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Prioritize Finance

In: Beating Inflation

Author

Listed:
  • Hermann Simon

    (Simon-Kucher & Partners)

  • Adam Echter

    (Simon-Kucher & Partners)

Abstract

Inflation places new and heavy demands on financial management. The CFO must take greater responsibility and plays a key role in managing inflation. Inflation means that money becomes a “perishable fruit” and should be treated like one. It must be collected as quickly as possible and reinvested in assets that retain their value. A company’s goal should be to maintain profits in real terms. One should not be fooled by an increase in nominal profit, the so-called “money illusion.”. Every company’s weighted average cost of capital (WACC) will be driven up by rising interest rates and higher risk premiums during inflation making it more difficult to achieve an economic profit. Nevertheless, this target should not be abandoned. Inflation consumes cash and financial leaders must sharpen their cash focus during inflation. For pricing purposes, it is essential to refer to replacement costs, possibly supplemented by an add-on for the phantom profit effect.

Suggested Citation

  • Hermann Simon & Adam Echter, 2023. "Prioritize Finance," Springer Books, in: Beating Inflation, chapter 13, pages 109-117, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-20093-9_13
    DOI: 10.1007/978-3-031-20093-9_13
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