In the Era of High Interest Rates, CFOs Should Not Miss Growth Opportunities
Against the backdrop of consecutive Fed rate hikes, how can CFOs balance costs and growth? TD Bank executive Bill Fink suggests focusing on capital investment, M&A, and organic growth, and anticipates that interest rates will begin to fall in 2024.
Since March 2022, the Federal Reserve has raised interest rates ten times, for a cumulative increase of 525 basis points, and the market has almost always been in a state of continuous expectation of rate hikes. Although Fed Chair Jerome Powell recently stated that he will continue to raise rates to curb inflation, more and more CFOs are shifting their thinking toward how to accelerate growth—whether through organic means or M&A.
Although borrowing costs have risen significantly over the past year, opportunities to achieve sustainable net profit improvement by stimulating revenue growth have moved higher on many CFOs' priority lists. In this regard, CFOs need to maintain an opportunistic attitude toward capital use and debt deployment. Here are three ways companies can take advantage of the current interest rate environment:
1. Reassess capital investment plans
Companies need to re-examine their capital investment plans. If a capital investment project can automate business operations and significantly reduce costs, it may be reasonable to proceed with the project even at current higher interest rates. Through automation—whether using robotics or other forms of technology—the long-term benefits of permanently cutting expenses may yield a positive discounted return on investment, even accounting for short-term higher interest costs. When rates eventually fall, CFOs can choose to refinance with banks or issue high-yield bonds depending on the scale of the capital investment plan.
2. Prudently evaluate M&A growth opportunities
Although M&A activity has declined due to higher interest rates and economic uncertainty, the M&A market is not closed and may still offer growth opportunities for CFOs. In the current market environment, bolt-on acquisitions are more likely to occur, as companies seek to consolidate existing platforms or explore new opportunities. However, potential buyers need to remain cautious, as the threat of recession makes the sustainability of future earnings, revenue, and cash flow difficult to determine.
3. Actively cultivate organic growth
CFOs should assess and promote the potential for organic growth. This may involve penetrating new products deeper into existing markets, or even expanding into new markets. If a company can identify an organic growth opportunity whose economic benefits exceed the cost of capital—even if the cost of capital has risen over the past year—then that opportunity is worth pursuing.
I expect interest rates to begin declining in 2024 and continue into 2025. This means that by 2025, rates will still be at relatively high levels—at least compared to a few years ago.
CFOs must determine whether there are opportunities that can both strategically advance the business and generate sustained revenue growth and profits. They need to balance the potential revenue growth from new investments against the (still high) cost of capital, while avoiding being overly optimistic about the timeline for revenue returns—which can easily happen.
The current interest rate environment will continue to pose challenges for some companies, but it also brings a range of new opportunities for others. By evaluating capital investment plans, M&A opportunities, and organic growth initiatives, companies can capitalize on these potential benefits. In navigating this period of economic uncertainty, companies need to be both strategic and cautious—but for those that get it right, the potential rewards could be considerable.
Bill Fink is Executive Vice President and Head of Strategic Partnerships for TD Bank's U.S. Commercial Bank. The views expressed in this article are solely those of the author.