How to Protect Your Profits From Inflation During a Global Crisis Inflation is coming to devalue your corporate treasury. Here's how to protect it.
Opinions expressed by Entrepreneur contributors are their own.
In times of global financial crisis, it is important to know how to shelter your profits. If you don't find a way to do this, the effective value of your corporate treasury will go down over time. It doesn't matter how good or bad your company is doing, if you can't find a way to protect your profits, you are losing money over time.
It appears that we're entering a period of rapid inflation (whether that be permanent or transitory), and it is essential to find ways to combat this, especially for those of us in the business world. If a business can't store its wealth in a way that protects its purchasing power, it cannot survive in the modern era.
What is inflation?
Inflation is the rising prices of goods and assets in an economy. Economists have many fancy formulas and explanations for its cause. However, a simple way to look at it is an increase of the money supply.
In other words, the central banks drop interest rates and create more currency via quantitative easing and the commercial banks, in turn, create more money by lending. That, combined with additional spending with no commensurate increase in products or services, creates inflation.
The inflation percentage is normally calculated by looking at the retail price of certain consumer goods. However, that does not tell the full story. The newly created money has to go somewhere; it may push up asset prices, real estate, the cost of going to university and more. All these things are part of the cost of living and none should be discounted from the true inflation number. Therefore, when looking to beat inflation, it is important to find things that offer significantly better returns than the official inflation statistics suggest would be necessary.
How to protect your purchasing power
The only way to protect your purchasing power is to put your business profits into assets that consistently beat inflation. As you grow your company, you will bring in profits from your business activities and then you will store that wealth in assets that can retain value and grow over time. Often, businesses do not think enough about storing wealth during the company's growth. But failing to do so means losing the value you worked so hard to acquire.
Why I use property
My vehicle of choice for protecting and growing my company's wealth over time is property. Real estate has a history of growing faster than inflation, thereby protecting your capital. It pays you to hold it in the form of rental income. It can also be leveraged in a lower risk way (compared to other assets) in the form of a mortgage.
As I explained earlier, to beat the real rate of inflation, you have to do better than the official rate based on consumer prices. So I wouldn't focus on commercial property, as the ROI isn't high enough in most cases. Rather, I have found it more profitable to look at the residential market both in terms of buy-to-let and development opportunities. This approach has helped my company retain and grow its wealth faster than inflation.
If you decide to go down the property investment route as a business, make sure to seek professional training before taking action, as there are many pitfalls to be aware of. If you decide not to do so, I hope this article still got you thinking about ways to protect your profits from rising inflation.