To slow the economy, the Federal Reserve began raising interest rates in March 2022. In May 2022, Fed policymakers indicated rate increases in the .50% range would likely continue throughout the year.1 Since then, rates have increased nine times with a current target rate of 4.75% - 5% which is the highest it’s been since 2007.2

Managing higher interest rates requires insight.

Inflation is a complex issue, and the only mechanism with which the Fed can address it is interest rate adjustments — in this case, what feels like dramatic ones. Such sweeping measures can derail business plans and forecasts, which are often based on inputs that include interest costs. To manage the unpredictability of interest rates, you must embrace two truths: no one can predict the future, but you can inform next steps when they rise.

As your cost of debt increases, you’ll face competing priorities. In the short term, some companies may try to pass along accelerating costs to customers. Others will choose to purchase “next-best” quality components, parts, or ingredients. Some will try to hire new employees at a lower wage, even though low unemployment rates are thwarting this approach.

For extended timeframes, you’ll need to consider property, plant, and equipment, as well as how to finance long-term assets and potential acquisitions. In addition, higher interest costs have an overall negative effect on the worth of businesses, so you’ll want to take steps to increase or preserve value.

Some companies saw their cash reserves grow exponentially during the pandemic, so taking on new debt isn’t an issue. But that’s not true for all. Depending on tolerance for risk, current financial circumstances may present a good opportunity for action or good reason to be cautious and wait for a clearer picture.

Extract trapped cash to increase options.

Given current uncertainties, businesses need to know how they are performing and what to consider for the future. Getting the best yield on investments is important but is just part of the picture.

Most critical is a comprehensive cash management plan that will help pinpoint current cash flow and opportunities for improvement. It all starts with the basics. For example, how quickly are you collecting? How quickly are you paying? How much do you really need to keep in an operating account?

Fine-tuning your receivables, timing your payments, streamlining operations, and digging into your cash management protocols, releases cash that’s “trapped” in your business. You’ll be able to pay down outstanding debt and reduce your interest rate expense or use the cash for other priorities. This “found” cash provides a cushion with which to increase value, plan for ownership transition or make necessary capital investments.

Uncovering trapped cash requires transparency. Effective cash management tools help to reduce guesswork so you can see how your company’s cash position compares with industry benchmarks. When combined with input from trusted financial advisors, these insights can better inform assumptions about trends and enable scenario testing for decisions on whether to ride out highs and lows.

While the economy can be unpredictable, there are steps you can take to prepare for the future – even in tough times. Understanding your financial position and creating a solid plan to manage it when interest rates rise enables you to make decisions with confidence.

Contact a Synovus Commercial Banker for assistance in the planning process.