Part five of Simon Freakley's Leadership on a tightrope series

Overall, the global economy performed better than many expected in 2023, and we seem to be off to a good start for 2024. Central banks may be close to pulling off the elusive "soft landing," bringing inflation under control while avoiding a recession.

Although rates appear likely to begin coming down this year, central banks have signaled their determination to keep rates sufficiently high to ensure inflation remains under control.

As the markets continue to digest the higher for longer mantra, interest rates in the United States last year set decade-long highs with the 10-year yield crossing the 5% threshold for the first time in 16 years and lower rated credit yields reaching peaks not seen since the 2008 financial crisis. In our annual AlixPartners Disruption Index, CEOs cited interest rates and inflation as the biggest threats facing their business in 2024.

Given this environment, it is no surprise that bankruptcies are also on the rise. Last year, U.S. bankruptcies were at levels not seen since the financial crisis.

It is worth remembering, though, that the current cost of capital is not particularly high in historical terms. However, while this may be true, companies will need to exercise muscles that may have atrophied after a decade of free money.

First, bring rigorous management discipline to understand where investments are driving value and where they are not. And in a higher cost of capital environment, those centers of value creation are fewer than they once were, and the number of investments that are destroying value are increasing. Make sure you know the difference.

Second, map out a business plan with both the financial and operational overlays, with a true liquidity and working capital forecast. One place where many fall short is being realistic about operational realities. Lay out different scenarios and understand how revenues and cash flows will be impacted. Doing so will give you a better sense of the future and avoid unexpected surprises.

Finally, capital markets remain open—even if at higher rates. Take advantage of this opportunity.

Mapping out a realistic go-forward business plan, based on a realistic understanding of true value creation, and applying operational effectiveness to financial maneuvers is the only way to ensure long-term success.

Read more of Simon's 'Leadership on a tightrope' series:

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