Controllers and chief financial officers are nothing if not adaptable. However, even the most fiscally nimble finance professionals have their work cut out for them in the current high-interest-rate environment. These rates make borrowing prohibitive for many businesses, leading organizations to rethink their investment and spending strategies.
With no end to high interest rates, it’s time to consider what you can do to promote your company’s financial health and adapt your strategies to the current conditions. Here are a few impactful strategies that can help your organization weather the storm:
Evaluate the Company’s Debt Structure
Debt becomes more expensive when interest rates climb. The first step in managing your company’s finances in this environment is to evaluate your existing debt structure.
Look closely at your company’s current debt obligations. Are you holding variable-rate loans? If so, explore ways to shed that debt as quickly as possible, provided you can do so without cutting into strategic reserves.
Consider refinancing existing debt into fixed-rate loans to lock in current rates and protect your business from further increases. Shorten the loan terms where possible. If liquidity is a chief concern, explore extending the loan terms to lower monthly payments, but be mindful of the overall interest cost.
Double-Down on Cash Flow
Cash is always king. Double down on cash flow to combat high interest rates and reduce your company’s dependence on borrowing.
Still, trying to figure out where to start? We recommend examining your accounts receivables (AR) workflow. Encourage customers to pay sooner by offering discounts for early payments or implementing stricter credit terms. The quicker you can turn receivables into cash, the better.
If your organization is cash-strapped, consider factoring, which involves selling accounts receivables at a discount. Only sell off a few invoices, as doing so can have long-term implications for total cash flow.
Conduct a Stress Test
Is now really the best time to conduct a stress test? Absolutely! You need to understand how stable your business is and what the implications of an adverse economic scenario could be.
Stress tests help you identify weaknesses in your financial planning processes. Once you know where you are vulnerable, you can strategically improve your financial defenses.
If you are particularly concerned about cash flow challenges or the implications of high interest rates, focus on those scenarios during your testing process. It’s important to know what you are against and what happens if market conditions worsen.
Look at Investment Opportunities From Additional Angles
Like any savvy finance professional, you conduct extensive due diligence before making any investment decision. However, there are always ways to make your process even more thorough. Get other stakeholders and decision-makers involved so you can view each opportunity through multiple lenses.
Prioritize investments that offer a solid return while staying within the company’s risk tolerances. Now is not the time to dive headfirst into high-stakes, high-risk deals. Scrutinize each investment’s potential return relative to the cost of financing to avoid taking on projects that may not deliver the desired value.
Use Scenario Planning to Identify Future Threats
Scenario planning can help you better understand the implications of each financial decision, including inaction. For example, if you are comfortable with your current debt structure, running through scenarios could help you better understand what challenges you may face if interest rates worsen.
Scenario planning allows you to make proactive rather than reactive decisions. By understanding the potential outcomes of future rate changes, you can position your company to weather the storms and capitalize on opportunities. This foresight enables you to adjust your strategies in real time.
Focus on Long-Term Sustainability
High interest rate environments can lead many businesses to look for quick wins that offer a near-instant return. Don’t give in to this temptation. You can’t bury your head in the sand and pause all significant investments, either. There’s no such thing as stagnation in the world of finance. Your business is either advancing or losing ground.
Focus on long-term initiatives that will promote business continuity and stability. High interest rates can create opportunities for prepared businesses. Strengthen your company’s financial foundation by reducing reliance on external financing and building up its cash reserves.
Adopt a conservative approach to financial management during these times. Be mindful of the risks associated with high interest rates and lead with revenue whenever possible. You still need to make strategic moves to promote growth; don’t get overambitious in hopes of achieving rapid expansion.
A Balanced Approach Is Key to Weathering High Interest Rates
The above principles will help you navigate the high-interest environment while moving closer to your organization’s long-term strategic goals. High interest rates do not have to hinder your company’s success. They can become an opportunity for growth and resilience.
