Businesses are facing many new challenges, and some uncertainty, as markets begin to normalize after a challenging year. Companies are keeping an eye on issues such as the interest rate environment, inflation and labor and material prices. They are also looking out for potential tax law changes that could be coming down and exploring how all of those issues might affect their business.
Smart Business spoke with Kurt Kappa, Chief Lending Officer at First Federal Lakewood, about steps companies should take now to prepare financially for future economic changes.
How can businesses insulate themselves from future economic changes?
If companies purchase a wide variety of products and services, or need materials to produce their product, inflation may affect the prices they pay. This, in turn, affects a company’s pricing and sales revenue. Exploring how inflation might affect these prices is crucial, and now is the time to consider hedging and inventory strategies to lock in the best prices and keep profit margins at a comfortable level.
It may also be time to consider planning an exit strategy and establishing a timeline for a transition or transaction. Business owners should weigh all the factors to determine if this is the right move for both for them personally and for the business.
Conversely, the weakened position of some companies or an owner’s plan to exit may make this a good time to make an acquisition. There could be a lot of opportunities in the next few years to do more than just grow organically, so a company’s cash position needs to be ready to make those moves.
Additionally, as uncertainty looms, one important aspect businesses should consider is their liquidity position.
What can companies do to improve their liquidity position?
Explore assets to identify where cash could be extracted to improve the quality of the balance sheet while simultaneously boosting account balances. This can help to mitigate the impact of any unforeseen tax changes that might be implemented or for future investment opportunities that come along. Interest rates continue to be low, so it’s possible that the lending environment could change in the future. It’s crucial to understand and consider how a swing to a higher rate environment could affect the company’s position.
If a business has loans with a floating rate or lines of credit, now is a great time to review whether those are working as best as they can for the bottom line while interest rates are still low. Locking in a low rate now can help businesses forecast their payments more reliably and not worry about potential fluctuations. As interest rates rise, a company’s cash flow position may be impacted, so now is the time to make adjustments.
Companies without a line of credit should look now to determine if they need one. Those that do have one should make sure it’s large enough for now and the future. It can be much easier to put a line of credit in place when times are good and financial statements are strong.
Who should companies work with as they put together a strategy?
Now is the time to talk with a CPA, banker and other professional advisers to make sure they are up to speed on the state of the business. Get these advisers’ input on potential economic, regulatory or tax changes that are being proposed, and how those might affect the business.
There’s a great deal that’s up in the air, both economically and, in many cases, within individual organizations, which puts an emphasis on the need to prepare. Businesses should be dialed in with where they are today, where they want to get to and what obstacles might exist. There will likely be as many pitfalls as there will be opportunities, so preparation is critical to future success.
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