As we kick off 2022, it’s a great time to evaluate the business environment and plan ahead for success. Some of the most pressing challenges for many businesses are rising inflation and climbing interest rates, which represent a major reversal of recent trends.
The following four strategies can help position your business to withstand these challenges.
Strategy #1: Audit the spending habits of your customers and how it may affect your cash flow.
It’s important to recognize how customers will be affected by inflation and higher interest rates. When consumers experience reduced cash flow from inflation and paying higher interest rates on loans, it lowers their disposable income to purchase goods and services. Additionally, higher interest rates encourage consumers to save excess cash because they can obtain more favorable returns.
Your customers’ spending habits will help you make financial projections this year. As you develop these projections, it’s helpful to put together three scenarios: a base case, a worst case and a best case. The base case is the scenario you expect if everything proceeds normally. If you anticipate a significant impact to your cash flow, it may be wise to obtain additional financing, such as a business line of credit, to help you get through slow times.
Strategy #2: Evaluate your balance sheet for debt and determine how financing will be impacted by higher interest rates.
If your company has taken on debt with fluctuating rates, you may find it more difficult to repay it in a higher interest rate environment. Higher loan payments will affect your profitability and could lead to diverted resources that would otherwise be reinvested in your company.
To hedge against this risk, it might be helpful to convert some or all flexible-rate loans to fixed rate. Be sure to involve your banker in this process as you evaluate your situation.
Strategy #3: Consider your product mix and pricing.
During inflationary times, it’s even more important to optimize your goods and services for profitability. This can be accomplished by analyzing your product and service streams and evaluating performance in different markets and distribution channels. Your findings might encourage you to focus on high-margin products and services to boost your bottom line. However, it’s wise to consider potential short- and long-term consequences before making any changes.
You may need to implement price hikes to offset rising costs. It’s important to be transparent on why price increases are necessary, which will help your customers adapt and increase the possibility that you’ll retain their business.
Strategy #4: Evaluate how other aspects of your business will be affected by higher interest rates.
Aside from the cost of financing, you may pay higher costs for commercial mortgages and commercial and office rentals, which could rise if the landlord’s mortgage costs increase. Because leases on equipment and vehicles are typically linked to interest rates, these expenses could also change.
It’s also important to evaluate how higher interest rates will affect investment in your company’s operations. If your business needs essential investments to grow, such as new equipment or a building, it might be a good time to seek financing before rates rise. Conversely, if some investments are nonessential, it might be a good time to postpone them.
Regardless of your industry, you need a solid financial strategy that evaluates risks and puts measures in place to help minimize them. Establishing a strong relationship with a banker will help you develop an effective plan that takes rising inflation and interest rates into account. Although change can sometimes be uncomfortable, it can also be a time of new opportunity for your business.
— Rick Lethbridge Jr. is a community banking relationship manager with Zions Bank, a division of Zions Bancorporation, N.A. Member FDIC.