Interest rate doubt is forcing organizations with new strategies

Interest rates, which hit a?22 year high last month, are a great unknown for finance professionals right now. What happens from here is anyone’s guess—and the answer you get will depend on who’s guessing.

Know Where You Fall

Your first task is concretely determining where your organization stands, which isn’t as straightforward as it may seem.

To determine your org’s standing, think through some of the key metrics. For instance, high interest rates can be positive because we’re getting a really high yield on our money. Interest income is fantastic right now for many organizations.

The situation is different for anyone with bank debt, however. That’s where companies are going to be having to deal with those covenants, and be paying out. You get no extra for your business. It’s just a higher cost. What happens when homeowners or real estate investors see interest rates go up on their mortgage and properties. You don’t have a better place; you just have to pay more money for it.

If that’s where you fall, it’ll be important to think critically about existing loans. In?some cases, refinancing could make sense, and analyzing debt repayment plans will be crucial for any debt-strapped business.

Back To Basics

While analyzing your company’s precise standing in this high interest rate environment will lead you to highly individualized solutions, there’s also a tried-and-true rulebook that any finance professional should consider. Finance professionals need to think critically about what initiatives they take on, and the investments they’re prioritizing.

The higher the interest rates, the higher the returns on those investments need to be, and the more quickly they need to be getting profit from them. The cost of capital is the rental rate. No one gives you capital; you rent it. The first thing I think about is the economic value add.

It's about going back to the basics: Think about the payback on every program you have, and consider the cost of every effort. It’s not just about analyzing profitability.

Peel apart your business. Attach capital to each one of the efforts that you have underway, and figure out, ‘Is it returning a positive return on capital?’

That could lead many companies to seriously reconsider how they’re currently doing things—and that’s the point.

Every CFO should be thinking about their business not just in terms of: ‘How do I grow it the fastest?’ but ‘How do I deploy capital most effectively and most efficiently?' While this might also lead to a pivot away from “capital-intensive projects that have long return cycles,” that’s what many companies will have to do to ride out the current moment.

That’s exactly what the policy is trying to do, what the Fed is doing by raising interest rates, what the markets are doing. It’s trying to stop investments that are not deploying capital efficiently.

Now is a time to focus on responsible growth. What that means is always thinking about: We are in a business cycle. This too shall pass, but while we’re in this business cycle, you need to invest responsibly.