The Bottom Line - Banking On Smart Credit
Banking On Smart Credit
An insider’s guide to managing business credit through economic cycles
As a community bank, we have no greater responsibility to our customers, employees and stakeholders than to maintain responsible and responsive credit standards.
Credit—the ability of a business to obtain goods, services, or money based on the trust that payment will be made in the future—is one of our core products and core competencies. To protect and preserve our own credit and the credit of our customers, we analyze it constantly and make adjustments daily.
We understand the importance of managing credit carefully, particularly through the highs and lows of economic cycles. We thought it would be helpful to share four fundamental tactics for managing credit prudently at any time, but especially when uncertainties arise. They include reducing discretionary spending, building cash positions, reducing debt and facilitating frequent creditor, customer, and business network communications. Let's explore these tactics.
Reduce discretionary spending
It’s crucial to scrutinize expenses and identify areas where you can cut back. Discretionary spending—non-essential expenses that can be delayed or eliminated—should be the first to be analyzed. These expenses might include travel, entertainment, or non-critical business expansions.
For instance, analyze your procurement processes and contracts with suppliers and seek cost-effective alternatives without compromising quality. By reducing these expenditures, you can free up capital to cover more essential costs and meet your obligations in a timely manner.
Build your cash position
Building and maintaining a strong cash position is another critical aspect of managing credit. Cash reserves provide a cushion to cover unexpected expenses and help in times of reduced revenue. To strengthen your cash position, consider accelerating receivables and tighter controls around your cost of goods, which include supplies, services, shipping and labor.
To ensure customers pay their invoices promptly, consider early payment discounts or tightening credit terms. On the inventory side, avoid overstocking with diligent inventory management, which helps free up cash that would otherwise be tied up in unsold goods.
Keeping cash longer gives you more options on how to deploy capital, thus enhancing your overall financial liquidity – and stability.
Reduce debt and related expenses
High debt levels can significantly burden cash flow. Reducing debt and related expenses should also be a priority. Start by reviewing your debt obligations and identifying opportunities to pay them off or refinance, and be sure to analyze all assets with direct debt and consider selling those that are not critical.
Additionally, consider paying down high-interest debt as quickly as possible. This reduces the overall cost of borrowing and can improve your credit rating, making it easier to secure favorable financing in the future.
Maintain consistent communications with creditors, customers and your business network
Keeping open lines of communication with your bankers, customers and the market is essential. Regularly updating your banker on your financial status and any challenges you face can help them provide better support and offer solutions tailored to your needs. Similarly, staying in touch with customers enables you to gauge their payment abilities and anticipate any issues that may arise.
If your business encounters financial difficulties, having a reasonable plan is crucial. Develop a realistic strategy to address the problems, communicate this plan to all stakeholders, and execute it diligently. Transparency and proactive communication can build trust and foster stronger, invaluable relationships during tough times.
Managing business credit effectively requires a proactive and strategic approach. You can strengthen credit by reducing discretionary spending, building cash positions and reducing debt and related expenses.
We believe maintaining good communications with your bankers, customers and the market is perhaps the most important principle because it’s such a vital part of our own relationship-based model. Open and direct communication ensures better information and more robust relationships that can withstand any challenge.
At Country Club Bank, we’re always glad to talk, eager to listen, and ready to help.
— Robert Healy, CRC, Chief Credit Officer, Country Club Bank — Member FDIC
Economic Insights
Positive inflation and jobs report opens the door to rate cut this year
Federal Reserve officials left interest rates unchanged at their meeting earlier this month and predicted one rate cut before the end of 2024, reflecting a cautious approach to managing inflation broadly in line with Wall Street expectations.
The U.S. inflation rate in May stood at 3.3%, down slightly from 3.4% in April (with core falling to 3.4% in May vs. 3.6% in April). This is positive movement, but still not as low as the Fed would like. However, the progress on inflation was further supported by a slight uptick in the unemployment rate in May to 4.0% from 3.9% in April.
In March, the Fed had anticipated three rate cuts this year, but persistent inflation early in the year led to a revision. The latest Consumer Price Index (CPI) data is good news, yet Fed officials stressed the importance of multiple positive data points before making significant policy shifts.
If only one rate cut occurs this year, the policy rate would reduce to 5.1%. The Fed did not specify when this cut might happen, leaving open possibilities for its four remaining meetings in 2024.
The Fed hinted at the possibility of more significant rate cuts in 2025, suggesting up to four cuts compared to the three previously forecasted.
Looking closely at the stronger than expected jobs report in May, sectors contributing significantly to job gains include healthcare, professional and business services and leisure and hospitality. As noted above, unemployment did rise slightly to 4.0% in May, up from 3.9%, but well within healthy and acceptable ranges.
Job openings (JOLTS) continued to soften through April (the most recent data point) at 8.06 million openings vs a peak of 12.03 million openings in March of 2022. Through this slowing period, we have moved from a peak of 2.0 job openings to each unemployed to now 1.2 job openings to each unemployed today. This is further evidence (outside of the unemployment rate increasing from a low of 3.5% to 4.0% today) that the labor market is softening on the margin, which is actually good for the Fed in terms of their fight against inflation.
The GDP growth rate for 2024 is expected to be around 2.1%, reflecting moderate expansion. This forecast is driven by solid consumer spending and business investments, balanced by challenges in global trade and geopolitical uncertainties.
Bottom Line: The Federal Reserve's decision to maintain the federal funds rate at 5.25-5.50% reflects a cautious approach to balancing economic growth and controlling inflation.
The data proves the Fed is on the right track, though. Sustained job growth, tolerable levels of unemployment, and increased spending on services, particularly in healthcare and hospitality, support continued GDP growth among households. Solid trends in technology and infrastructure investments also lend further credence to ongoing economic expansion since these investments are essential for productivity improvements and long-term financial stability.
Overall, markets agree with the Fed’s approach. The bullish sentiment continues to prevail, with the S&P 500 up nearly 14 percent this year, far outperforming what Wall Street analysts had expected at the start of 2024. Volatility will likely continue, but consumers and investors have adapted and remain relatively confident.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The opinions and views expressed herein are those of the author and do not necessarily reflect those of Country Club Trust Company, a division of Country Club Bank, or any affiliate thereof. Information provided is for illustrative and discussion purposes only; should not be considered a recommendation; and is subject to change. Some information provided above may be obtained from outside sources believed to be reliable, but no representation is made as to its accuracy or completeness. Please note that investments involve risk, and that past performance does not guarantee future results.
Client Success Story
Display Studios enjoys a better banking experience with Country Club Bank
John McCoy, CEO and owner of Display Studios, is driven by relationships, and it shows.
From long-term customers to employee shareholders to trusted legal, accounting and banking advisors, he invests in and relies on relationships to guide and grow Display Studios, a maker of exhibits and displays since 1937.
McCoy's journey with Display Studios began 44 years ago, helping his father and business partners catch up on the weekends and grow the business from a local provider to a national player.
Taking over the reins in 1999, McCoy and his team of 25 dedicated designers, fabricators and account managers work with 70 clients nationwide. McCoy is proud that the team's average tenure at Displays Studios is 15 years. Several team members have become shareholders through hard work, loyalty, and leadership potential.
“We have a great team, and we believe in granting ownership to those who have earned it,” McCoy said. “Our history of shared ownership builds stronger relationships with our employees, and we think it’s crucial for our future success.”
McCoy said another strong relationship that has paid dividends over the years is the one with Country Club Bank. It started when McCoy grew tired of constant paperwork demands from his previous bank, a nationwide provider.
“With our previous national banking provider, we’d never missed a payment, had a shortage of funds, or had any serious business problems, yet they wanted information from us all the time because it was their policy,” said McCoy. “I knew there had to be an easier way.”
McCoy was referred to Country Club Bank by another business owner.
“They came in with good questions and genuine interest,” McCoy said. “We went with them immediately, and we’ve never looked back.”
Display Studios’ national clients often require long payment terms, which can create cash flow problems when materials and labor must be used before final payments are collected. A line of credit with Country Club Bank fills the gap.
“Lumber, show services, building crates and shipping must be paid for upfront,” McCoy said. “Country Club Bank gives us important operating capital that keeps things running smoothly – without the hassle of paperwork requests every month.”
Instead of paperwork, McCoy relies on regular conversations with the team at Country Club Bank.
“We talk monthly by phone or in person, and there’s a lot of value in those conversations,” said McCoy. “It’s a much easier way to do business with that level of trust and rapport.”
Reflecting on the company's 87-year history and his part in it, McCoy feels a deep sense of fulfillment and appreciation for all partners, past and present.
The partnership with Country Club Bank has not only provided financial benefits but also contributed to the company's ethos of building strong relationships.
“Country Club Bank is a quality partner at every level; they’re patient, committed, loyal and supportive,” said McCoy. “They provide everything you look for in a great relationship.”
Mergers and Acquisitions Insights
How long does it take to sell my business?
Thinking about selling your business? You're probably wondering how long the process will take. The answer is more complex than you might think.
Trent Barnes, an investment banking analyst with Country Club Capital Advisors, provides an overview of the sale process, highlighting factors that can either delay or expedite the timeline.
Dive in to learn about the preparation, marketing, diligence and closing phases, and discover how to navigate each step efficiently. Read the full article here.
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