How SMEs can build buffers against the impact of rising interest rates

As the world prepares to enter 2022, one question is on the minds of business owners all over the world — will interest rates rise next year?

As is usually the case with such questions, the answer will likely vary, depending on where you are and whether your country’s central bank believes that inflationary pressures are controllable. In the United States, for instance, the Federal Reserve recently announced plans to raise interest rates three times in the coming year, up from one rate hike announced a few months back. Their decision has global implications as other countries may soon follow suit.

Hints that interest rate hikes are likely can also be found in mortgage-related news. In Singapore, for instance, the Monetary Authority of Singapore (MAS) struck a note of caution in its recent Financial Stability Review (FSR): “Households should exercise restraint in taking on large new loan commitments, and build buffers against further financial stresses.”

Small and medium businesses (SMEs) will benefit from building similar buffers. In particular, SMEs need to prioritise cash flow management to smoothly navigate possible rate hikes in the coming year, as that will have a major impact on these businesses.

SMEs employ around 50 to 70% of the world's working population but operate with just an average of one to two months' cash in hand to keep these businesses running. Higher interest rates mean business loans get costly, which may lead to lower profits, and in turn make it difficult to secure more funding that could be used for innovation and growth.

To get their cash flow processes in order, SMEs should focus on managing receivables and avoiding late payments from customers by adopting RIABU’s concept called the Virtuous Revenue Cycle (VRC). This is built on a belief that building customer intimacy is a constant endeavour that requires a transparent and self-correcting culture of continuous service and improvement. It starts with communicating clear payment and service expectations from the begin­ning of every customer relationship and ensuring you interact with the customer at every stage of the cycle.

When VRC is correctly employed, it ensures you are closer to your customers than your competitors are and in a better position to identify potential issues and opportunities to get paid on time.

SMEs should also consider implementing Pareto’s 80/20 principle, which states that 20% of your customers are responsible for 80% of your receivables. All customers are important but investing time and energy in high-intensity proactive service for your top 20% will improve your payment cycle much faster.

Get more tips on effective cash flow management from our book, Let the Cash Flow. To find out more about how RIABU helps small businesses get paid on time, visit RIABU.com