University of Khartoum

School of Management Studies

Department of Accounting and Financial Management

THE EFFECT OF INFLATION ON PROFITABILITY OF

SMALL BUSINESSES

Research submitted to the School of Management Studies in partial fulfillment of

requirements for the degree of BSc in Accounting and Finance.

Prepared by:
Al-Busiri Mohammed Youssef
Aref Moawia Al-Tijani
Abazar Abdul-Hamid Mohammed
Abdalmalik Mustafa Mohamed Ahmed
Hussam-Aldin Hisham Bashir

Supervised by:
Ustaz. Abdelwahab Ahmed Ibrahim

Co. Examined by:

Ustaz. Eyad Abd-Alkareem Nasir

July, 2022
 DEDICATION

This study is whole heartedly dictated to our parents, teachers and friends
whom were been our sources of inspiration and strength when we go through of
giving up…

To our brothers, sisters, mentor friends, and classmate who shared their words
of advice and encouragement to finish this study…

To our small wages Sudanese workers whose lives begin and end under the sun
Thanks firstly and lastly to almighty Allah for guidance, protection, and giving
us faith…

i
 AKNOWLEDGEMENT

We would like to express our special thanks to our teacher Mr. Abdelwahab as
well as our supervisor who gave us the golden opportunity to do this wonderful
project.
Also, all thanks to Mr. Alalaim and Ms. Hager from national Bureau of
statistics. And Ms. Mona Moner, Ms. Nafisa, and Mr. Abdalkhatim from the
Ministry of Industry.
Last but not least many thanks to Mr. Hassan Babiker and Mr. Mohammad
Nabil for their help in data analysis using SPSS statistics.

ii
 ABSTRACT

The inflation rates in Sudan have started increasing aggressively since the secession of
southern Sudan in 2011, resulting in ranking Sudan as the highest inflation rate worldwide
after Venezuela. This problem overshadowed all Sudanese economy particularly small
businesses which form the biggest sector of the Sudanese economy representing 93% of the
total number of the Sudanese businesses. In light of the high inflation rates in Sudan
profitability of small businesses is probably influenced, which directly affects the Sudanese
economy. This requires serious research to assess the effect of inflation on the Sudanese
small business’ profitability. This research aimed to investigate the relationship between
inflation and exchange rate, and the relationship between inflation and profitability of small
business in Sudan. The research sample consisted of 150 small Sudanese businesses
classified into three sectors: services, commercial and manufacturing. The research surveyed
150 small Sudanese businesses, 66 of them are commercial, 48 industrial and 36 service
business. The research results indicated that there is a significant positive correlation between
inflation and exchange rate. Also, the results presented a negative insignificant correlation
between inflation and return on assets. Moreover, the results revealed in an insignificant
correlation between inflation and return on equity. Also, profit margin is insignificantly
affected by inflation. Sudanese small businesses were significantly affected by the increase in
the exchange rate since 2018 till 2022. Most Sudanese small businesses are not significantly
affected by policies of floating exchange rate which were applied in Sudan since 2018.
Sudanese small businesses are significantly affected by hyperinflation. Despite the significant
effect of the exchange rate increase and hyperinflation, most Sudanese small businesses did
not stop selling goods or providing services.

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 TABLE OF CONTENTS

DEDICATION ....................................................................................................... i
AKNOWLEDGEMENT .......................................................................................ii
ABSTRACT ........................................................................................................ iii
TABLE OF CONTENTS .....................................................................................iv
CHAPTER ONE: INTRODUCTION ................................................................... 1
1.1 Research Problem ........................................................................................ 1
1.2 Research Objectives ..................................................................................... 1
1.3 Research Questions ...................................................................................... 1
CHAPTER TWO: LITERATURE REVIEW ....................................................... 2
2.1 Previous Studies ........................................................................................... 2
2.2 Inflation ........................................................................................................ 3
2.3 Profitability .................................................................................................. 3
2.4 Small Business ............................................................................................. 4
CHAPTER THREE: METHODOLOGY ............................................................. 5
3.1 Data Sources ................................................................................................ 5
3.2 Research Sample .......................................................................................... 5
CHAPTER FOUR: ANALYSIS AND DISCUSSION ........................................ 6
4.1 Reliability Test ............................................................................................. 6
4.2 Relationship between Inflation and Exchange Rate .................................... 6
4.3 Relationship between Inflation and Profitability ......................................... 7
4.4 Additional Survey Analysis ......................................................................... 7
CHAPTER FIVE: RESULTS AND CONCLUSION ........................................ 10
REFERENCES.................................................................................................... 11

iv
 CHAPTER ONE: INTRODUCTION

1.1 Research Problem

The inflation rates in Sudan have started increasing aggressively since the secession of
southern Sudan in 2011 (Darbo and Nakumuryango, 2019), resulting the highest-ranking
inflation rate worldwide after Venezuela (Trading Economics, 2021). This problem
overshadowed all Sudanese economy particularly small businesses which form the biggest
sector of the Sudanese economy representing 93% of the total number of the Sudanese
businesses (Ministry of Industry, 2005).
In light of the high inflation rates in Sudan profitability of small businesses is probably
influenced, which directly affects the Sudanese economy. This requires serious research to
assess the effect of inflation on the Sudanese small business’ profitability.

1.2 Research Objectives

This research aims to achieve the following objectives:
1. Investigate the relationship between inflation and exchange rate.
2. Investigate the relationship between inflation and profitability of small business in Sudan.

1.3 Research Questions

This research tries to answer the following two questions:
1. Is there a significant correlation between inflation and exchange rate?
2. Is there a significant correlation between inflation and profitability of small business in
Sudan?

1
 CHAPTER TWO: LITERATURE REVIEW

2.1 Previous Studies

There are many previous studies that addressed the effect of inflation on profitability. Dayi
(2020) aimed to determine the effect of inflation on firm profitability. The study sample
consisted of ten retail trade firms at the Borsa Istanbul equity market. Earnings, cost of sales,
gross profit, operating profit and net profit data for the second and third quarters of 2017 and
2018 were analyzed. A paired sample t-test is conducted to determine the variables’ change
between 2017 and 2018 periods. The findings indicate that the variables do not change
significantly from 2017 to 2018. The results showed that firms’ profits are higher than the
increases in their costs.

Ifeanyi and Chukwuma (2016) investigated the nature of the relationship between inflation
and the value of firms in the manufacturing sector of a developing economy like Nigeria.
They tried to discern the nature of the relationships between inflation, profitability, economic
value added and return on assets. The study employed data collected from the audited
financial statements of 12-year period (2003-2014) yielding 439 observations. Pearson
correlations and multiple regressions including ANOVA were used to test the relationship
between the variables. Results indicate a strong negative relationship between inflation and
firm value, and an insignificant negative relationship between inflation and return on assets.
Furthermore, the relationship between return on assets and economic value added is
insignificant.

Hooshyari and Moghanloo (2015) Findings showed that the P-value of ROA and Inflation is
lesser than the 0.05, which indicates that Inflation has impact on profitability.

Alfani and Rustandar (2013) specific objective was to investigate the influence of external
factors (the U.S. dollar exchange rate and the inflation rate) on the level of profitability
(ROA). The conclusion of the study indicates that U.S. dollar exchange rate and inflation
does not have a significant impact on profitability in the form of return on assets (ROA).

Esther (2019) measured the relationship between the annual inflation rate and profitability.
The study major finding was the positive significant relationship between inflation rate and
the return on assets, on the other hand rise in inflation leads to low profits.

Marimba (2016) correlation matrix has shown the existence of significant negative
correlation between ROA and inflation rates. This is to imply that lower values of ROA are
associated with high values of inflation rates. This was also evident in the trend mean of
inflation rate versus ROA.

2
2.2 Inflation
Understanding inflation dynamics requires an understanding of the underlying concept and
how it is measured. Inflation is defined as a process of continuously rising prices and falling
purchasing power, In other words, a general and broad-based increase in the price of goods
and services over an extended period (Hoflmyr, 2022).

An increase in the supply of money is the root of inflation, though this can play out through
different mechanisms in the economy. A country's money supply can be increased by the
monetary authorities by printing and giving away more money to citizens, legally devaluing
the legal tender currency, loaning new money into existence as reserve account credits
through the banking system by purchasing government bonds from banks on the secondary
market (Fernando, 2022).

Sudan has strike conditions that were difficult during 2011-2019; Sudan lost 40 percent of its
revenues and 90 percent of its exports due to South Sudan’s secession in 2011 resulting in
severe macroeconomic imbalances, high inflation rate, unemployment rates and low
economic growth. Sudan was vulnerable to various shocks, the major ones being the
economic shock resulting from secession of South Sudan, conflicts and climate shocks. The
government tried several reforms since 2012; measures included exchange rate adjustments,
fuel price increases, and tax increases. High inflation rates persisted increasing from 13
percent in 2012 to 63 percent in 2018 (Ministry of Finance and Economic Planning, 2019).

2.3 Profitability
Profitability has a lot of definitions simply can be described as ability of firm to generate
earning (Gibson, 2011). Profitability measures how efficient the business is in using its
resources to produce profit. Unlike profit, profitability is a relative measure of the success or
failure of a business. The point to note is that it is possible for a business to generate a profit
but not be profitable. In other words, profit is a necessary but insufficient criterion for a
business to be profitable (Evans, 2020).

Profitability is the primary goal of all business ventures, without profitability the business
will not survive in the long run, so measuring current and past profitability and projecting
future profitability is very important. Profitability has many measurements. Return on assets
measures the firm’s ability to utilize its assets to create profits by comparing profits with the
assets that generate the profits (Gibson, 2011). Return on equity is an important ratio It tells
what percentage of profit is made for every dollar of equity invested, it’s a good indication of
whether the company is even capable of generating a return that is worth whatever risk the
investment may entail (Gallo, 2016).

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 2.4 Small Business
Small businesses have many definitions American intuitions for their definition of small
business. The SBA definition of a small business has evolved over time and is dependent on
the particular industry, in the 1950s the SBA defined a small business firm as independently
owned and operate and not dominant in its field of operation (Tillamook Bay Community
College, 2017). Also, the Office of Advocacy defined a small business as an independent
business having fewer than 500 employees (Congressional Research Service, 2022).

Table (1) below presents small businesses in Sudan according to Sudan Ministry of Industry
(2005).

Table (1): Small Businesses in Sudan

Total Small
Descriptions Small Medium
Number %
Food And Beverages 16453 521 16974 97%
Textile 20 38 58 34%
Forming Of Metals 2736 76 2812 97%
Civil Metallurgical Products 878 663 1541 57%
Manufacturer Of Wooden Furniture 792 28 820 97%
Metal Furniture Industry 509 12 521 98%
Tanning & Dressing of Leather 419 42 561 75%
Chemical Industry 196 82 278 71%
Foundries and Engineering Workshops 132 7 139 95%
Maintenance of Television and Radio 50 1 51 98%
Manufacturer Of Vehicles and Trailer and Semi-
25 3 28 89%
Trailers
Manufacturer And Maintenance of Transport
25 - 25 100%
Equipment
Printing And Publishing and Packaging 24 64 88 27%
Manufacturer & Maintenance of Machinery
4 11 15 27%
Equipment
Manufacturer and Maintenance of Machinery and
4 8 12 33%
Electrical Appliances

4
 CHAPTER THREE: METHODOLOGY

3.1 Data Sources

Primary data sources include questionnaire and interviews, while secondary data sources
include documents of Central Bureau of Statistics Sudan and the Central Bank of Sudan.
Person correlation is used to investigate the correlation between inflation, exchange rate,
return on assets, return on equity, and profit margin.

3.2 Research Sample

The research sample consists of 150 small Sudanese businesses classified into three sectors:
services, commercial and manufacturing. The research surveyed 150 small Sudanese
businesses, 66 of them are commercial, 48 industrial and 36 service business. Figure (1)
below presents classification of the study sample according to business sectors.

Figure (1): Classification of The Study Sample According to Business Sectors

commercial
industerial
services

5
 CHAPTER FOUR: ANALYSIS AND DISCUSSION

4.1 Reliability Test

The reliability test is acceptable as the Coronbach’s Alpha is not equal or greater to 1 and not
equal or less than zero. Table (2) below presents the reliability statistics.

Table (2): Reliability Statistics

Cronbach's Alpha N of Items
0.127 5

4.2 Relationship between Inflation and Exchange Rate

The research results indicate that there is a significant positive correlation between inflation
and exchange rate. Each change in exchange rate is followed by 64% positive change in
inflation. Table (3) and Figure (2) below explain inflation and exchange rate correlation.

Table (3): Inflation and Exchange Rate Correlation

Inflation Rate Exchange Rate
Pearson Correlation 1 0.643**
Inflation Rate Sig. (2-tailed) 0.000
N 450 450
Pearson Correlation 0.643** 1
Exchange Rate Sig. (2-tailed) 0.000
N 450 450
**Correlation is significant at the 0.01 level (2-tailed).

Figure (2): Exchange Rate Plot

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4.3 Relationship between Inflation and Profitability
The research measures profitability according to three variables which are return on assets,
return on equity, and profit margin.

The results present a negative insignificant correlation between inflation and return on assets.
Any increase in inflation is reflected by a small decrease in return on assets. Moreover, the
results revealed in an insignificant correlation between inflation and return on equity.
Whenever inflation increases the return on equity decreases slightly. Also, profit margin is
insignificantly affected by inflation.

Profitability of small businesses is negatively – but insignificantly – affected by inflation.

This result is observed in Table (4) below.

Table (4): Inflation and Profitability Correlation

Inflation ROA ROE Profit
Rate Margin
Pearson Correlation 1 -0.051 -0.017 -0.066
Inflation Rate Sig. (2-tailed) 0.283 0.712 0.160
N 450 450 450 450
**Correlation is significant at the 0.01 level (2-tailed).
*Correlation is significant at the 0.05 level (2-tailed).

4.4 Additional Survey Analysis

Sudanese small businesses were significantly affected by the increase in the exchange rate
since 2018 till 2022, as 79% of the surveyed businesses consider the effect of the increase in
exchange rate as significant. Figure (3) below explains this result.

Figure (3): Effect of Exchange Rate Fluctuations

Insignificant Effect
no effect
Significant Effect

7
Figure (4) below shows that most Sudanese small businesses are not significantly affected by
policies of floating exchange rate which were applied in Sudan since 2018.

Figure (4): Effect of Exchange Rate Floating

Significant Effect
No Effect
Insignificant Effect

Sudanese small businesses are significantly affected by hyperinflation, which is obvious from
figure (5) below.

Figure (5): Effect of Hyperinflation

Significant Effect
No Effect
Insignificant Effect

8
Despite the significant effect of the exchange rate increase and hyperinflation, most Sudanese
small businesses did not stop selling goods or providing services. Figure (6) below explains
this output.

Figure (6): Effect of Exchange Rate and Hyperinflation on Sales

Yes
No

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 CHAPTER FIVE: RESULTS AND CONCLUSION

5.1 Results
The research indicated the following results:
− There is a significant positive correlation between inflation and exchange rate.
− There is a negative insignificant correlation between inflation and return on assets.
− There is insignificant correlation between inflation and return on equity.
− Profit margin is insignificantly affected by inflation.
− Sudanese small businesses were significantly affected by the increase in the exchange
rate since 2018 till 2022.
− Most Sudanese small businesses are not significantly affected by policies of floating
exchange rate which were applied in Sudan since 2018.
− Sudanese small businesses are significantly affected by hyperinflation.
− Despite the significant effect of the exchange rate increase and hyperinflation, most
Sudanese small businesses did not stop selling goods or providing services.

5.2 Conclusion
The inflation rates in Sudan have started increasing aggressively since the secession of
southern Sudan in 2011, resulting in ranking Sudan as the highest inflation rate worldwide
after Venezuela. This problem overshadowed all Sudanese economy particularly small
businesses which form the biggest sector of the Sudanese economy representing 93% of the
total number of the Sudanese businesses. In light of the high inflation rates in Sudan
profitability of small businesses is probably influenced, which directly affects the Sudanese
economy. This requires serious research to assess the effect of inflation on the Sudanese
small business’ profitability. This research aimed to investigate the relationship between
inflation and exchange rate, and the relationship between inflation and profitability of small
business in Sudan.

The research sample consisted of 150 small Sudanese businesses classified into three sectors:
services, commercial and manufacturing. The research surveyed 150 small Sudanese
businesses, 66 of them are commercial, 48 industrial and 36 service business.

The research results indicated that there is a significant positive correlation between inflation
and exchange rate. Also, the results presented a negative insignificant correlation between
inflation and return on assets. Moreover, the results revealed in an insignificant correlation
between inflation and return on equity. Also, profit margin is insignificantly affected by
inflation.

Sudanese small businesses were significantly affected by the increase in the exchange rate
since 2018 till 2022. Most Sudanese small businesses are not significantly affected by
policies of floating exchange rate which were applied in Sudan since 2018. Sudanese small
businesses are significantly affected by hyperinflation. Despite the significant effect of the
exchange rate increase and hyperinflation, most Sudanese small businesses did not stop
selling goods or providing services.

10
 REFERENCES

[1] Alfani, Lery and Rustandar, Irvan (2013). The Impact of Inflation to Private Banking
Profitability. International Journal of Science and Research (IJSR), India Online
ISSN: 2319-7064
[2] Congressional Research Service (2022). SBA Office of Advocacy: Overview,
History, and Current Issues. CRS report R43625. https://crsreports.congress.gov
[3] Darbo, Suwareh and Nakumuryango, Amandine (2019). Inflation Dynamics in Post-
Secession Sudan. Working Paper Series, No 305, African Development Bank Group,
Abidjan, Cote d’Ivoire.
[4] Dayi, Faruk (2020). The Effect of Inflation on Firm Profitability: An Application in
Retail Sector of Borsa Istanbul. Süleyman Demirel University Visionary Journal,
Year: 2020, Volume: 11, No: 26, 62-72.
[5] Esther, Kizza (2019). Analysis of the Effect of Inflation on The Profitability of
Commercial Banks in Uganda Case Study: Stanbic Bank Uganda. BSc, Makerere
University, College of Business and Management Sciences, School of Statistics and
Planning, Uganda.
[6] Evans, Edward (2020). Are profit and profitability the same Thing? series of the Food
and Resource Economics Department, UF/IFAS Extension, University of Florida,
FE939.
[7] Fernando, Jason (2022). Inflation, Gide to Inflation. Investopedia:
https://www.investopedia.com/terms/i/inflation.asp
[8] Gallo, Amy (2016). A Refresher on Return on Assets and Return on Equity. Harvard
Business Review: https://hbr.org/2016/04/a-refresher-on-return-on-assets-and-return-
on-equity
[9] Gibson, Charles H. (2011). Financial Reporting and Analysis Using Financial
Accounting Information. 12th edition, South-Western, Cengage Learning, ISBN 13:
9781439080863
[10] Hoflmyr, Martin (2022). Inflation Explained: What Lies behind it and What Lies
Ahead? European Parliamentary Research Service (EPRS), PE 729.358 – April 2022
[11] Hooshyari, Naser and Moghanloo, Abdollah Pakdel (2015). Evaluating The Impact of
Inflation on Profitability of Banks. Kuwait Chapter of Arabian Journal of Business
and Management Review, Vol. 4, No.9; May 2015.
[12] Ifeanyi, Nnado and Chukwuma, Ugwu (2016). An Empirical Analysis of Inflationary
Impacts on Profitability and Value of Selected Manufacturing Firms in Nigeria.
Research Journal of Finance and Accounting, ISSN 2222-1697 (Paper) ISSN 2222-
2847 (Online), Vol.7, No.12, 2016.
[13] Marimba, Kobia Araya (2016). Effect Of Inflation Rate on The Profitability of
Commercial Banks in Kenya. MSc, School of Business, University of Nairobi, Kenya.
[14] Ministry of Finance and Economic Planning (2019). Implementation of Istanbul Plan
of Action for Least Developed Countries (IPoA) 2011-2020. Sudan National Report,
Khartoum, October 2019.

11
[15] Ministry of Industry, Republic of Sudan (2005). Comprehensive Industrial Survey
2001, volume 2.
[16] Sudan Ministry of Industry (2005). Comprehensive Industrial Survey 2001, volume
2.2005.
[17] Tillamook Bay Community College (2017). Small Business Management in the 21st
Century. Saylor: http://www.saylor.org/books
[18] Trading Economics (2021). Inflation Rate: G20.
https://tradingeconomics.com/country-list/inflation-rate

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