Interest Rates are Up: What it Means for Your Business

On September 16th, the Fed raised rates for the first time in three years. An increase in interest rates mean the cost of business can go up noticeably, and not just your borrowing costs. When rates increase, business gets more expensive for both you and your customers. You have to do more than just watch your expenses in this environment to survive.

It is not only a good idea for you to have your personal savings in a high yield savings account. A HYSA can bring in extra cash for your business as well. When the Fed raises rates, the yield on HYSAs increase as well. Open a HYSA for business savings and/or check to make sure your rates are going up. Don’t leave cash on the table.

If you don’t already forecast your cash balance, you need to start now. 82% of failed businesses suffered due to cash flow problems. ¹ Cash flow forecasting will help you anticipate your short-term cash needs and provides a guide for decision making that will protect your working capital.

This should be at least a 13-week forecast that is updated regularly. I recommend updating it weekly, however you may find bi-weekly or monthly frequent enough, depending on your average transaction frequency and volume.

Don’t assume each customer will continue to pay on your terms. It’s smart to start making adjustments to when you expect cash inflows due the impact of the higher interest rate environment squeezing everyone’s cash position. If a customer pays in 15 days, assume they’ll start paying 20-30 days instead. You have to be prepared for these delays in payments.

Throughout my corporate and consulting days, I’ve seen many businesses create their own cash flow problems. Many small businesses delay their cash inflows by keeping the sales and accounts receivable departments separate. They are separate in function but they are parts of the same process: Order-to-Cash.

Before you collect cash, the product/service must be delivered. And before that, the sale must be made. When the sell is made, ensure your salespeople collect all the data needed. Not just their contact to get the contract signed, but also the correct billing contact and customer requirements for invoicing: the right inbox, details required to be noted on the invoice, etc.

I’ve seen countless invoices go unpaid only to find out that the invoice isn’t in the customer’s system. It was forwarded to the wrong individual or accounts payable inbox. Or a summary invoice was sent when the customer requires an itemized invoice. Make it a requirement for your salespeople to collect this data when the order is placed. This one change closes the gap on errors leading to cash receipt delays.

The earlier you invoice, the earlier you get paid. Every day you don’t invoice a customer after the work is done is a day or two added to the cash collection cycle. Immediate billing is a must! Too many small businesses are lackadaisical with their invoicing process and will wait up to two weeks to invoice. Late invoicing in this environment is a sure way to end up shutting the doors to your business for good.

Something has shifted in how larger businesses treat small vendors. It used to be the case that when you invoice, the customer is bound to the terms you established. Net 15 meant net 15. Now, a lot of larger companies default to paying on their own schedule, regardless of what your invoice says, often stretching to 60 days.

If this happens to you, you have more leverage than you think, especially if you’re a vital vendor. A direct phone call asking for tighter terms works more often than owners expect. If you push back on their extended terms, you’ll be one of the few vendors to do so, leading to more favorable terms. Most vendors accept the 60-day cycle, financing their customer’s operation. Don’t be most vendors. If your relationship and your service are strong, request 30 or 45 days instead, and be direct about why it matters to your business.

Of course you have the option of holding on to cash longer, delaying payments to your vendors. It can help in the short-term. I call this the last resort because potentially souring relationships with your vendors is something you want to avoid. Also, this may not be “the fix” to your operation you need.

Rising rates increase the cost of business and can extend your cash collection cycle. Being a savvy leader means you can mitigate the effects of almost anything. There are businesses who are currently struggling that will shut down due to a lack of cash flow management. You don’t have to be one of them.

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https://www.score.org/articles/1-reason-small-businesses-fail-and-how-avoid-it/