Focus Management Group: Third Quarter in Review
Updated: Oct 4
The third quarter of 2023 ends on Friday and the economic factors of inflation and interest rates continue to be the discussion topics. FMG has been addressing the performance impacts that companies are experiencing as they try to perform to budget during these difficult times.
We began the quarter with an article addressing The Three Most Used Performance Excuses. Click here to read this article dialing in on the Covid 19, supply chain, and inflation excuses that are still being used.
Inventory Levels Remain High addressed the issues companies collectively faced with a stuffed supply chain.
The article What will the 2023 performance there be? focused in on the impacts of inflation.
With interest rates rising, the next article addressed Managing Working Capital in a High Interest Rate Environment, followed by expanding 2023 performance themes to address inflation and interest rates with The 2023 Performance Theme is Inflation and Interest Rate Increases!
In these articles there are tools lenders and companies can use to deal with financial performance during times we have not experiences since the 1970’s and 1980’s. Use these articles to help guide companies through these times.
The Three Most Used Performance?
With calendar year 2023 almost halfway over, the three most common financial performance excuses lenders and company management are hearing relate to:
Let’s look at each of these excuses as related to 2023 performance and consider how to deal with the real impacts on a business, without lumping performance excuses into a broad undefined category.
Read more here!
Inventory Levels Remain High?
The St Louis Fed publishes monthly inventory levels, with the most recent data being March 2023. The FRED graph shows the millions of dollars invested in inventory during the five year period from March of 2018 to March of 2023. Prior to the pandemic, inventory levels peaked at $2,048,565 million. During the supply chain issues in 2020 and 2021 inventory reached a low of $1,918,868 million in June of 2020. In the fourth quarter of 2021 inventory levels reached pre pandemic levels and are now at $2,490,045 million in March of 2023.
Take a look in this article!
What will the 2023 performance theme be?
Why are margins and EBITDA heavily impacted by inflation?
2020 and 2021 were the Pandemic problem years. 2021 and 2022 were the problem supply chain years. 2022 was the year of oversupply of inventory and weakening working capital. What will the 2023 performance theme be? The impacts consistently being heard in 2023 are working through excess inventory and weak EBITDA performance caused by increased costs.
Managing Working Capital in a High Interest Rate Environment
For decades interest rates have been low, and companies have been able to readily afford the interest costs associated with funding working capital with debt rather than equity. The Fed Funds Effective Rate is at a level not seen since 1995/2000 and then again in 2007/2008. The current Fed Funds Effective rate is 5.12% as of July 2023 compared to 0.08% in January of 2022.
Asset based lines of credit have seen rates increase 5% or more since the beginning of 2022. Repricing of debt began occurring with renewals or refinancing in 2022 and has accelerated with rate increases in 2023.
The 2023 Performance Theme is Inflation and Interest Rate Increases!
How do you use this to prepare for 2024 forecasts?
Let’s look at the July PPI and CPI coupled with the current SOFR rates to evaluate financial performance through the end of the year and in to 2024. Preparing 2024 forecasts will require careful consideration of working capital management, cost increases, and interest expense. Companies are seeing the combination of weakened EBITDA performance and cash or availability shortfalls contributing to loan covenant compliance issues.