Consequences of Inflation for Companies

Cost increase: production and material costs.

Inflation can lead to rising costs for raw materials, energy, labor , and other operating expenses . Keep an eye on your cost structure and regularly analyze how these changes affect your profits.

Increased borrowing costs:

Higher interest rates:

During inflation, central banks typically raise interest rates to control the money supply and curb inflation. Higher interest rates often lead to rising interest rates on loans and advances from banks.
When companies need to borrow money for investment, expansion or other purposes, they may face higher interest costs.

Declining purchasing power and price changes:

When inflation rises, consumers' purchasing power loses value , leading to a reduction in their real incomes. This can cause businesses to face falling demand as customers may spend less or switch to lower-priced alternatives. At the same time, however, the costs of raw materials, energy and labour often also rise, leading to higher production costs . Businesses must therefore adjust their prices to compensate for rising costs , which in turn can affect consumers' purchasing decisions . This interplay of dwindling purchasing power and price changes can affect the profitability and growth of businesses during inflation.

Currency risks due to changes in exchange rates also play a role:

During periods of high inflation, exchange rates can fluctuate widely and are highly volatile. Companies doing business with foreign countries need to be aware of the potential impact of this volatility on their finances.
Sudden exchange rate fluctuations can affect the cost of imported goods and services and the value of export earnings.

Companies can hedge against currency risks by using instruments such as forward exchange contracts or currency options. A careful hedging strategy can help minimize potential losses from exchange rate fluctuations and ensure the company's financial stability.

Agreements concluded in a specific currency can lead to additional financial risks in times of high inflation and exchange rate fluctuations. Flexibility in currency clauses can be an advantage here.

Inflation and exchange rate changes can increase the cost of imported raw materials and components. Companies must factor these additional costs into their pricing to ensure profitability. Otherwise, they could run into financial difficulties.

Sound financial planning and effective risk management are crucial for companies during inflation. It is important to To analyze the impact of exchange rate fluctuations and inflation on the company's finances and to take appropriate measures to mitigate risks and exploit opportunities.

Employees’ wages are rising:

Even if wages are gradually increased, they may still lag behind the actual costs of daily living.

This is often related to increased operating costs:

For companies, inflation means that they often face rising costs, such as raw materials, energy and rents. If employee wages do not rise at the same rate as costs, this can lead to a deterioration in the financial situation of employees.

Materials and supplies are reduced:

1. Due to excess demand:
   When inflation rises, consumer prices rise too , which can lead to people trying to rush their purchases before prices rise further. This often cannot be done quickly enough.
2. Bottlenecks at suppliers:
   If suppliers increase their prices or face shortages/delays in the supply chain themselves , this may result in the company having difficulty obtaining adequate supplies.
3. Uncertainties and a wait-and-see attitude:
   During times of high inflation, companies may be more cautious in their investments and inventory management . They may try to reduce their inventories to minimize financial risks in case the economic situation worsens.
4. Liquidity bottlenecks:
   Inflation can also cause liquidity constraints , as businesses may need more money to purchase goods and services but their financial resources are limited , which may prevent them from keeping enough inventory in stock.
5. Impact on production:
   When the cost of labor and inputs increases , it can cause businesses to limit or slow down production , which in turn reduces the availability of goods.

Credit availability:

Rising interest rates can also affect credit availability . If interest rates rise sharply, some businesses may struggle to obtain cheap credit , particularly if they are considered high-risk . This can affect businesses' financing options and growth plans.

debt repayment:

Companies that have already borrowed money may have to pay higher interest rates to repay their debt during a period of inflation . This can strain their margins and limit financial flexibility.

investment decisions:

The increased cost of debt could also affect companies' investment decisions . Higher interest rates may make some projects appear less profitable , which may prompt companies to postpone investments or be more cautious about raising debt.

Impact on competitiveness:

• Companies that rely heavily on debt capital may be at a disadvantage compared to competitors in an environment of higher interest rates and more difficult credit availability. Companies that have solid equity structures and are less dependent on debt financing have advantages here. The company is protected from enforcement measures and gains time to draw up an insolvency plan.
• The continuation of the company is encouraged , which is often more advantageous than breaking up the company.