A decade of high inflation has trapped many chief financial officers between severe financing needs and weakened balance sheets. The overall deterioration in corporate financial health has been stunning (see Exhibit I). Hard-pressed during the 1970s to supply inflation-mandated additions to working capital and to meet the increased cost of new plant and equipment, CFOs leveraged every new dollar of equity with some 3½ dollars of debt. Having piled so much new debt onto their balance sheets, they now face sharply higher interest payments as a percent of pre-tax profits. Worse, since much of that debt is short term, they also face volatile swings in interest rates and heightened refinancing risks.
A version of this article appeared in the July 1982 issue of Harvard Business Review.
