Execs, Time to Prep for the Return of Low Interest Rates and Low Inflation (Here’s How)

Written by Jason Mountford
July 24, 2023

Over the past couple years, we’ve heard nothing but inflation, inflation, inflation. Gradually, though, we’re starting to hear the dreaded I-word in a different, more positive context – it might go away soon!

As slowly as this news is emerging, things could return to normal much quicker than you might expect. End of 2023, early 2024 seems to be the consensus. And once inflation comes down, says the IMF, interest rates will likely return to pre-pandemic levels.

That’s great for consumers. Businesses too, at least in the long-term, but in the short-term, it could present some difficulties.

After all, you’ve adjusted everything – price points, inventory, and supplier contracts – for high inflation and high interest rates. A quick return to normal would feel like the rug being pulled out from under you.

But have no fear – we’re here to help you stay on your feet. Read on to learn how you can prepare for a rapid return to normalcy. Fingers crossed.


Position Your Price Points

When inflation is high, raising prices is usually your best bet – however, you still do this slowly, methodically, to avoid a mass exodus of customers used to specific prices. Now, like a pendulum, things are swinging back, and you’ll want to start thinking about how to price strategically in the opposite direction.

Just as with raising prices, think about how you might be able to lower prices slowly. This might seem counterintuitive, but it could mean a bump in demand that means overall profits push higher, even though prices are getting lower.

Don’t just dive in and slash them across the board like your local, “crazy” car salesman might. You might test lower prices on specific products in specific markets or segments to see how customers react. Consider the effects of changing cost structures (are expenses starting to decrease?) on your profit margin, and look at what competitors are doing. 

Take in the landscape, and use scenario planning and cash flow forecasting to show how different price points might affect your liquidity position over time. Will it be sustainable? Are you building up your cash reserves over time, and investing in expansion when it will have the best effects?

The goal is to carefully model things and take prime advantage of the increased customer demand that comes with lowered inflation – it’s sort of like a New Coke, classic Coke kind of demand spike. Rather than bringing back an old recipe, though, you’re bringing back your old prices. Open the floodgates, but do so cautiously. Then, plan to use that money optimally.

Consolidate Your Cost Structure

As inflation decreases, you can expect to see some seismic shifts in your variable expenses.

Let’s start with an obvious one: supplier costs. Lower inflation may cause these prices to decrease, or at least level off. Normally that’s great, but you may have locked in prices with long-term contracts when inflation was first starting to ramp up. That was excellent then, but now it’s going to be a disadvantage. Sort of like buying Dogecoin, but not selling it at its high.

Fortunately, there may be some wiggle room here. See if you can renegotiate those contracts or get out of them altogether. Consider penalty fees, though, and whether they’re worth the benefits of exiting a contract. Here’s one place where having good relationships with suppliers can come in handy.

If you’re creating new contracts, make sure they’re flexible, as prices could continue to decrease.

Contrary to common sense, you may actually need to increase costs in some areas as inflation reduces. Workforce planning is a great example, and a bit less obvious than those supplier costs. By nature, lower inflation means higher consumer demand, and higher consumer demand means you’ll potentially need more employees to cope.

Scenario planning can help you out here, too, by modeling increased salary costs. You’d see how that works with other factors such as decreased price points and cheaper access to financing (more on that below).

You’ll also need to consider how a rejuvenated economic situation will probably mean increased wages in your industry. In order to retain employees, you’ll have to remain competitive, so keep an eye on what other companies are doing and raise wages accordingly.

However, keep in mind you won’t necessarily have to increase headcount everywhere. You can improve the efficiency of employees you already have by investing in automated cloud-based solutions. Nowhere is this more apparent than in the treasury department, where tech has been helping finance teams stay afloat in the face of economic difficulty, departing CFOs, and more.

Ponder Your Products

When inflation first burst onto the scene like an overenthusiastic balloon at a party, you may have scaled back production of certain items – consumer habits do change, after all. Now, as things start to return to normal, you can modify your product offerings.

Specifically, you’ll want to think about increased consumer demand. During the period of high inflation, you may have had a reduced inventory of products – why worry about those carrying costs? Now, it’s time to think about boosting your inventory. 

Will your supply chain be ready to meet these demands? Do you have the necessary capacity in terms of headcount, production efficiency, and storage space? Use scenario planning to find out, and start getting the pieces in place.

Next, maybe there was something you shelved, because you figured it wouldn’t do well during a period of high inflation. Use scenario planning to model your expenses, and cash flow forecasts based on different price points to figure out if it’s feasible.

Invest in Expansion

With low inflation comes low interest rates  – central banks like the Fed no longer need to keep trying to force that high inflation down like a ball in a pool. Low interest rates means cheap access to loans, and cheap access to loans means you can start thinking about expansion once again. 

Think capital budgeting – now could be the time to invest in major projects, projects you may have been putting off due to tough economic times. Now’s not the time for savings accounts.

To get the most bang for your buck, you’re going to need scenario planning. How will different market conditions affect the success of your project? Which project has the best chance of reaping an excellent return? How will undertaking a major project – even with that lowered cost of debt – affect your cash flows? Will you have enough capital to keep operations afloat?

Speaking of expansion: what about acquisitions? Now would be a good time to think about acquiring competitors. By being prepared for reduced inflation, you’ll be better positioned to acquire companies that did not prepare. Use scenario planning to model how these acquisitions might play out – and how best to utilize them – in the new, lower inflation environment.

Refinance and Pay Off Debt

Now’s also going to be a great time to refinance debt. Use the opportunity of finally lowered interest rates to aggressively pay off liabilities and improve your bottom line.

Use scenario planning software to see how refinancing your debts would affect your cash flow over the coming months, and determine how best to strategically allocate that money.

No matter what, the goal of scenario planning is to save money and optimally build your business.

The Whys and Hows of Scenario Planning

If you could look into a crystal ball that showed your business’s financial future, based on specific, proposed actions, wouldn’t you want to? Ok, while there’s no financial crystal ball we know of, scenario planning is the closest thing. It should be used in almost any context, but especially when macroeconomic changes are about to occur. And boy, are they.

Doing scenario planning automatically provides you an advantage over competitors who don’t. But why wouldn’t they do it? Well, the truth is scenario planning can be complicated.

For one, building solid scenario plans depends on data aggregation. When you have many bank accounts, this can be difficult – especially if you’re relying on spreadsheets. You need a centralized, data management platform that requires no input from finance teams and guarantees error free, high-quality data.

As stated, things may be returning to normal quickly – you don’t want to spend so much time gathering data that you can’t react quickly enough. Get a near real-time view into your cash position, and begin modeling how changing factors will affect it.

Actually modeling lower prices, increased access to financing at lower rates, and more money spent on headcount and wages is no simple task. There are a lot of moving parts. Use scenario planning to see how all these factors might affect each other. 

You might build a model that combines increased salary costs and lowered product prices, for instance, then examine the effects on revenue, profitability, and cash flow over time.

Alternatively, let’s say you’re not sure inflation will decrease as fast as some are saying  – you might create a scenario for a slower reduction of inflation and a slower reduction in interest rates. You’d plan out your price points and cash flow accordingly and optimize your loan strategy based on less rapidly declining interest rates.

Build Scenario Plans With Trovata

Trovata enables you to automate scenario planning, quickly adjusting to changing circumstances. We pride ourselves on flexibility – set user-defined growth rates to see exactly how all the different variables that come with lowered inflation will affect your liquidity position and cash flow, and then take action from there. 

Fortified by machine learning algorithms that become more accurate over time, Trovata specializes in helping you build a strong liquidity position through robust cash flow forecasts. At the end of the day your business is all about cash, and making your cash work for you – especially now since, with lowered inflation, each dollar’s worth more!

We’re here to help – say goodbye to inflation and hello to solid, sustainable growth with Trovata.

Curious to see it in action? Book a demo today.

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