4 Ways the Economy May Impact Your Business, and How to Prepare
While there’s no crystal ball into our country’s economic future, understanding how shifts in the economy have impacted businesses in the past is a smart way for business owners to identify ways that they can guard their own companies against potential market changes. Of course, using past performances as a prediction for the future can be tricky. For example, rather than adopting a one-size-fits-all solution for business, making the right moves for your own company involves taking expert advice for what’s previously worked and molding it into a plan that works best for your own specific needs. When it comes to preparing for a shift in the economy in a volatile market — whether that’s one month, six months or a year from now — the following are some of the specific areas that every small business owner should be paying attention to.
Economic Factor: Trade agreements
Why it could impact your business: Depending on your field, trade with other countries can be a major factor for how you do business. For example, ongoing and fluctuating trade deals with other countries, like China, can either help or hinder whether or not American businesses can seek additional opportunities — or continue to do business — there. This in turn can have a definitive impact on a business owner’s profit margins and sourcing paradigms.
What you can do to prepare: Careful business planning often involves a little forethought, which means having multiple back-up plans in place for when any number of factors change. This is especially true when it comes to sourcing business goods. No matter where you conduct your business — whether it’s strictly within the U.S. or in outside countries — it’s always a good idea to understand where you can shift your focus in a pinch.
Economic Factor: Interest rates
Why it could impact your business: A shift in interest rates can have a big impact on business strategy, like whether it’s smarter to invest in floating or fixed rate products as it relates back to your overall capital.
What you can do to prepare: Small business owners should continuously watch the Fed for guidance on which way interest rates are shifting and, with those shifts in mind, create a solid outlook on how those changes can impact both short- and long-term needs. For example, a slight decline or flat movement shouldn’t cause a total change in business direction. Instead, business owners can weigh cash flow changes against their available expenditures, evaluate what their downside cash flow looks like, and determine if capital expenditures allow the business the ability to go after a new market or expand their product to find that incremental growth they’re looking for. In other words, even if the overall market is flat, it could still be a good time to invest in the growth of your business. As far as financial products go, a good rule of thumb is usually to go with a blend of fixed versus floating rate debt, but the day-to-day decisions about what to buy and what products to invest in will involve a little more thought, like the lifespan of the debt you’ll be taking on and whether that’s wise and something your company can afford.
Economic Factor: Labor market and unemployment
Why it could impact your business: Most businesses have been feeling a labor market squeeze lately — if we remain in a low unemployment window, it’s harder for businesses to attract talented workers to keep their businesses running when there are so many good options for employment.
What you can do to prepare: Businesses must be willing to adapt to the labor market by providing additional perks that can either gain or help retain a talent pool. Strategically speaking, a small business, especially, needs to be more cognizant of keeping the very best people, even when this ultimately drives up the cost for the business owner when it translates into higher compensations or additional perks, such as more flexible hours or shorter shifts, changes in company 401k options to become more aggressive with matches, offering employee stock plan options and flexibility around opportunities for remote work. As far as luring a talented pool of workers goes, remember to evaluate the age group of the employees you’re hoping to entice, and be creative about the stage of life you’re targeting. Workers who are 25 will desire different perks than those who are 55 and older.
Economic Factor: A landscape of mergers and competition
Why it could impact your business: In today’s business world, more mergers and acquisitions are happening every day. For business owners, it’s important to be prepared prior to an opportunity presenting itself in order to best take advantage of potential prospects, whether that means focusing on a merger for your own business or taking advantage of the fallout that’s occurred from a merger between other companies.
What you can do to prepare: Preparing for a potential merger or acquisition often involves focusing on your business’s current needs and making smart adjustments where necessary. For example, preparation for a merger may include shedding unwanted assets or business lines, as well as ceasing to do business with clients that no longer fit into your overall business model, especially if a merger has already occurred. Owners should evaluate quarterly whether or not their business line fits within their long-term plan and do some smart future forecasting. If growth is a goal, then even if you purchase new equipment that you’re currently running at 40 percent capacity, if you are tapped into the broader industry and understand that an upcoming merger means it’s worth having that additional capacity on hand for an eventual uptick, then you’ll be ready to go when the time comes.
At the end of the day, a smart entrepreneur is one who pays attention to the market and is always planning for growth, but who also understands that there may be times when it’s better to play it safe than others, such as when you’re trying to expand your market. It also helps to surround yourself with the best possible talent and advisors. For more help deciding how to best grow your business in a fluctuating economy, get in touch with a First Midwest advisor today.