If you are a small business owner, then you are all too well familiar with inflation and its effects on your businesses. One of the most obvious ones is the ability to erode your short-term investments. Taking commercial papers for example, when inflation hits a company investing in this vehicle to raise money for day to day operations might end up losing or fail to make money at all.
Commercial Paper Effect
Commercial paper is a form of short-term investment that small businesses get in to. The commercial paper is sold on the open market for gains that are slightly above the interest rates. When inflation hits, a company investing in commercial papers is only concerned with the return of capital as opposed to return on capital. Inflation’s immediate effect is to automatically drop fixed income value since the money that is returned will be worth less than the initial investment.
The losses that a company incurs during inflation are huge if the period persists for some time. This is bearing in mind that short-term investments often attract lower yields than long-term investments. Other than that, inflation has the ability to affect the value of a company’s stock. It is even worse if the said company is listed on the Stock Market. In the short-term, the company’s stock value will be greatly affected, however, the same will normalize.
Commodities tend to react fast to inflation. For a company trading in commodities such as wheat, oil, and livestock, will feel the immediate hit when inflation sets in. The price per unit for these comedies shoots up almost as soon as the market senses a slight change in inflation. Consumers tend to look for supplementary goods. That can affect a company’s inventory and stock price.
Doing business with another company might present a challenge, especially when negotiating for commodity sales. It can also present a financial risk to a company and more especially if such a company does not conduct regular credit checks. Since inflation will devalue the dollar value, failure to analyse vendor risks can see the company dive deep into debts or company devaluation. It’s important to analyze risks using tools like CreditRiskMonitor. It is a much worse fate to face than a few thousand dollars in losses.
Inflation affects small businesses short-term investments in more than one ways. It is an unfortunate thing for businesses to face since some of the effects might take close to a decade to recover. As such businesses should always be prepared for when and not if inflation happens. Regular risk assessments can help the business to prepare for the inflation eventuality.