4 Ways to Adapt to Rising Inflation and Interest Rates


As we begin 2022, it’s a great time to assess the business environment and plan ahead for success. Some of the most pressing challenges for many businesses are rising inflation and rising interest rates, which represent a major reversal from recent trends.

The following four strategies can help you position your business to meet these challenges.

Strategy #1: Check your customers’ spending habits and how it may affect your cash flow.

It is important to recognize how customers will be affected by inflation and higher interest rates. When consumers experience reduced cash flow due to inflation and pay higher interest rates on loans, it reduces their disposable income to purchase goods and services. Additionally, higher interest rates encourage consumers to save excess cash, as they can earn more favorable returns.

Your clients’ spending habits will help you make financial projections this year. As you develop these projections, it is useful to set up three scenarios: a base case, a worst case, and a best case. The base case is the scenario you would expect if everything goes normally. If you anticipate a significant impact on your cash flow, it may be a good idea to obtain additional financing, such as a business line of credit, to help you weather the downturns.

Strategy #2: Assess your balance sheet for debt and determine how financing will be impacted by higher interest rates.

If your business has taken on debt with fluctuating rates, you may have a harder time paying it back in a higher interest rate environment. Higher loan repayments will affect your bottom line and could result in the diversion of resources that would otherwise be reinvested in your business.

To guard against this risk, it may be useful to convert all or part of the flexible rate loans into fixed rate loans. Be sure to involve your banker in this process when assessing your situation.

Strategy #3: Consider your product line and pricing.

In times of inflation, it is even more important to optimize your goods and services for profitability. This can be accomplished by analyzing your product and service flows and evaluating performance in different markets and distribution channels. Your results might encourage you to focus on high-margin products and services to boost your bottom line. However, it is wise to consider the potential short-term and long-term consequences before making any changes.

You may need to implement price increases to offset rising costs. It’s important to be transparent about why price increases are needed, which will help your customers adjust and increase the chance that you’ll retain their business.

Strategy #4: Assess how other aspects of your business will be affected by higher interest rates.

In addition to the cost of financing, you may pay higher costs for commercial mortgages and commercial and office rentals, which could increase if landlord mortgage costs increase. Since equipment and vehicle leases are usually tied to interest rates, these expenses could also change.

It is also important to assess how higher interest rates will affect investments in your business operations. If your business needs essential investments to grow, such as new equipment or a building, now may be the time to seek financing before rates rise. Conversely, if certain investments are not essential, it might be time to postpone them.

Regardless of your industry, you need a sound financial strategy that assesses risk and puts measures in place to minimize it. Building a strong relationship with a banker will help you develop an effective plan that takes into account rising inflation and rising interest rates. Although change can sometimes be uncomfortable, it can also be a time of new opportunities for your business.

Rick Lethbridge Jr. is the Community Banking Relationship Manager for Zions Bank, a division of Zions Bancorporation, Member NA of the FDIC.

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