Bank of Texas
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 Joseph Rangel, treasury management officer for Bank of Texas.
Indeed, it was 2007 when America last saw a Federal Funds rate over 5.0%, and as of September 2023, the rate was 5.5%.
Bank of Texas
“What this means for businesses is they have to think differently about how they optimize their working capital, debt, and liquidity,” said Rangel. “On one hand, higher interest rates can be challenging for companies that need to borrow money. But high rates also create new opportunities to generate stronger returns on bank deposits and liquid investments.”
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 Rangel. “These are always important goals, but given current economic conditions, companies may need to make some adjustments to their long-held strategies.”
Bank of Texas
Four tips for financial stability
Rangel and the treasury services team offered a range of suggestions for businesses to consider as they reevaluate their needs.
- 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.
- Maximize working capital. In times of uncertainty, 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 collecting on accounts receivable quickly and optimize their payables process. For example, 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.
- 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.
- 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.
“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,” Rangel says.
For More Information, visit Bank of Texas.