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How Cash Managers Can Navigate Rising Interest Rates

rising interest rates

Interest rates are making headlines again, and cash managers are taking notice.

The Federal Reserve Bank is mulling another round of interest rates to try and tame high inflation.

Interest rates play a crucial role in shaping the economy.  Rising interest rates also can have a significant impact on a company’s cash flow and profits, making a cash manager’s job much harder.

This article details the impact of rising interest rates on cash flow and strategies that cash managers can use to manage their company’s cash flow effectively in a rising interest rate environment.

The impact of rising interest rates on cash flow

Rising interest rates can have a big impact on a company’s cash flow.

  • Higher borrowing costs. The increased cost of borrowing is one of the biggest consequences of rising interest rates.  When interest rates go up, it becomes more expensive for companies to access funds through loans, bonds, or lines of credit.  This directly affects a company’s cash flow as it must allocate a larger portion of its revenue towards interest payments, reducing the funds available for operational expenses, investments, or expansion initiatives.
  • Bigger debt servicing burden. As interest rates rise, existing debt becomes costlier to service.  Pricey debt servicing can put the squeeze on companies with variable rate loans or debt instruments tied to interest rate benchmarks.  Higher interest payments can strain a company’s ability to meet other financial obligations and negatively affect profitability.
  • Lower revenues. Today’s rising interest rates are the Federal Reserve’s response to inflationary pressures.  But economists warn that higher interest rates can also lead to a slowdown in overall economic growth.  Higher borrowing costs often dampen demand for goods and services, affecting a company’s revenue and cash flow.  This indirect effect further exacerbates the challenges faced by cash managers during periods of rising interest rates.
  • Increased volatility.  Rising interest rates can introduce volatility and uncertainty into financial markets.  Cash managers who are responsible for managing liquidity and cash positions may need to be on their toes to navigate fast-changing market conditions.  To stay one step ahead, cash managers should closely monitor interest rate movements and their potential impact on investment returns, cash flow requirements, and risk management.

None of this is to suggest that there aren’t any benefits to higher interest rates. 

Higher interest rates can lead to increased yields on fixed-income investments, such as bonds and money market funds.  Cash managers responsible for managing such investments may be optimistic about the potential for higher returns and increased income from interest-bearing instruments.

But after years of low interest rates, the sudden spike in rates should have cash managers on alert.

Navigating the cash flow challenges created by rising interest rates will require a steady hand. 

Steps to improve cash flow in a rising interest rate environment

There are steps that cash managers can take to improve cash flow as interest rates rise.

  • Review and renegotiate debt terms. Cash managers should review their company’s existing debt agreements to identify opportunities for refinancing or renegotiation of terms.  This could involve seeking loans with longer repayment periods.  By optimizing debt structures, organizations can potentially reduce their loan payment expenses and improve cash flow.
  • Strengthen working capital management. Efficient working capital management is crucial during times of rising interest rates.  Cash managers can enhance their company’s working capital by closely monitoring and optimizing their inventory levels, accounts receivable, and accounts payable.  For instance, many businesses are trying to negotiate more favorable terms with their suppliers in anticipation of a slowdown in economic activity.  Reducing excess inventory and improving collections from customers also can help free up capital.
  • Prioritize cost control and efficiency. When times get tough, it is crucial for cash managers to scrutinize their company’s expenses and identify areas where costs can be reduced or eliminated.  Implementing cost-saving measures, such as improving operational efficiency, renegotiating contracts with suppliers, or consolidating functions, can help preserve cash flow during periods of higher borrowing costs.  While cash managers may not oversee the execution of cost-saving initiatives, it’s up to them to help push those efforts forward.
  • Consider alternative financing options. To alleviate the impact of rising interest rates on a company’s cash flow and profitability, cash managers should explore alternative financing options.  This may include seeking equity financing, issuing corporate bonds, or exploring strategic partnerships.  Diversifying sources of funding can provide flexibility and reduce a company’s reliance on increasingly costly debt, mitigating the adverse effects of increasing interest rates.  It can also help ensure that a company has access to credit when it needs it. 
  • Rethink pricing strategies. Adjusting pricing strategies can be another effective way to counteract the impact of rising interest rates on cash flow.  While raising prices should be approached thoughtfully, particularly in competitive markets that may be experiencing a decline in customer purchasing, carefully analyzing their company’s pricing structure, and considering modest increases can help cash managers offset higher borrowing costs.
  • Look for revenue growth initiatives. To bolster cash flow in a rising interest environment, cash managers should proactively pursue opportunities for revenue growth.  This may involve expanding into new markets, launching new products or services, or investing in marketing and sales efforts to capture additional market share.  While revenue growth may be hard to come by during a recession, even small improvements in revenues can strengthen a company’s cash flow position and offset the challenges posed by higher interest rates.

These steps can help cash managers improve their cash flow in a rising interest rate environment.


The Federal Reserve appears committed to higher interest rates in its fight against inflation. 

As interest rates continue to rise, it is essential for cash managers to be aware of the potential implications on their company’s cash flow and be prepared to act fast to offset the negative impact.

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