Companies have been working on their business plans and budgets for 2023 since early fall 2022. There have been many developments in the economy and financial markets during this time. One of the biggest concerns is that interest rates are rising around the world and how long they will continue to rise.
For the US Federal Reserve, interest rates are expected to rise to 5.25-5.5% in 2023 and remain there until inflation subsides. Other central banks have taken similar steps around the world. A US recession is expected in his 2023, but its length and depth are uncertain.
The final interest rate will probably stay in place beyond 2023 and into 2024 and even 2025. Given the degree of uncertainty and risk in global markets, businesses face a number of scenarios for which they must prepare.
Impact of interest rates on business
A key question for planning professionals is, “How will interest rates affect customers, businesses, and business operations?” Interest rate levels and their changes can have direct and indirect effects on businesses and their customers.
1. May affect interest expense for working capital financing such as inventory.
2. May affect the cost of financing capital goods and capital projects.
3. May affect interest expense on debt carried forward when maturity is reached.
4. They can affect a company’s cost of capital directly through interest expense and through investors’ expectations of equity returns as interest rates rise or fall.
5. May influence ROI hurdle rates used in capital spending decisions and product development projects.
6. They can affect not only the exchange rates faced by businesses when buying and selling goods, but also the exchange rates faced by their customers.
7. These may affect the company’s overall capital structure through the relative proportions of debt and equity funding.
8. They may affect the interest costs of customers who purchase the company’s products. In particular, inventory and “big-ticket” items such as cars, trucks, and other capital assets.
Interest rates and their implications are therefore an important consideration in many business scenarios for demand planning and financial planning and analysis (FP&A) purposes.
Reevaluate your financial and operational plans for 2023
All “approved” 2023 business plans, demand plans, budgets and financial plans should be re-evaluated and stress-tested to reflect the impact of changes in interest rates on the business and its customers. They may already be outdated.
Before implementing the 2023 financial reporting process, operational and financial plans should be aligned to ensure business metrics utilize a realistic set of goals, benchmarks, and budgets across the company. I have. These should be reviewed periodically during the 2023 fiscal year. 2023 will be a time of change in business and market dynamics.
Request for interest rate and investment
For example, when requesting investment in product development, capital investment, new software, etc., it is important to consider the impact of changes in the ROI hurdle rate due to changes in interest rates. The basis of these ROI hurdle rates is the company’s cost of capital (debt and equity). Higher interest rates through 2023 will have the associated effect of increasing the hurdle rate for corporate investment ROI, thus requiring greater economic returns to justify investment. (ROI hurdle rates also scale up or down to reflect this consideration, as they scale to reflect the degree of financial risk in the type of investment.)
If you are requesting resources during 2023, it is important that you work with your FP&A department to ensure that your requests are structured to meet the level of performance required to make your company’s investments financially successful.
2023 is here. Analytical and adaptable skills are essential to choosing the best path to operational and financial success. Understanding the impact of interest rates is an important part of this effort.
To bring S&OP/IBP to life for your organization, attend IBF’s S&OP/IBP Boot Camp in Las Vegas. Taking place February 15-17, 2023, planning professionals can learn planning fundamentals and best practices. Chance to win the world’s only S&OP/IBP certificate and his one-day supply planning workshop.