Finding a chair when the interest rate music stops: a focus on pricing, costs and asset utilization.

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.

Finding a chair when the interest rate music stops: it pays to be prepared.

As interest rates rise off historic lows, clients are asking what, if anything, they should be doing differently. The Federal Open Market Committee raised the fed funds rate by a full percentage point in 2018 and expectations are for another half point raise during 2019. Inflation and interest rates typically move in sync. Does that mean we should expect inflation to increase? Lower than normal interest rates and lower than normal unemployment certainly point to higher future inflation While there are plenty of forecasts, nobody really knows what will happen in the future. But, we do know the implications of higher interest rates and higher inflation.

For example, if the interest rate on your loan goes from 2.5% to 3.5%, then the interest paid on the same amount of debt will go up by 40%. If inflation drives up the costs in a business, profit goes down without offsetting price or productivity increases. If the cost to borrow goes up or profit goes down, then the borrowing capacity of a business decreases. When both happen at the same time, liquidity can dry up very fast.

If interest rates and inflation are increasing, it creates problems for companies that fail to adjust in time and creates opportunities for companies that do. The last time the Fed steadily raised interest rates was 2005, and we all know how that ended. Most of us who were running businesses at the time recall that there were opportunities. But to take advantage, your business needed to be prepared.

In general, getting ready for rising inflation and rising interest rate is about managing three fundamental areas of the business: customer pricing, cost structure, and asset utilization. Managing these three areas properly creates the flexibility and liquidity to capitalize on the opportunities. 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. In our next post we will discuss how to manage these three fundamental areas of your business. Contact Exceptional Leaders International to learn how we can help.

Succession: How Next-Gens can attain leadership competencies

Publicly owned companies like PepsiCo and Johnson & Johnson have talent management strategies for their fast-track employees. Developing NextGen talent within a family business should be afforded the same time, attention and disciplined approach. However, family dynamics and ownership considerations create additional complexities.

For example, a controlling shareholder may want his son to run the business, even if the son isn’t qualified, creating an understandable fissure in the family.

Or consider the example of a daughter of the second-generation leader when she became CEO of a successful food distribution business (one of our clients). Her uncles and cousins struggled with affording her the authority to lead the business through the transformations it needed to remain competitive. Although she was highly qualified and up to the task, her family continued to view her as the little gymnast on the balance beam. They could not imagine her running the family business.

A leadership development plan for a family business addresses can address such challenges. It acknowledges each family team member’s current set of core competencies and aptitudes and those that will be required in the years ahead.

A leadership development plan for NextGens should begin with an honest assessment of their current skills and aptitudes. This should include a self-assessment, consideration of prior performance reviews, interviews with appropriate team members and other elements as appropriate.

Candid discussions about the NextGen team member’s personal aspirations for the future should also occur. All too often, the senior generation makes assumptions about NextGens’ career goals without asking the NextGens what they think.

We also highly recommend that before a family member joins the family business, they spend a minimum of two years, and ideal­ly five years, of working outside the family business.

Then, NextGens also must immerse themselves in the industry. Attend trade association meetings and events, and visit strategic partners to see firsthand how they conduct business, touring distribution channels (for example, if your family business is in the consumer products sector, tour an Amazon facility).

Every family business must identify competency gaps and assist NextGens in developing leadership skills such as:

• Data-driven strategic thinking and execution
• Communication skills, including being an active listener
• Ethical decision making
• Motivating people
• Assessing and developing talent

Leadership development plans are hard work and require objectivity, commitment and flexibility. The benefits of planning and taking time to implement the plan extend well beyond the NextGen members. The payoff is well worth it: a drama-free family business story with a happy ending.