Inflation forces companies to reassess their assets and rethink their strategy

This tight monetary policy It also affects the general economy (which reduces the amount of money in circulation and ease of credit), families and companies that do not take measures to adapt to this situation. Long-term government bond yields rose sharply, with many companies feeling the effects of rising commodity prices and labor cost inflation (and in some cases significantly lower stock prices).

Benigno PrietoPartner of KPMG’s Digital Control Solutions in Spain, it places companies’ axis of action in four areas: “Growing revenue, reducing costs, planning to anticipate and mitigate risks, and doing this with the help of new technologies”. KPMG experts advise companies to consider how the impact of rising inflation and interest rates will affect their accounts, in particular. reflect this change in accounts of your company.

Companies often consider the following: the effect of inflation on labor, material and service costs forecasts for the future over a more or less extended forecast period (usually the next five years). Due to the problems in the supply chain and the sanctions imposed on Russia within the framework of the occupation of Ukraine, the costs of materials and raw materials (including the energy price) have increased significantly in a short time. “Everything suggests that most of the effects of these factors will persist, at least in the short term,” they explain at KPMG.

price increase

For example, according to data from the agriculture sector, which affects the food sector in general, electricity became 78.81% more expensive in 2022; sulfates 106.18%; diesel 89.47%; animal feed increased by 44.31%. According to CaixaBank, construction materials prices are following a moderate course after the increases that had a big impact in multiple sectors. According to the data of the Ministry of Transport, Mobility and Urban Agenda, construction materials cost In September 2022, housing was 26.7% higher than the record in January 2019 (slightly lower than the 27.6% maximum growth it reached in June 2022). Cement and concrete increased by 20% in two years, and wood by 28%. Steel became 84% more expensive in one year. According to CaixaBank analysis, in September 2022 the price was 61% higher than in January 2019.

Given this variability price increaseThe use of references such as CPI does not reflect the factors affecting the performance of companies. The expected level of change in material and service costs during the forecast period may differ greatly from the general inflation level. But raising prices to customers is a short-term strategy, and price wars are expected to resume, according to KPMG. “A company’s ability to reflect increased costs and maintain profit margins is often limited and depends on the nature and competitive position of its products (or services),” they explain at KPMG. IESE professor José Luis Nueno, an expert in the distribution industry, admits that when consumers’ disposable income declines due to inflation, they change their consumption habits and, for example, prefer more affordable products or directly reduce their spending. An example of this behavior is the growth of private label in supermarkets, which could reach 50% of family spending this year, according to Nielsen (46% at the end of 2022).

profitable investments

In inflationary environments, a company’s investment in protecting its tangible assets cannot be assumed to equal depreciation expense. The idea is that any investment must take into account the current and future prices of fixed assets, while the depreciation expense depends on the historical price (what is the investment cost or agreed payment terms that may fluctuate more than expected). The biggest job threat in the inflation environment is that growth is less than expected and not proportional to inflation. Opposing this real growth spiral and having a conservative strategy can cause problems.

This analysis of company accounts It’s more complex right now. The distinction between real growth and inflationary growth can be made by analyzing the development of the average unit price, the number and efficiency of sales points, units sold… With growth less than inflation, billing and even operating profit can be a harbinger of inefficient management. KPMG experts warn that “an increase in long-term interest rates in 2022 could significantly reduce the recoverable amount of assets, particularly real estate, unless cash flow projections are adjusted upward.” The business cliché that “not growing inevitably means disappearing” becomes even more frightening in an inflationary environment. In the current environment, companies will have to include their key assumptions about the future and other key sources of estimation uncertainty in their audits if there is a significant risk that this will result in a material adjustment to the carrying values ​​of assets and liabilities. in the next financial year.