Rising interest rates and the impact on accounts receivable.(SELECTED TOPIC)

After aggressive rate cuts in the 2001-2003 timeframe, the Federal Reserve is changing I gears and is working toward moving rates back up to more consistent levels with our economic landscape. In this vein, on March 22, 2005, the Federal Reserve continued a series of quarter point rate advances providing a background of further increases in 2005 with no hint that the end is near.

The Latest move pushes the benchmark federal funds rate at 2.75 percent vs. 1 percent last June, when it reached its lowest threshold in almost 50 years. Whether the purpose is to have rates back to a neutral stance where the funds rate is neither encouraging nor suppressing economy growth, or simply to have a more direct impact in attempting to arrest any threats of inflation, it is not unrealistic to assume that higher interest rates are here to stay.

Rising interest rates affect companies in numerous and different ways; and the sensitive threshold for industries is quite different as well For companies where profits increase as interest rates rise, interest rate hikes usually offer a thriving opportunity. Large companies with sound financial and management backgrounds tend to weather these interest rate hikes more favorably since they have the tools available to balance their long-term and short-term cash needs; and perhaps because it tends to be a lapse of what is happening in the market and their current borrowing costs, thus providing a window of opportunity to recalibrate their borrowing needs. However, for small, marginal cash-poor companies, interest rate increases can turn business cycles into a challenging predicament. It is not only that rates increase, but lenders begin to be more selective in their lending practices--the basic risk/reward approach of managing a successful business.

So where is the critical relationship between rising interest rates and accounts receivable? Simply stated, companies that depend, on an ongoing basis, on borrowing to pay for their product or service purchases or their cash flows are deficient and will start to tag on their payments. Strong economic and industry conditions may temporarily delay the impact of higher borrowing costs, but for cash deficient companies inevitably it becomes a race against time that in many cases leads to serious financial problems. Depending on the seriousness of the financial condition the outcome may ultimately gravitate to the same results--the end-game. It is at this juncture then that companies must sharpen their collection efforts to identify early in the process borderline accounts in ...