. Depreciation during inflationary periods is lower than the cost of replacement of depreciable assets and offers less tax shelter. To maintain the generation of cash flow, it is necessary to achieve rates of earnings growth above inflation. This can sometimes be a daunting task.

IV. Effect on Share Price

Also, during inflationary periods, the HIGHER COST OF CAPITAL in real and nominal terms reduces the present value of expected future cash flows and the calculated value of share prices. Financial markets liquidity, which might be present during inflationary periods, might not be enough to increase demand of shares and avoid poor stock market performance unless liquidity is also accompanied with a substantial appetite of investors for risk.
⇨ What am I still missing? Please explain it briefly.

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		5 Anonymous
	Impact of Inflation on Companies I agree inflation impacts many aspects of finance and areas of business. The size of the impact that high/increasing inflation is going to have on businesses depends to a large extent on the LEVEL of the inflation rate (%) and its DURATION (months/years). At this moment little can be said about either of them. Just think of the war in Ukraine (oil, gas, grains) and Covid. But financial leaders can and should prepare. Scenario Planning can be applied, foe example distinguishing: - A scenario in which inflation is successfully returned to international norms of around 1-2%. - A scenario in which it remains elevated between say 3-5%. - A scenario in which it remains high, say 6-10%, for a sustained period. - Etc.

		5 Norman Dragt Netherlands
	More Effects of Inflation on Companies High inflation also influences businesses in many other areas beyond the financial one. Here are some of the main ones: HR: Employees see themselves confronted with higher costs of living, but their salary tends to remain unchanged initially as the company will try to divert the risk of the inflation in part to the employees. This situation will motivate employees to demand higher salaries or look for a job with better pay to compensate the higher cost of living. Consequently at a challenging time in the company's life it suddenly not only is confronted with increased cost of operating, but also with brain drain. Making things even worse is the increased cost of hiring a replacement and training the replacement. PRICING: Businesses will need to increase their prices to be able to pay for their increased cost of operating. A vicious circle is thus being created. SALES: Lower spending by customers, in particular when corrected for inflation is another issue, because customers are waiting for the heated inflation to cool down or until they have found a better paying job, or until you decide to pay your employees a higher salary, so they have money to spend on your products. MARKETING: When inflation is high and you think of saving on marketing, this is the time you should invest in marketing, so you stay at the forefront of your customers attention, and hope that your competition did not get this advice. As a result, your sales figures might hopefully remain at a relatively healthy level.

		1 Sarkis Yaralian Director, Saudi Arabia
	Impact of Inflation on Cost of Product and Cost of Labor During times of inflation, COST OF SALES (derived from cost of material and production overhead) will increase and this will affect earnings or net income negatively. Many companies try to pass on the cost increase to customers through selling price increases, or diversify their sales by introducing low-cost products or low-cost sales channels, or try to change their product mix (selling more of higher margin products and less of lower margin products). Another adverse impact is increasing LABOR COST which will impact earnings or net income negatively. More automation and flexible contracts might be ways of avoiding higher costs. Office and support labor hours can be reduced without necessarily reducing operating labor hours. Thus, keeping labor cost mainly a variable cost linked to sales and operations.