Ever wonder how economic factors might affect your business? Most business people immediately think of tax rates that affect all businesses (macro) though there are other economic factors that you should be aware of, particularly if you are looking to launch a new product, or enter a new market segment or geographic market.
Mike Thompson, my co-author of Business Diagnostics and I recorded a series of short videos explaining the key elements of our Business Diagnostics book.
The following is a transcript of my video outlining the elements of the Business Diagnostics Framework. Scroll down to find the video in this post. The rest of the Youtube videos can be found on the Business Diagnostics Youtube channel.
Economic Factors that Affect Business
Today I’m going to be going over the economic factors that you need to consider in your ‘PEST-C’ external review which is part of the larger Business Diagnostics Framework.
What happens very often is that businesses tell us that they’re too small to worry about micro economic factors. It’s something they hear about on the news but don’t really give a lot of thought to. In the Business Diagnostics Framework, economic factors are included in our diagnostic checklists because we want you to keep in mind the areas of macro economic activity that are most likely to affect your business. Depending on your business, you will either be hugely impacted by economic factors or it will be a mild effect – but it will affect you.
Economic Growth ?
The first economic factor you want to consider is economic growth. You don’t have to be an economist or understand all the factors that go into gross domestic product (GDP). I would even argue that you don’t even have to agree that GDP is the best measure of an economy. That said, GDP is a benchmark, it is a bellweather for business to determine what will be happening in an economy. You can find the data on a World Bank site or at a government statistics website, but it it important keep an eye on economic growth.
Inflation & Interest
You will also want to keep an eye on price levels, which are typically tracked by a basket of goods. It is a crude measure if that basket doesn’t contain items that provide realistic measures of prices. Like GDP, it’s just a benchmark. That basket of goods is called the Consumer Price Index (CPI) and it is a yardstick for tracking inflation, which reflects interest rates, which in turn, are going to cost you when you do capital investment. So it’s in your best interest to monitor.
Employment
Employment levels are a prime indicator of labour market health. There is a lot of argument about how the numbers are tracked and if this really is a key economic indicator. However, business impacts can include: labour supply, the cost of retaining key employees and consumer discretionary spending, among others.
Government Policy
Another economic factor to consider is government policy. You need to know whether your government is likely or not to raise taxes or fees, increase services or change procurement policies. It is all going to matter to you. Economic performance tends to make government change policies, so it is good to keep a look out for any pending changes.
Global Economy
Lastly, global economic factors create major economic impacts, locally and regionally. Currency values, trade agreements or protectionism are all economic factors to be aware of.
To sum up, economics is a massive and complex field, and you don’t have to know all of it. But having a few indicators you can track can keep you stay up to date.
The Business Diagnostics Framework is your starting point for diagnosing and growing your business. Stick to the framework and you will keep your head above water!
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