Help Protect Your Corporate Income Statement

Keep a close eye on how your revenues and expenses may be impacted by fluctuating interest rates.

businesswomen at a conference table

Whether rising or falling, interest rates present uncertainty. Managing risk in a changing rate environment should include focusing on the income statement.

What are key areas of consideration for protecting the income statement amid changing rates?

1. Foreign exchange (FX)
It's important to assess how FX rates affect your business.

  • Currency risk. FX fluctuations can affect revenue and the cost of goods sold. If your business is importing from or exporting to other countries, you must decide how to hedge this risk.
  • Global interest rates. Around the world, interest rates can move in different directions, putting pressure on FX rates. It's vital to understand the correlation between interest rates and FX rates and assess the impact of interest-rate movements on your business and suppliers.

FX hedging and multicurrency deposits are a few tools for managing FX risk. The Wells Fargo 2016 Risk Management Practices Survey shows that 55 percent of companies saw FX risk management as a concern in 2016, up from 31 percent in 2014.

2. Payables and receivables
As rates change, you may be able to use tools for managing your payables and receivables to help protect your income statement. For example:

  • Lengthen payables. If rates rise, it's more valuable to hold cash longer. You may want to consider extending payment terms, holding on to payables for 60 to 90 days, which will give your business more working capital.
  • Accelerate receivables. Consider offering customers services such as dynamic discounting, where they receive a discount for early payment, or same day settlement as ways to accelerate or manage the timing of your cash flow.
  • Analyze discounts. Perform a more precise analysis on whether or not to take or offer discounts and what percentage is most effective. For example, amid rising rates, traditional receivables discounting may be a less powerful tool as interest rates align with traditional discount terms.

3. Cash visibility
Improving your cash visibility and cash forecasting can also be effective ways to help manage rate uncertainty and protect your income statement. Don't just focus on the accounts that represent 80 percent of your cash. Chances are, the hard to get information represents the most risk and opportunity.

Treasury-management systems may give you better visibility into your cash. Multivariable decision rules that are embedded in treasury management systems are helpful in managing risks, as some can send alerts and notifications.

While interest rates and other market conditions may create uncertainty, incorporating these risk-management strategies into your business may help you protect and maintain a healthy income statement.

This article also appears on Wells Fargo Treasury Insights, which shares information on cash positioning and forecasting, fraud protection, managing payments, and more.

Anthony Carfang is Managing Director, Treasury Strategies — a Division of Novantas, Inc.

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Information and views provided through Wells Fargo Treasury Insights are general in nature for your consideration and are not legal, tax, or investment advice. Wells Fargo makes no warranties as to the accuracy or completeness of information; does not endorse any non-Wells Fargo companies, products, or services described here; and takes no liability for your use of this information. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information.

This information is provided for educational and illustrative purposes only.

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