Cash Management Strategies Key After Fed Rate Hikes
With many small and medium-sized businesses experiencing an upturn in sales, the recent increase in interest rates may seem like a tempting time to change your cash management strategies to move excess cash from a non-interest bearing account into one paying the highest rate they can find.
But there can be more important considerations when it comes to crafting smart cash management strategies, according to Jeremy Parker, the Director of Corporate Treasury Solutions at Boston Private.
"Business owners, like all of us, have a tendency to focus on the issue of the moment, which currently is rising interest rates and maximizing the return on cash," Parker says. "But it's also good to look at both sides of your balance sheet and your cash flow statement. There are often many other important factors to consider, not just the rate on a single cash vehicle."
Renegotiate Payment Terms
For companies using an operating line of credit, which often comes with a variable interest rate, Parker said it is important to review their collection and disbursement practices to find opportunities to optimize cash flow and use of that credit line. It may also be a good time to renegotiate payment terms from clients or extend those they have with vendors. As Deloitte noted in its working capital series, nailing down advantageous rebates and terms is part of having an effective cash management strategy. By making those changes, companies can reduce outstanding balances on the working capital line of credit.
"For a small business, the marginal reduction in their credit line for working capital may far outstrip the benefit of a slightly higher yield on their cash surplus," Parker says.
He says that with rising rates, there is more competition to make loans and consequently many financing options for entrepreneurs. That translates into now being a propitious time to seek new loans or extend the term of existing loans at a fixed interest rather than a variable-rate loan, which is bound to get more expensive.
The New York Times reported that the Federal Reserve has raised rates three times this year, and another increase will be forthcoming in December. It also said Fed officials anticipate three more next year, with another in 2020.
New Software Solutions
Parker says that since some business owners may have no memory of what it was like during the last period of rising rates, from 2004 to 2007, it's a good idea to review cash management planning before rates go up much more. In addition, he notes that there are many software solutions now available for cash management that were not around more than a decade ago.
Take payments, for example. A decade ago, most customers paid their bills by check. Now, many companies have the option of transferring cash by wire or by electronic payment through the Automated Clearing House (ACH) Network, cutting days or weeks off the time it takes to receive money.
A Business Insider report predicted rapid growth particularly in mobile payment technologies, reaching $503 billion by 2020. Accenture's 2017 North American Consumer Payments Pulse Survey also cited mobile as one of 10 "mega trends" driving the future of payments. "An entirely new future for the payments industry" is on the horizon, the report notes.
Managing your cash faster by capitalizing on growing technologies will open up doors as rates continue to rise.
"That will allow you to reconcile accounts that much faster, especially if you have a small accounting staff, and give you an extra 15 or 20 days of cash that you can use to pay down credit lines," Parker says.
In addition, if you are a retail operation or have merchant services, it may make sense to set up a credit card system, which will facilitate instant payment. But the cards also have interchange fees, so you need to carefully consider whether the additional costs are worth it from a cash management perspective, while also insuring a good customer experience. By the same token, you can use a credit card to schedule your payments with vendors so you have the most time to pay an outstanding amount.
"Broadly speaking, the number of cash management options available has significantly increased," Parker says. "That's why finding the right partner and advisor to help navigate the complex maze of payment options is the most important decision. It can make a big difference."