An Assessment on Inflation Risk and Its Effects on Business Operations

An Assessment on Inflation Risk and Its Effects on Business Operations

DOI: 10.4018/978-1-4666-7288-8.ch013
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The latest economic crisis in the world affected business operations and decision making process at management rank. One of the major components of financial system is business organizations within the financial environment, which injects cash to the system and individuals. Therefore, fluctuations in financial system regarding inflationary trends should be evaluated and risk management functions for banking operations should be facilitated. In this chapter, operating mechanism of financial system, risks, inflation and the effects of inflation on business operations have been outlined from a theoretical perspective.
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Operating Mechanism Of Financial System And Financial Risks

According to Hacioglu & Dincer (2009), a financial system is the environment that provides cash flow in order for a country’s economy to systematically maintain its continuity. Persons that derive profit may choose not to spend in certain circumstances, which enables them have the opportunity to achieve savings. Apart from this, there are also debtors who are bound to spend; these are, in other words, those who demand funds. The aim of the system is to help transfer funds from those who have fund surplus to those with funding gaps. During this exchange process, one party lends money while the other borrows it. The borrower demands a bill of debt which specifies under which conditions it will be borrowed and when the debt will be paid. In the event that the funds change hands, financial assets will change hands as well.

As per the research done by Sener (2012), while the foundation of the financial system of some countries is comprised of banks, this foundation is constituted by direct finance resources. Solutions should be sought by taking into consideration how the financial system should be. Therefore, growth is supported by increasing investment instruments and capital accumulation, allocating resources equally and providing economic stability via carrying out various comparisons among the economic indicators of countries.

According to Agayev (2013), economists conduct research for many years in order to identify the position of financial systems in the economy world. It is observed that the functions of markets and intermediaries have influence on developing a financial system and providing economic growth. Information, along with technological developments, lowers costs and secures economic progress and development. In accordance with the aforementioned research, there are five known basic functions of financial systems in economy.

Key Terms in this Chapter

Finance: Finance is a field that deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty. Finance also applies and uses the theories of economics at some level. Finance can also be defined as the science of money management.

The Effect of Inflation: Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates (to mitigate recessions), and encouraging investment in non-monetary capital projects.

Capital Markets: Capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

Accounting: Accounting, or accountancy, is the measurement, processing and communication of financial information about economic entities. Accounting, which has been called the “language of business”, measures the results of an organization's economic activities and conveys this information to a variety of users including investors, creditors, management, and regulators.

Balance Sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a “snapshot of a company's financial condition.

Business: A business, also known as an enterprise or a firm, is an organization involved in the trade of goods, services, or both to consumers. Businesses are prevalent in capitalist economies, where most of them are privately owned and provide goods and services to customers in exchange for other goods, services, or money. Businesses may also be not-for-profit or state-owned. A business owned by multiple individuals may be referred to as a company.

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