While watching the State of the Union address recently, I took note of the years of experience our president, vice president and House speaker have amassed while helping run our country — approximately 100 years. Can their successful experiences in managing our country through past crises be effectively, and collectively, leveraged to help guide us in overcoming current issues? While the answer to that question remains to be seen, the same question should be asked of your banker.
History repeats itself, and the quote remains as relevant as ever when considering the broad range of issues you and your company face today. Inflationary pressures not seen in 40 years, escalating energy costs, volatile and increasing interest rates, availability of labor, government budget deficits and both domestic and international political unrest represent a fairly comprehensive list of items needed to consider as you run your business. We have been here before and, as Winston Churchill once said, “Those that fail to learn from history are doomed to repeat it.” Businesses need to use the lessons of the past to successfully guide them in the future.
What’s interesting about this broad number of issues is the interconnection between so many of them — and the domino effect they have on one another. Inflation is influenced by, among other things, high energy prices, followed by the Federal Reserve increasing interest rates to fight inflation. Of course, the dynamics of supply and demand can further heighten inflationary pressures, as does increasing government spending, leading to budget deficits and the need to contract the money supply. The balancing of supply and demand is also impacted by interruptions in the delivery of goods, as we’ve seen recently with COVID-19. A similar interruption in the supply chain was seen in the 1970s with an oil embargo that led to high unemployment, interest rates in the teens, excessive inflation, budget deficits and domestic and international unrest, among other things. Sound familiar?
It has been a while since all of these factors have impacted your business and the economy as a whole. When you consider how to manage this “perfect storm” of events, you must look to your trusted business advisers to help you, especially your bank. Banks have played a prominent role throughout history in dealing with outside economic factors. Unfortunately, in some cases, banks have caused, or at least contributed, to the crises. More often than not, however, financial institutions have served as a stabilizing force for businesses and government alike, uniquely positioning them to provide valuable wisdom, advice and time-tested products to help safeguard your company through these tumultuous times.
It is no secret that the Fed will be increasing short-term interest rates and it will most certainly negatively affect borrowing costs. The flat yield is indicative of uncertain economic times 2-3 years from now and beyond, but, given recently enacted government spending programs, does that mean long-term rates remain low? Is your company’s capital structure sufficiently insulated from higher interest costs? How about rising labor and raw material costs? All of this is unclear, at best.
These items need to be discussed with your bank and its experience needs to be leveraged to help you manage them. For example, since inflation has been dormant of over two decades, last-in, first-out layers have been exhausted. If your company relies on carrying high inventory levels, your banker must be well versed in understanding what a LIFO layer is and how it can impact the bottom line, balance sheet and/or borrowing capacity. If your company relies on bank financing, your banker should provide interest rate hedging options like swaps, forwards, collars and caps, to name a few. If goods are imported from overseas and you buy on open account, perhaps it’s time to consider trade finance services to protect against supply chain interruptions, among other things, and your bank should have those services at your disposal.
The products listed above are not new to banking — and largely resulted from the industry’s experience in managing the risks of the past. Economic conditions have caused some of these services to become less relevant in the last two decades, but, given today’s environment, they offer the potential to help minimize the impact that unforeseen and uncontrollable items can have on your company. Experience matters greatly in helping manage your business. Your bank offers many tools to help you prevent history from repeating itself.
Bill Ruckert is a senior vice president at Provident Bank.