We are still in very uncertain times; headwinds are prevalent, and the daily headlines bombard the small business owner with plenty of potential worries. While talk of a recession is more frequent than it was six months ago, the impact should it occur, will vary by business, industry, and local market. So, what is a business owner to do right now other than just stay the course and power through? There are a few key headlines to watch and understand how they impact your specific business.
Inflation – Supply chain issues are nothing new and have played a role in inflation but there are multiple factors driving inflation overall. There are two areas in which to monitor the impact of inflation. First, what impact is it having on your customers and vendors? For example, some B2C businesses are seeing their customers begin to spend less on certain goods because of the rising prices of food and fuel. Other businesses feel the pain as well. Do you know what impact this could have on your business going forward? Second, understand how inflation impacts the inputs required to run your business on a more granular level. The inflationary outlook is still uncertain, and while broad, commonly measured inflation metrics like the CPI make the first page, it is important to drill down another level. Based on your business, what are prices doing for the raw materials you need and the goods you sell? Some commodity prices like steel have tapered off. Real estate prices in certain markets are showing indications of slowing, while food prices continue to rise. Yes, in general, goods and services are much more expensive than they were a year ago but watching trends on the specific goods and services that go in, out, and around your business is worth regular monitoring.
Interest rates – Rates are increasing. But just like inflation, interest rates is a broad term - what interest rates matter to you? The Federal Reserve raised its Federal Funds rate 0.75% this year. While not across the board, this has resulted in a roughly similar increase that most banks are charging their customers for corporate loans and lines of credit. Home mortgage rates have risen over 2.5% this year, while the 10 year treasury has risen 1.5%. All of these rates are expected to continue to rise but the magnitude is less clear. What impact do higher borrowing costs have on your business? Have you projected the financial impact to your P&L now and in the future? You should, especially in the case of a loan renewal in the near term. What about your customer? We know these increases will affect consumers and businesses. Could borrowing costs impact their ability to buy?
Consumer spending – The United States has been and will be a consumer driven economy. To date, consumer spending has held, as has the overall health of the consumer, in spite of the economic turmoil of the last couple years. It is not talked about near as commonly but a decline in consumer spending is often the canary in the coalmine relative to more serious economic slowdowns, and perhaps a sign for businesses to take more of a defensive stance.
Don’t let the headlines cause fear. Peer through the noise to the key information behind the headlines that affects your business, not just internally, but your customers and the downstream impact on your customer and supply chain. A ten second glance at the headlines may give you a different answer than the data that really matters for your business. Drill down, explore the potential impact, and take action accordingly.