Zimbabwe has fallen into another high-inflation zone and could end the year in hyperinflation. A critical managerial accounting concept in a high-inflation economy is replacement costs. Read More!
A critical managerial accounting concept in a high-inflation economy is replacement costs. It is rarely thought of in a low inflation market because it doesn't shift. In a high-inflation market, it is important because it moves. For example:
- In a low-inflation environment, if you buy a pack of ten tubes of toothpaste at $10, each tube would cost you $1. If you sold at a 20% margin, then you would make $12 from the entire pack. $2 would be your profit, and you would be able to replace your stock with $10.
- In a high-inflation environment, you would buy the toothpaste at $10, sell it at $12 to make a profit of $2. But when you return to your supplier, you will find that the same pack of toothpaste now costs $20 or $2 each. Using your sales, you will only be able to buy six tubes of toothpaste. You made no real profit, and your stock is diminishing because you initially had ten tubes of toothpaste, and it has diminished to just six. Your business is essentially dying.
So, rather than focus on the historical cost of goods, a business needs to be aware of replacement cost in a high-inflation market. It is one of the reasons that prices continuously go up even on old stock. This is because companies are trying to avoid a situation where their inventory is steadily declining.
Find a Store of Value
Keeping a currency that is consistently dropping in value is not a smart business practice. To store the value of the money you have in hand or the bank, business owners should put it into a commodity that does not lose value. There are a couple of commodities you can use to store value, such as:
- Shares in the stock market
- Foreign currency
- Or in commodities that track inflation and can be easily liquidated like fuel.
Trying to grow the value of your business in real terms during hyperinflation can be impossible. It would be best to instead, at the very least, keep the value from shrinking.
Explore International Trade Options
In a hyperinflated local market, exploring your global options might be beneficial. For example, Export Portal is a cost-effective, easy-to-use, and secure online marketplace to both buy and sell goods. Gain access to a network of users ready to trade internationally and register today.