High inflation ,
Even high inflation, is not necessarily detrimental to a business. High inflation simply means there's an increase in the price of goods and services, and that's precisely what a business sells. Although business expenses rise due to inflation, the income should also increase in line with inflation.
If the inflation rate is 10% per annum, then business profits should automatically increase by 10% pa This increase is irrespective of any growth experienced by the business from a greater demand for its goods and services. Hence, it's clear that a business can be used to protect yourself against inflation. For example, compare a bank investment with an investment in a good business.
The income (interest) on the bank investment will more or less stay the same from year to year. However, the purchasing power of the capital, which is invested, will decrease every year due to inflation. However, an investment in a business is different. The profit in a well-managed business will increase annually and keep up with inflation. The value of the business will also grow automatically, since the value of a business is based on its profits
What is the effect of inflation in your business
The conclusion is that inflation is not the enemy of an investment in a business, but rather a strong motivation to make this investment. A business hedges the income, and the capital value of the investment made in it, against the destructive effect of inflation.
The next aspect that a business should be measured against is the consequences of a recession. If economic growth is negative, but inflation exists (as was the case in 2009), then a business could still experience growth. So, even if there's no economic growth, a good business can still grow in line with inflation.
The secret of well – managed business
Well-managed businesses could experience growth even though the average economic growth rate is negative. No matter how bad things are, there'll always be certain businesses that grow rapidly due to an increased demand for their products and services. Remember, that the global population, and the middle class in particular, is increasing and these people must satisfy their needs.
For this reason, businesses that sell food, for instance, should experience positive growth, even in a recession. The same applies to other goods and services that are always in demand.
The conclusion is that your own business can still record real growth despite recessions and high inflation. It should now be clear from the discussion above that a business, chosen according to sound business principles, can be instrumental in building wealth.
People who fear short-term fluctuations in their investments will get poorer over the long-term. Inflation will destroy their investments! However, if you take a long-term view with your investments in listed shares and your own business, then you could build wealth in any kind of economy. All of these investments could benefit from inflation, survive recessions and convert poor returns into exceptional growth.