In early May 2023, the Federal Reserve implemented its ninth consecutive interest rate hike in one year, raising rates by 25 basis points (.25 percent) to 5.25 percent. This move marks the tenth increase since the central bank began its efforts to control inflation through a series of rate hikes, reflecting its ongoing commitment to managing economic stability. When the Federal Reserve increases the federal funds rate, it aims to increase short-term borrowing expenses across the economy. This subsequently diminishes the availability of credit and raises the cost of loans and lines of credit for businesses. By doing so, it aims to curb inflationary pressures by limiting the amount of money circulating within the economy. However, the pursuit of stability in the country has created a challenging and uncertain business environment for many companies. In such times, it becomes crucial for businesses to focus on their financials, emphasizing the importance of closely monitoring financial performance and exercising prudent cash management practices.
Business Strategies to Manage Rising Interest Rates and Inflation
At Windham Brannon, our Strategic Advisory practice provides comprehensive financial projections and cash flow management solutions to help clients navigate the challenging inflationary landscape of 2023. By comparing current month actuals to projected figures, we identify potential areas of concern, such as a continued increase in accounts receivable (A/R), which signifies slower customer payments and a financial burden on your end due to the 5.25 percent interest. To address this, we recommend a thorough review of A/R, including assessing collection speed through turnover ratios, calculating days sales outstanding and analyzing receivable aging schedules. These strategies will help uncover the root causes and determine whether it’s a concentrated issue or widespread non-compliance. In cases of widespread non-compliance, implementing measures such as enforcing late payment penalties or refusing future business until invoices are paid can help tighten collections and improve cash flow.
Cash Flow Management One Key to Rate Hikes
Cash flow has become paramount, given that the rate hikes alone have resulted in a 4.25 percent increase in business operating costs compared to the previous year. For a company utilizing a $1 million line of credit, this translates to a substantial $42,500 annual expense, yielding a return on investment (ROI) of 0 percent. This highlights the criticality of closely monitoring and managing cash flow to mitigate the adverse financial impact caused by the rate hikes. Implementing a 13-week cash flow analysis enables a company to proactively monitor its cash position weekly, avoiding relying solely on monthly bank reconciliations. This real-time visibility allows for early detection of potential cash shortages and allows one to take necessary actions, such as renegotiating payment terms or strategically managing payables. By promptly alerting the controller or CFO to possible cash crunch situations, the company can effectively navigate financial challenges and ensure the timely fulfillment of significant obligations.
Reassess Pricing Strategies
Finally, during a shift in the inflation landscape, it becomes crucial to reassess pricing strategies and labor costs to avoid unnecessary expenses. Conducting a thorough review of price sheets and labor expenditures can help identify areas where cost-saving measures can be implemented. For instance, utilizing an AI-powered data analytics program can assist in optimizing schedules and eliminating unnecessary overtime. At Windham Brannon, our dedicated data analytics team, consisting of data scientists and CPAs, leverages advanced analytics tools to help optimize schedules, reduce unnecessary expenses and enhance overall operational efficiency for our clients.
Adopt Proactive Measures
As businesses navigate the impact of rising interest rates and inflation, adopting proactive measures becomes crucial. By monitoring financials closely, adjusting pricing strategies, optimizing costs and leveraging data analytics, businesses can combat the true cost of inflation. Embracing these strategies enables companies to maintain profitability, enhance operational efficiency and navigate the changing monetary policy landscape successfully. Windham Brannon is ready to help your business – for more information, contact your advisor today, or reach out to Laura Berry.
