As prices increase, so do operational expenses. Revenues (rents) can increase as well. Fixed interest payments though, remain static. Thus, a four -plex owner is able to pay off fixed debt with cheaper dollars.
Inflation as it Applies to a Public Company
A company with shares outstanding will realize the same effects of inflation as a four-plex owner: prices go up, expenses increase, if they are not in a price competitive industry, the business can increase product prices as well. In addition to long term fixed debt, shares can remain the same or potentially decrease if the company buys back shares. If the number of shares outstanding remain the same, as revenues increase with inflation then earnings per share will increase.
Inflation as it Applies to a Small Business
Typically, a small business will not have shares outstanding (some will) so in most cases, a small business with the ability to increase prices with inflation will benefit from long term fixed debt that can be paid off with inflated dollars.
Also keep in mind thought that it is wise to not have a hefty amount of debt on the balance sheet. Warren Buffett likes companies that can retire their entire long term debt in one to two years from revenue.
________________________________________________________
For more information, check out my first book, My Happy Assets at http://www.myhappyassets.com/ and the complete second book, Small Business Coffee Hour, Three Essential Ingredients for a Successful Business athttp://www.smallbizcoffee.com/. Both are also available at lulu.com. Happy Reading!
Also be on the lookout for my fourth book due out in February 2012 by Wiley. To stay tuned in go tohttp://www.facebook.com/myhappyasset and "like" away.
Posts
No comments:
Post a Comment