5.5 The Impact of Inflation on Working Capital Policy

Inflation has the effect on increasing liabilities, whilst at the same time reducing the value of assets in real terms. Inflation leads to a higher nominal cost of financing working capital, and higher working capital requirements, especially when the working capital cycle is long or lengthy. Adjustments are easily made to take inflation into account and in the short-term the working capital policy is fairly insensitive to differing levels of inflation.