A CFO Risk Mitigation Strategy Amidst High Interest Rates

Written by Jason Mountford
November 16, 2023

As you will no doubt have already seen, earlier this month the Fed made the decision to hold interest rates again at their current level of 5.25% – 5.50%. After hiking rates 11 times, this most recent decision means that rates have now stayed flat since July. With no end in sight, it creates the need for a CFO risk mitigation strategy to navigate a volatile market.

There’s been plenty of coverage around how the current rate environment is impacting consumers, with higher mortgage rates than we’ve seen in years, and savings accounts that are actually providing a return above inflation for the first time since the 2008 crisis.

But of course consumers aren’t the only ones who are heavily affected by the Fed’s monetary policy. As a CFO or senior finance executive, you’ll know that the prevailing base rate can have a major impact on your business.

So what does the Fed’s recent decisions mean for corporate finances? Do these consecutive pauses mean that rates will begin to head down soon? And how can you as a senior finance executive ensure that you’re able to navigate your company through any rate scenario that might be ahead of us? Let’s examine how high interest rates impact CFOs in the short-term and long-term.

The Fed Attempts a Soft Landing

Let’s be honest, the Fed hasn’t had an easy job over the past couple of years. Faced with massive inflation as a result of the complications surrounding the pandemic, the obvious next step was to raise rates hard and fast. Which they did.

But while that decision might seem like the obvious one, it has always been a little more complicated. Consumers have been dealing with that record high inflation, and increasing interest rates has meant putting even more pressure on household budgets.

That’s not good for people on an individual level, but it has also meant that the Fed has had to contend with the risk of sending the economy into a recession while trying to slow the rate of rising prices. Chairman Jerome Powell has made it clear many times that they view lower economic growth and even a potential recession, as the lesser of two evils compared to spiraling inflation.

Even so, they’ve been attempting to engineer what’s become known as a ‘soft landing,’ bringing inflation down while limiting the damage to the economy. So far it looks like they might be on track to do just that.

Inflation is still higher than the target of 2%, but at the current level of 3.2% it is still significantly down from its peak of 9.1% in June 2022. At the same time economic growth has been low, but the job market and consumer demand has remained remarkably steady.

For CFOs that paints a somewhat encouraging picture. But as you surely already know, there are many different potential outcomes from here, and finance teams need to be prepared for all of them. So let’s dive into how high interest rates impact CFOs as you plan for the year ahead and beyond.

The Short Term Outlook

We want to focus more on the long term strategy in this article, but let’s quickly take a look at what the short term might have in store. Firstly, Jay Powell and co. have made it clear that they want inflation down to 2%. Until we see that, it’s unlikely that rates will drop by any significant measure. Understanding how high interest rates impact CFOs in the short term means understanding how long we’ll see interested remain at this record high.

In my opinion, that means we’re likely to see this holding pattern of current rates for some time. There are still inflationary pressures at the moment, and getting the rate down by another 100 basis points from its current level will be a challenge.

I expect rates to remain around their current levels for probably another year, give or take a few months. Of course that’s assuming there are no major economic events that force the Fed to act. An issue like more instability in the banking sector as we saw at the beginning of this year, or some other national or global issue could force the Fed to slash rates to avoid an economic collapse.

Let’s hope it doesn’t come to that.

In many ways this is all just part of the day to day of a CFO or senior finance executive. Your job is to navigate these unforeseen issues as they arise, and sometimes there are black swan events that you simply can’t plan for.

But where I see the potential for some real strategic gains (or indeed missteps) is in the way a business is prepared to operate in an environment that has structurally changed from the one we’ve become used to over the past 15 years.

Looking Further Ahead

In order to understand how high interest rates impact CFOs in the long term, we need to look back. What I’m talking about here is a change to the Zero Interest Rate Policy (ZIRP) that has effectively been in place since the 2008 global financial crisis. Even when rates were slowly increased from 2016 through to the beginning of the pandemic in 2020, they only peaked at just over 2%.

With that immediate history, the current rates are often described as being high. While they are compared to the rates of the past 15 years, the long term average for the Fed rate is 4.6%. In that context, the current rates are only slightly higher than ‘normal.’

So the question is, should we consider that rates going back to close to zero would be considered the baseline, or are we more likely to see rates stay around their current level for the foreseeable future? In my opinion, it’s the latter. 

Therein lies potential for savvy treasurers to put in place strategies and business plans that take better account of the underlying economic conditions than their competitors. ‘Reading the room’ more accurately can allow you to make better decisions on the future plans for the company, and more appropriate financial steps to ensure efficient funding in a higher interest rate environment.

Put simply, higher rates could be here to stay, and CFOs who are best prepared for that are going to give their company’s a competitive advantage compared to those who aren’t.

That’s the big picture, but how can this be done on a practical level?

A CFO Risk Mitigation Strategy for an Uncertain Future

It comes down to two main components. Having an accurate and clear view of where your company is right now, and having the ability to make plans based on various economic scenarios in the future.

The first part of this might seem obvious, but as you will know, getting an accurate, real time view of a company’s finances can be far more difficult than it should be. But it is absolutely vital. Without knowing exactly what position your company is in today, it’s impossible to accurately predict how it’s likely to look in the future.

Here, technology can provide a massive advantage. Through the use of open banking APIs, treasurers can now use platforms like Trovata to access a real time view of the entire company’s financial position. It means that the financial baseline can be pulled up instantly, without the need for hours of manual data collation, and eliminating the risk of transcription error or mistakes in a formula on a spreadsheet somewhere.

But of course knowing where you stand right now is just that starting point. The key to building a strategic advantage over your competitors is in the way you prepare for the future.

As far as interest rates go, this should be a fundamental component of how a CFO plans for the coming 1-10 years. In my opinion, it would make a lot of sense to create a base scenario which assumes higher rates than we’ve become accustomed to.

This will mean capital is more expensive from traditional lenders like banks, and equity funding will be harder to come by. Payment terms and interest for late payment suppliers will likely be impacted, as will the interest earned on corporate savings or treasury funds sitting in money market accounts.

Preparing for this will allow the CFO to provide invaluable advice to the CEO and the rest of the senior leadership team. For example, geographic regions or product lines that were profitable 5 years ago, may not be if the cost of short term cash flow financing has increased. Or perhaps it makes more sense to hold more cash reserves in countries with the highest rates, while taking into account the cost of hedging any foreign exchange risk.

Regardless of the specifics for your company, the point remains the same. By planning for a certain scenario (such as prolonged higher interest rates), you’ll be prepared to thrive if and when it happens.

Obviously this doesn’t mean you should only plan for one scenario. No, any good financial manager knows that it’s important to envision as many different potential outcomes as possible, putting in place broad strategies to deal with them if they come to fruition.

In the days of manually created spreadsheets, this type of complex scenario analysis could prove to be a nightmare. A hundred different versions of spreadsheets saved in files spread all across the company, on individual analysts’ desktops or as email attachments, meant that consistent data integrity and analysis was a huge problem.

Again, tech has provided a solution. Modern cash management software like Trovata provides a single source of truth, with cloud collaboration tools meaning anyone can work on the projects from anywhere in the world.

cfo risk mitigation strategy

Not only that, but the sophisticated scenario planning tools mean that practically any possible scenario can be built with a few clicks. This means less time spent on data entry and collation, and more time on the high value components of analysis and strategic advice.

It allows the CFO to become a true strategic partner of the CEO, which is becoming an expected part of the role. That’s especially true when the macro environment and the future for interest rates is uncertain, as it is today.

Create the Right Long Term Strategy with Trovata

The benefit of Trovata is that it brings together all of these necessary tools and features on a single platform. CFOs and their teams gain access to a dashboard of real time financial and cash data for the entire company, across multiple entities, currencies and geographic regions.

Through the use of open banking APIs, this data is 100% accurate and requires no manual data manipulation. That saves the finance team hours every month. Not only that, but the inbuilt scenario planning tools mean you can create multiple forecasts with that data, based on various interest rate scenarios.

Should changes occur, such as a banking crisis causing the Fed to slash rates unexpectedly, you can quickly and easily make changes to the forecasts to see how the news could impact your business. That means you can act faster than ever before to the changing economic picture. And these days, speed can be a true competitive advantage. 

As James Krikorian, VP & Treasurer at Krispy Kreme put it,

cfo risk mitigation strategy

If you want to learn more about how Trovata can help your strategic cash flow planning, download our platform data sheet today.

cfo risk mitigation strategy

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