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Stock market circles have been abuzz through most of June 2006 with talk of interest rate hikes. Prophets of doom and assorted bears have lost no time in crying over prospects of spilt milk, and investors have been juggling their portfolios in frenzy!
Management practitioners may view things differently: federal action to make money dear can be a sign of profligate times. Every interest rate hike is an occasion to hop aboard the productivity band wagon, and to tighten belts for the corporate good.
Current assets are often the most slippery slopes for business efficiency. Suppliers and tiers of the distribution chain are in continual negotiation with company personnel. The induction of relational databases has not appreciably changed the situation, because qualitative human factors continue to determine crucial terms of trade. The best executives revisit all inventory statements, try to reduce supply lead times, collect dues against sales quicker and ask for longer supplier credit periods.
Interest rate hikes should also prompt companies to take fresh looks at their pricing levels and policies. Can parts if not all of the rate hikes be passed on to customers, especially for product lines which involve long credit periods and financing as well. Many enterprises which have used relatively cheap funds to finance purchases of their products can use interest rate hikes to evaluate the values of their offers.
Project management improvements can cut back on gestation periods and thereby negate the inflationary effects of raised interest costs. The best companies know that their capital expenditure plans always have some degree of slack: they almost welcome interest rate hikes as a challenge to improve all efficiencies related to their investment projects.
Gullible investors may be led to believe that interest rate hikes are sound excuses for downward trends in profits, but those who have weathered many storms in every stock market know that the tough get going when interest rates rise. You should expect and demand that companies in which you stay invested fight higher interest rates so as to protect your rates of return.