Small business Economics isn’t something you find in the back of a library, imprinted in a 30 year old dusty book, nor is economics a black art, understood by the vital few. It is however, an integrated cog for the small business strategy.
In fact, getting it right can mean excelling in a tough old world and so, Small Business Economics can be the differentiating factor between failure and success for all small companies. – If you play it right of course…
Although Economists don’t always get the predictions about the business cycle right, that doesn’t mean Economics doesn’t matter. In fact it matters a great deal for the small business. It can be argued that the smaller the business, the more it matters.
Why? Because there is less room for error, less finance at one’s disposal, Less resource to pool from, and so on and so forth.
Reactive or Proactive?
It’s a sad fact that most business owners respond to economic factors in EXACTLY the opposite way they ideally should. They don’t really use small business economics effectively.
Sure, most owners understand key economic performance indicators but track the performance in a delayed manner, meaning that they react to changes to the economy rather than proactively planning for these changes in advance.
Why? Because they get their information from the News channels, Papers, RSS News feeds etc.
Don’t get me wrong, this is good information, but it is delayed information, which reports the effects of the economy and in particular, things that have already happened. This then means that the owners of the company then react to economic changes that have already happened; only responding to those effects and essentially moving along with most other businesses in the struggle to survive.
- A business needs to know when interest rates are going to rise, not that they already have.
- It needs to know when the labour will be in short supply, not that it already is.
- A business needs to understand where the skills gaps will be in the market place, not where they are right now.
- It must plan for raw material costs ahead of time, not on the day it fluctuates in the market.
- A Small Business must understand these small business economics indicators to succeed. They are critical, and, if used correctly, can not only keep you from losing your business, but can also help you grow and create real competitive advantage as well.
Small Business Economics Indicators
Understanding key indicators and linking them to the phases of the business cycle is the answer to working strategically in a proactive way.
Economics provides a forecast of events that allow business owners to plan for these possibilities in advance.
There are several economic indicators you should care about and understand to allow you to track changes before they happen and maximising competitiveness in the market place:
Consumer Price Index – Or CPI, measures the average change in price over time for a fixed group of consumer goods and services, as paid by the consumer. It is the most accurate indicator of inflation and probably the most important economic indicator available.One of the strengths of the CPI is that it gives the most insight into a Government’s movement of interest rates. An increase in CPI is considered inflationary and can drive bond prices down with a resulting rise in interest rates.
Gross Domestic Product – Or GDP, measures average changes in prices received by domestic producers for their output. In other words, it measures the market value of the output of goods and services produced within a country, during a specific period of time.It is an important small business economics indicator as it strongly affects inflation, and a stronger than expected increase in GDP is a good sign of inflationary pressures (things getting more expensive!). This will often cause a Government to step in and raise interest rates to slow GDP growth. Conversely, a weaker than expected GDP indicates an economic slowdown and may cause Governments to lower interest rates to stimulate the economy.
Current Employment Statistics – or CES, measures the employment rate of the country. It provides comprehensive data on national employment, unemployment and wages and earnings dataacross all non-agriculture industries.
This is the earliest indicator of economic trends released each month. Employment rates indicate the well-being of the economy and labour force and so is another important small business economics indicator. Changes in wages point to earnings trends and related labour costs, which could mean that the economy is overheating and adding to inflationary pressures, where as low incomes and higher unemployment could mean that there is a downturn of the economy happening, encouraging businesses to potentially cut back on inventory levels and focus on internal efficiencies.
Consumer Confidence – Or Consumer Confidence Index (CCI), measures consumer confidence by assessing consumer spending and saving activity. An increase in consumer confidence indicates economic growth, resulting in more demand and ultimately money in the economy – times are good!
A decrease in consumer confidence implies a slowing of the economy, whereby people are saving more and spending less – output will fall as demand also falls.
A monthly downward trend would be an indication to manufacturers to slow down inventory production because consumer demand may be down. Conversely, a monthly increase in CCI may direct manufacturers to increase inventory because consumers are buying.
Producer Price Index – Or PPI is a measurement of the prices for goods and materials at the producer level, before they get passed on to customers and consumers. This is a good indicator of material costs and how much businesses are paying for materials.
One of the most important aspects of the PPI is its link to the CPI indicator. One can predict an increase in CPI, by looking at the PPI.
For example, a rise in the Producer Price Index is a strong indication that a business needs to consider raising prices. If market condition don’t allow for a rise in price, profit margins will decrease and expenses must be controlled to compensate, including focusing on interal costs and efficiencies through best practices like Lean Manufacturing.
Where to get the data
A simple search on Google will quickly allow you to find what you are looking for, but the major sources to published economic indicators are below.
Alternatively, for a complete one-place stop for Economic Indicators for many countries across the world, and also indicators on the global economy, visit: Moody’s Analytics
Remember, by keeping abreast with economic trends, will allow small business economics to work for you and your business. Adjusting and proactively planning in advance could mean a competitive advantage over your competition and allow your company to thrive in a tough environment.