Finding a chair when the interest rate music stops: a focus on pricing, costs and asset utilization.
March 26, 2019
As rising interest rates and rising inflation create both threats and opportunities. Businesses that aren’t prepared tend to spend more time than they should mitigating the threats and less time taking advantage of the opportunities. And businesses that are prepared have more time to chase opportunities while their competitors are distracted. As our previous post pointed out, getting ready for rising inflation and rising interest rate is mostly about managing customer pricing, cost structure, and asset utilization.
The key thing to remember about customer pricing is that it is all about understanding the value your customer derives from what you sell. When times get tough, customers really aren’t loyal to you or your product or service. Customers are loyal to the value they derive from what you sell them. The more you know about your customer and understand the value they perceive in your product/service the easier it is to pass on cost increases.
Every company is squeezing their suppliers to deliver more for less, including your customers. Why do you purchase from these suppliers? Price? Dependability? Reputation? Quality? Identify your core suppliers, those that help your company deliver more value and create a close relationship defined by clear two-way communications. You likely will need to call on these relationships during more trying economic times. And, the more you understand about the actual value your suppliers deliver the easier it will be to negotiate.
When unemployment is low and inflation is increasing, employees expect rising wages. The risk is your most productive employees will leave and your least productive employees will not. An underpaid productive employee is more likely to leave than an overpaid productive employee, irrespective of which talks the loudest. A good way is to think of a review/raise process as an opportunity and not as a cost. You can set a pay range for each job category and then review each employee based on performance. As a rule, you want to give higher performing employees a larger raise. But a good idea is to scale the increase based on where they are in the pay range for their job.
When rates go up, more customers will attempt to extend their payables. Cleaning up your accounts receivables before rates rise makes it easier to hold the line as rates increase. And allows more flexibility when your most profitable customers get into a bind. Selling unneeded equipment and slow-moving or obsolete inventory is a great way to free up cash and reduce debt. But it is a long process so start early.
Interest rates may continue to rise, and inflation may increase — or they may not. In either case, preparing will merely make your business more efficient and generate more cash. Contact Exceptional Leaders International to learn how we can help.
