Running a business is never easy, from a financial standpoint as well as with myriad other challenges. And managing the money side of a company has been a roller coaster ride, to say the least, for the past three years. Always on one’s budget radar screen, inflation has been a leading car on that coaster.
Businesses and the world overall are beginning to see the global pandemic in their rear-view mirror, but inflation remains a challenge. How is it impacting your company and its value?
The Role Inflation Continues to Play in the Economy
Inflation and Covid-19
Inflation negatively impacts value across virtually every industry. The annual inflation rate for the United States was 4.9 percent for the 12 months ending in April, as reported May 10 by the U.S. Labor Department. Since 2012, the Federal Reserve has targeted a 2 percent inflation rate for the U.S. economy, but changes may be made to monetary policy if inflation is not within that range.
- The inflation rate is the percentage by which a chosen basket of goods and services purchased in the U.S. increases in price over a year. A notable time for exorbitant inflation was during the recession of the early 1980s, when rates soared as high as 14.93 percent. This led the Federal Reserve to take dramatic action.
- After four decades, high inflation reared its ugly head as a central problem of the Covid-19 era. As of September 2022, the rate of CPI (consumer price index) inflation over the previous 12 months was 8.2 percent. Now, hopeful predictions are that things will continue to normalize, but after the shock wave of the pandemic, it’s natural to be cautious and wise to plan thoughtfully for the future.
Capital, Cash Flow, and Business Expectations
When you understand what does – and does not – threaten value creation, you can more effectively allocate your company’s time and resources to meet whatever challenges lie ahead. Stay abreast and help keep your senior business leadership educated on inflation and its impact. A few current key points include:
- Historically, inflation has not had a huge impact on the cost of equity capital. Throughout the oil crisis of the 1970s, the double-digit inflation of the 1980s, the internet boom and bust, the credit crisis of 2008-2009, and the global pandemic, the cost of equity remained steady.
- Inflation does, however, erode business cash flow. Most companies are unable to pass on to customers the higher costs they incur as a result of inflation. This pressure erodes cash flow in real terms. It’s a challenge for accounting teams to handle inflation, as depreciation and amortization tables have been built for low inflation times.
Want to Learn How to Navigate Inflation Better?
At KeyHR, we’re all about helping growing businesses meet their financial and HR management challenges head-on. We’re aligned with leading preferred provider companies to offer new and innovative ways to meet your payroll, employee leasing, benefits, and insurance needs – so you can save time, increase revenue and minimize risk. Contact us today to learn more.
- Posted by admin
- On June 7, 2023
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