In any business, adapting to changing market conditions is critical to long-term prosperity. Corporate CFOs and treasury departments should take that advice to heart, as 18 months of rising interest rates require new approaches to managing the company coffers.
"Interest rates have been low for so long that many of today's finance professionals weren't even in the workforce the last time high rates were an issue," said Tammy Foy, director of treasury sales for BOK Financial®.
Indeed, it was 2007 when America last saw a Federal Funds rate over 5.0%. From late 2008 through mid-2017, the rate never rose above 1%. But since early 2022, the Federal Reserve has hiked rates aggressively, attempting to stem rampant inflation in the aftermath of the COVID-19 pandemic. As of early September 2023, the rate was 5.5%, with few economists predicting a decrease any time soon.
“What this means for businesses is they have to think differently about how they optimize their working capital, debt and liquidity.”- Tammy Foy, director of treasury sales for BOK Financial
"On one hand, higher interest rates can be challenging for companies who need to borrow money. But high rates also create new opportunities to generate stronger returns on bank deposits and liquid investments," she said.
A confluence of curveballs
Of course, interest rates are only one factor out of many affecting the fortunes of companies large and small. Inflation over the past two years has made supply costs higher and led many customers to put purchases on hold, creating a cash crisis for the organizations caught in the middle. With the addition of ongoing supply chain issues, geopolitical uncertainties and recent turmoil in the banking industry, many companies are seeking new solutions to maintain financial resilience.
"We think the top three priorities for most companies should be safety, liquidity and yield, in that order," said Foy. "These are always important goals, but given current economic conditions, companies may need to make some adjustments to their long-held strategies."
Four tips for financial stability
Foy and her treasury services team offered a range of suggestions for businesses to consider as they reevaluate their needs.
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Focus on safety first. While bank failures are rare, the high-profile collapse of several regional banks last spring served as a reminder for businesses to ensure their assets are secure. Working with banks that are FDIC-insured is a start, but clients should also conduct due diligence on their bank's loan, deposit and revenue diversity, and check their financial health ratings issued by third parties such as Moody's and Standard & Poor's.
Additionally, treasury managers can take advantage of innovative banking products, such as Insured Cash Sweep (ICS) accounts, designed to maximize insurance coverage for deposits larger than the $250,000 FDIC limit.
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Maximize working capital. In times of uncertainty (and especially when interest rates are high), companies want to increase cash flow, which provides a safety net to deal with potential adversities while earning a return on money in reserve.
For these reasons, companies should prioritize the need to collect on accounts receivable quickly and optimize their payables process. As an example of the latter, Foy mentioned that some companies use their corporate card program strategically to pay vendors, making more efficient use of working capital for another month until the credit card bill comes due.
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Reevaluate debt. With higher interest rates, borrowing is more expensive and credit may be harder to access. Companies that have traditionally operated as net borrowers should closely examine their future needs and explore alternative sources of funding to avoid becoming overleveraged. Concurrently, an emphasis on increasing working capital, as mentioned earlier, can help to service existing debt.
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Reposition cash reserves. When interest rates were low, a common strategy involved leaving cash reserves in non-interest-bearing accounts to maximize earnings credits and offset treasury service fees from the bank. But in today's high-rate environment, companies with excess cash are achieving handsome yields from money market accounts and other short-term instruments.
Some banks now offer hybrid accounts that offer a combination of earnings credits and interest, which can be a best-of-both-worlds solution.
Amid the shifting sands of the economy, every company faces its own unique challenges to find and maintain a solid financial footing. That is why it's important for businesses to have good relationships with their banking partners, Foy said.
"As the economy evolves, a proactive, consultative banking team can help companies understand their financial needs, improve processes, and take advantage of the right mix of products and services," she said.
With a more comprehensive approach to treasury management, companies can shore up their financial security today and weather whatever economic storm comes next.
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