Don’t Just Survive, Build Your Company to Thrive in This New Interest Rate Environment
10-year quality corporate bond spot rate compared to 10-year US Treasury and Bank Prime Loan Rate (shown for illustrative purposes as it is, by definition, a short-term rate and thus not directly comprable to 10-year rates)
If you didn't issue debt or borrow money before 2008, you might not have witnessed current debt issuance costs. As lenders and bondholders navigate the shifting rate scene, it's vital for corporate issuers to ensure their companies do more than just survive – they should thrive. Achieving this means evaluating your preparedness in three core areas:
The strength of your forecasting process.
The depth of your relationship with your bankers.
The specifics of the terms, covenants, and conditions of your debt agreements.
For this blog, let’s dive into the first point.
Recalibrate your Budgeting Process
Even with rising interest rates, growing businesses can still reap returns well above their borrowing costs. But borrowing isn’t risk-free. A top concern for CFOs and Treasurers is covering interest expenses and managing principal repayment or refinancing when due. Accurate financial forecasting is crucial here.
Survival Habit from Past Years: In a low-rate scenario with easy access to debt markets, forecasting future cash flows to cover interest and principal felt much simpler. This ease came from the minimal return demands posed by low interest rates and the backup plan of refinancing if things did not pan out.
Thriving Tactics: While that market environment made it easier to survive, the new realities require that we plan to thrive. Operating in this new rate environment demands a deeper grasp of your business and potential pitfalls affecting future operations. Here are some tactics:
Define the bare minimum margins needed to produce enough operational cash to cover your set costs. This means examining factors like pricing, sales volume for revenue, cost of goods sold, and operating expenses. The fixed or variable nature of your expenses and your sway over external factors is key.
When financing capital expenditures, grasp the asset utilization necessary to produce required cash flows. Reflect not just on equipment uptime needed for desired margins, but also on routine and unexpected maintenance, and possible delays tied to processes, personnel, or unforeseen factors.
In acquisitions, consistently gauge anticipated synergies and their roots. Despite meticulous merger plans, adjustments will crop up. Keeping an eye on expected synergies and discerning if they stem from revenue upticks, streamlined operations, or staff reductions lets you pivot if reality skews from projections.
Shape a debt maturity profile suited to your balance sheet and decide if a floating or fixed interest rate works best. Many issuers hesitate to commit to long-term debt at these higher rates, eyeing shorter maturities. Yet, if a chunk of your debt is already set to mature soon, this might hike your refinancing risk. Similarly, for cyclical businesses, your maturity choice should consider potential industry downturns when refinancing looms.
Projecting cash flow beyond a year or two is tricky. Avoid getting swept up in the allure of unrealistic growth or profit projections. When contemplating debt repayment, prioritize a grounded approach. Ponder the revenue or margin dips that would hinder covering your new debt's interest. If your long-term outlook hinges on everything falling perfectly into place, revisit your strategy. There's a long checklist that impact your outlook including: shifting customer acquisition costs, sales volume influencers, client turnover rate, the efficiency of both fixed and variable cost factors, etcetera.
Having an expert on your side to gauge your readiness and pressure-test your forecasts is invaluable in such times. If these tactics aren't on your team's radar, contact Chief Financial Partner today for a free consultation. Ensure your business doesn't just survive, but truly thrives in this fresh rate environment.