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ECB Set to Raise Rates Again: How CEOs Should Think?

European Central Bank set to raise rates last week, despite a fall in eurozone inflation and signals at least one more hike. Supply shocks, not excess demand, drive today's inflation. If higher raw material prices or production costs cannot be transferred to prices, this increases the pressure on Cash flow.

The ECB's key interest rate and inflation

Inflation in the euro zone decreased to 9.2 % in December 2022 (10,1 % in November 2022). Globally, falling energy prices are reducing headline inflation and fuelling optimism in the markets that Central Banks' monetary policy will ease later this year. These expectations have caused a sharp decline in global longer-term interest rates.

While headline inflation has fallen and core inflation has receded slightly in some countries, both remain far too high. So Central Banks must be resolute in their fight against inflation and ensure the policy remains appropriately tight long enough to bring inflation back to target durably.

What is the key interest rate?

The key interest rate is a fixed interest rate. It determines the level at which commercial banks deal with central banks. European Central Bank uses it to influence the financial market, which is an essential tool for managing inflation and currency exchange rates. In general, low-key interest rates stimulate the economy, while higher interest rates tend to slow it down.

What is the ECB's key interest rate currently?

In July 2022, the ECB raised all three key interest rates by 0.5%. The last time ECB increased key rates was eleven years ago. With last week's 0.5 % interest rate hike by the ECB, the key rates stand today at 3.0%, 2.5%, and 3.25%.

What does ECB guidance mean in your Cash flow management?

Supply shocks, not excess demand, drive today's inflation. This is why CEOs should now focus on Cash flow management to optimize Cash flow. If higher raw material prices or production costs cannot be transferred to prices, this increases the pressure on Cash flow.

Interest fees As Euribor rates increase, interest fees for your cash flow also increase. For example, loan products, from credit cards to factoring, generally use short-term Euribor rates that adjust as interest rates rise.

Rising expenses In today's market environment, this goes together with rising expenses on everything from raw materials to rent: costs that rose due to last year's increased rates but will only start to impact cash flow this year as price changes take time to take effect.

Payment times, both supplier and customer side Be prepared that your suppliers want to get paid faster, and your customers wish to extend their payment terms, given that both will potentially be in similarly tighter cash positions.

Funding, tighter terms At the same time, banks, factoring companies, and alternative lenders had already started to tighten their terms. Together, these increasing costs from rate increases and lower access to funding start creating stress for your cash flow.

This is why Cash is the CEO matter, rather than a CFO.

Cash is like oxygen for a company; CEOs sometimes take it for granted, but it keeps your business alive. Even if you have a great product, growing revenue, and a steady talent pipeline, your company is dead if you run out of Cash.

Given the importance of Cash today, cash flow management is a CEO matter rather than something to be handed off to a CFO or external finance consultant, particularly during times of uncertainty.

Optimize the top line, and the rest will follow. With strict Cash flow management, no panic.

High prices do not mean lost cash flow. By optimizing the topline, product prices, and payment terms, the rest will follow. Analyse product pricing, volumes, and churn by your top customers and products with ease at riskrate. When you negotiate new prices with customers, keep payment terms in mind. Payment time is your funding to your customer without collateral or an interest fee, and the cost of payment time is now becoming higher. Use riskrate's customer payment time analysis to improve your purchasing power.

Tips on how to start to Optimize Cash Flow

  • Cash is like oxygen for your company. Get confidence about your Cash flow today, next weeks, and months by consolidating data from banks and finance tools into a live cash forecast. No manual work is needed.

  • Product prices, volumes, and payment times go hand in hand. Keep payment terms in mind when negotiating a new price list with a customer. Payment time is your funding to your customer without an interest fee, and the cost of payment time is now becoming higher for you.

  • Optimize Cash flow and automate cash flow management by tracking real-time KPIs. Speed up Cash-in by keeping customer late payments in control.

The environment is changing rapidly right now. If you need to make better decisions faster, we'd love to serve you - quickly.

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