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Right now, everyone from homeowners to business owners are wondering when rate cuts will come. And while most people can wait to buy a new home until the time is right for them, you can’t wait to run your business.
Daryl Stafford
Don’t worry. I’ve worked closely with clients through all types of economic cycles, and there is plenty you can do to take care of your business and stay competitive while we ride out the economic volatility.
First, don’t wait for rate cuts. That might sound counterintuitive, but it is important to be in the right mindset. By this, I mean don’t run your business in hopes of lower rates coming in the future. If you’re waiting for rate cuts, you may be missing opportunities and efficiencies in other areas of your operation, or if your opportunity is reliant upon rate cuts, it may mean it is not cycle-proof. Rate cuts will come, but you should anticipate higher-for-longer rates and plan accordingly. It is better to be surprised with good news than to plan for and be reliant on it.
One area where it makes sense to wait is with debt. You could consider pausing some larger expenses or long-term business plans that involve taking on more debt. Some debt may be necessary to adapt your business to new challenges. But it might not be the right time to expand, add locations, update equipment, etc. if you don’t have a healthy liquidity reserve or reliant cash flow stream to lean on.
Back to basics: cash management 101
To determine the nice-to-have from the need-to-have, I advise all business leaders to get familiar with their budget. Cash management is a lost skill that has gone dormant as a result of more than a decade of low interest rates, but the age-old saying remains true, cash is king. According to a 2024 study from QuickBooks, 28% of respondents stated cashflow challenges as their biggest business worry.
Business profits are not the same as cash flow, so, don’t look to your profit/loss statements to determine if you have enough cash to cover your business operations. Dig into the details of your business’s financial statements to see what you have in cash reserves each month and get familiar with what your income and payment cycle looks like. Here are some quick things to review and implement:
- Analyze fixed expenses. Review insurance policies, subscriptions, vendor services, and retainers for ideas on where to trim costs.
- Put more focus on your cash projection by creating both 30-day outlooks and a 13-week cash flow model.
- Identify what “excess” cash, working capital, and working cash really mean to you.
- Consider carrying a higher cash balance than you typically did in the past as a safety net during market shifts.
Use the resources you already have
Once you are in the mindset of working with your present circumstances, connect with your banker. They are a great resource for brainstorming new ideas in tougher economic times. I always ask our clients to share their account analysis statements, and we can then tell where you are putting cash and whether it’s being utilized to the fullest.
Your banker can share other ideas and considerations, such as trying new savings accounts. If you’re taking your money out of your company and investing it in the stock market, right now it may be wise to shift some money into a money market or a high-yield savings account. With current conditions, if you can get a good return on one of those essentially no-risk savings accounts around 4.5%-5% versus taking a 7% investment return that carries market risk, you may want to consider it.
The discrepancy between risk and return is larger right now than it has been in some time. And, while the S&P is up (as of this writing in July), if you take away the top handful of stocks, the overall market isn’t looking as strong. Looking at savings avenues you might have overlooked in the past is a simple shift to consider.
Your banker is also going to give you guidance on new tools to implement in your business. One we typically recommend is an overhaul of your corporate credit card program. Credit cards can have a big impact on business cash flow. If your cash flow still relies on paper invoices or checks, it could significantly slow your payment cycle. Beyond the speed and money-back savings, many credit cards also offer fraud prevention benefits, which is a huge benefit given rising cases of fraud.
One step further would be to add integrated payables, if you aren’t using them already. Outdated payment processes expose businesses to unnecessary costs, inefficiencies, and payment fraud risk. Integrated payables help eliminate obstacles using a single, simplified process across systems, bank accounts, and payment types.
All in all, there are many things you can do to strengthen your business, even when things such as interest rates are out of your control. An emphasis on cash flow and having a strong working relationship with your banker are going to help keep your business running smoothly and prepared for the future.
Daryl Stafford is senior vice president, relationship manager for commercial banking at UMB