For the past few years, inflation has been a very concerning topic for most of America, including hundreds of thousands of businesses. Depending on the industry, inflation has brought some companies to the brink of bankruptcy and yet conversely, helped increase profits for others. Let’s look at some of the impacts and/or benefits to businesses during this inflationary economy.
Increased Cost of Borrowing: The Federal Reserve has raised interest rates several times to combat inflation. Higher rates have increased the cost of borrowing for businesses, which in turn has strained cash flows and affected their ability to repay loans.
Creditworthiness Assessment: Along with higher interest rights, lenders have tightened credit standards, making it harder for businesses to obtain financing. They might require higher credit scores, more collateral, or better financial performance metrics.
Operational Costs: Inflation has increased the cost of raw materials, labor, and other operational expenses, thereby squeezing profit margins. Businesses with lower profit margins to begin with or those unable to pass on costs to consumers are at a higher risk of default.
Revenue Volatility: Companies may have experienced fluctuating revenues due to changes in consumer purchasing power and demand. This volatility makes it more challenging to predict future cash flows and assess credit risk.
Varying Impact by Industry: Different sectors experience inflation differently. For example, manufacturing and construction might face higher raw material costs, while service-based industries might deal with increased wage pressures.
Supply Chain Disruptions: Inflation has exacerbated supply chain issues, leading to delays and increased costs. Businesses dependent on global supply chains have faced higher risks.
While high inflation generally poses challenges to many sectors, certain industries have benefited from higher prices. Here are some of the industries that have historically benefited from periods of high inflation:
Energy (Oil & Gas): High inflation often leads to increased prices for commodities, including oil and gas. Companies in this sector have seen higher revenues and profits as their products’ prices rise.
Mining and Metals: Similar to energy, mining companies have benefited from rising prices of metals and minerals. Gold, in particular, is often seen as a hedge against inflation, driving up its demand and price.
Property Owners and Developers: Real estate values have greatly risen with inflation, benefiting property owners and developers. Rents have also increased in line with inflation.
Food and Beverage: Companies producing essential goods such as food, dairy items, and beverages usually maintain demand even during inflationary periods, passing on increased costs to consumers, thereby maintaining profit margins.
Household Goods: Producers of essential household items have also benefited from a steady demand and the ability to raise prices in line with inflation.
Farmers and Agribusiness: Rising food prices have brought about more profits to agricultural producers.
Insurance: Insurance companies often adjust premiums to keep pace with inflation, maintaining their profitability.
Pharmaceuticals: Companies in the pharmaceutical industry often have pricing power due to the essential nature of their products. They have been able to pass on cost increases to consumers and maintain profit margins.
Semiconductors: The high demand for semiconductors, coupled with supply constraints, have allowed companies in this industry to raise prices in line with inflation.
The upshot is that an inflationary period may range from having a big impact down to having little or no impact on your business and subsequently, your credit risk management protocols. It really depends on how your company and your customers in your specific industry are affected.
Your questions are most welcome.
Nancy Seiverd, President
CMI Credit Mediators, Inc.
All Rights Reserved
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