Many countries who are experience difficult economic times normally have a high inflation rate. High inflation goes hand in hand with increase in price of goods & other commodities. Most businesses struggle to generate profit during such period. However, many businesses try to adjust themselves during this period, Why do they survive. The answer is simply, they increase their prices of goods & commodities in order to generate consistent profit.
Building wealth with your business in difficult economic times
A business can do very well, even in a country with economic problems and political uncertainty. We can substantiate this as follows: High inflation, even exorbitantly 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 year, then business profits should automatically increase by 10% p.a. 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.
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, then a business could still experience growth. For instance, if the economic growth in the country is minus 2% per year, but inflation is 3%, then any well-managed business will experience growth of 1% (3% inflation less 2% negative economic growth).
So, even if there’s no economic growth,( like in Greece) a good business can still grow in line with inflation. 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.
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. This is an insight into how to build wealth even in difficult economic times