Sometimes it seems like the economy's only constant is that it will change. Even though this is always the case, these past years have been the clearest. These cyclical economic ups and downs are inevitable, so you must be aware of how they affect your company and, more significantly, be ready to ride out the ups and downs of a shifting economy to have a successful small business.
Making wise judgments and leading your business to greater heights requires understanding how economic factors impact business. The first step is comprehending these factors' function and how they affect companies like yours. This article will explore economic factors, examples, and how to prevent them from affecting your business. Let's dive in!
What is an economic factor?
Interest rates, tax rates, laws, policies, wages, and governmental activities all impact the economy. These factors are unrelated to the business but impact the investment value in the future. Why? Because economic factors relate to goods, services, and income, either locally or globally. And so, the state of the economy can decide many things when it comes to your business, for example:
Value of products or services.
Cost of capital
Liquidity of cash.
Even though these are not exhaustive, let's look at some examples of economic factors to pay attention to when owning a small business.
Examples of economic factors
There are numerous economic factors to consider. Among them are the following:
Demand and supply
Policies and legislation
Below we'll review some of the top economic factors that affect a business economy.
Economic factors affecting business
A tax rate is the percentage of an individual's or corporation's income that is taxed. The tax rate influences the price of goods and their sales, affecting the economy.
Federal interest rates
The federal interest rate is a significant factor influencing the cash liquidity in the economy. With increases in interest rates, the country’s cash flow tends to decrease due to the higher cost of lending, resulting in a decrease in the country’s liquidity. A reduction in the country’s investment cash flow, on the other hand, increases the country’s liquidity. However, lowering interest rates could also lead to inflation. The federal interest rate essentially controls the “Cost of money.”
The rate at which prices for goods and services rise is called inflation. Inflation seeks to assess the overall impact of price changes on a wide range of goods and services. The increase in the demand price of goods or services increases inflation and money supply. The cost of items must rise to maintain business. Therefore, if companies don't raise salaries in line with inflation, consumers' purchasing power may decrease due to inflation.
Supply and demand
The economy is affected by the demand or supply of goods or services, as when demand rises, the price of goods or services rises, resulting in inflation. With inflation, the economy's money reserve grows in tandem with the increase in the supply of goods or services—the cost of the same falls. Demand and supply are interdependent.
With all the factors above would come to a recession. During a recession, customers' purchasing behavior may alter, no matter how small the recession could be. A recession can then affect your business and could compel you to lower the prices of your services, possibly forcing your company to reduce its products or services.
Follow tips on preparing your small business for a possible recession.
How to prevent economic factors from affecting your company
The economic landscape will always affect your business in one way or another. However, you can apply these four practices to potentially minimize the negative impact a downturn in the economy could have on your business .
Perform a PEST Analysis
A PEST Analysis (political, economic, social, and technological) is a management technique in which an organization can assess major external factors influencing its operations to become more competitive in the market. A PEST analysis benefits executives in any company who want to outperform competitors develop revenue streams, and expand their business, just like most other aspects of business analysis.
PEST analysis, or its variations, is where economic aspects in a company come into play, even though there are many more versions (like PESTLE analysis, which also takes legal and environmental issues into account).
Have a savings account and diversify your products
Put a portion of your profits into a non-marketable savings account so you can keep the doors open during difficult times. Diversifying your company's products or services will also give you options for continuing to generate income if changes in your customers' income affect their purchasing patterns, needs, or desires. When necessary, be able to refocus on where the opportunities are.
Check for further opportunities
Every phase of the economy offers a different opportunity. In a time of expansion, you can stockpile funds, recruit the extra staff you need, or relocate to a bigger, more suitable space.
Slow times, though, might present a new kind of opportunity. While many of your rivals may "hunker down" when growth slows, your team may focus on your marketing plan or reorient its initiatives to concentrate more on digital marketing. These seasons could also inspire you to think about new price points, offers, or services you hadn't previously provided.
Not rely on a single large customer
If you haven't already, now is the time to diversify. What if you lost your most important and profitable client? What would your location be? Now is the time to ensure that you have a diverse client base and enough clients to have sales still even if you lose 10% or 20% of them.
Safeguard your cash flow
As the saying goes, cash is king. An emergency fund is always a good idea, but it's crucial when the economy worsens. Make sure your cash flow is in good shape to have a cushion if you find yourself short on cash for any reason. A way to protect your company is to safeguard its cash flow by utilizing a short-term business type of financing; business owners must ensure they do not over-leverage themselves with long-term debt.
Be ready to face economic change with One Park Financial
If you're a business owner, you probably know that making sure your business is bulletproof against the ups and downs of the economy isn't easy. With the right experts by your side, you can consult more practical options that meet your company's requirements. And that's what we're here for; you can access a network of funding providers through One Park Financial.
How can you be sure One Park Financial is the right team to drive your business growth? Our team of professionals will be more than happy to help you find the right alternative business financing you need if your company has been in business for at least three months and generates more than $7,500 per month. The first step is determining if you pre-qualify by filling out our simple and quick online form. Get in touch with a financial expert today.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.