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The 3 Big Economic Indicators You Should Track

The Role of Global Economics in Your Small Business

Did you know your small business can feel the impact of the global economy before larger businesses are affected? Small businesses, because of their size and more streamlined decision-making process, have certain advantages over their larger counterparts. Yes, even small business leaders should pay close attention to what is happening with the economy on a global scale.

Economics gets complicated, especially as the world becomes more connected. A stubbed toe in Belgium can cause a broken foot in the United States. This doesn’t necessarily mean you should hire an economist, or sign up for college courses on macro and microeconomics, but there are three statistics you should keep track of to stay informed:

  • GDP 
  • FOMC 
  • Inflation

GDP

Gross Domestic Product (GDP) measures the size and health of the U.S. economy. It is calculated as the value of all goods and services produced in the U.S. In 2019, GDP was $21.4 trillion. It’s not just the size of GDP that matters. Most economists are interested in the growth of GDP more than the size. When GDP growth is around 2.8% to 3.5%, our economy tends to signal a positive economic outlook. GDP under 2.8 tends to indicate a sluggish economy, which sparks fears of recession. When GDP exceeds 3.5%, the economy could be growing too fast, creating a whole different set of problems.

When GDP is lower, many economists begin to fear it may trigger a recession. Public spending slows, inventory grows, and supply and demand move in favor of buyers. Despite how they sound, none of these scenarios are inherently “bad.” Businesses which understand the economy tend to find value in any fluctuations, up or down. In a “down economy” or recession, buyers can find value when interest rates and prices start to drop, and producers can clear their warehouses. Cash is king, and if you have cash during a recession, you can get more value for your purchases.

The textbook definition of a recession is when GDP shrinks for two consecutive quarters. However, while recessions are officially declared by the National Bureau of Economic Research (NBER), they unofficially become the topic of discussion when GDP dips below 2.8% in a quarter.

A GDP growing at a rate of 3.5% or higher tends to make economists jittery because it indicates an economy that is growing too rapidly. With this type of growth, there tends to be more spending. So much so that spending can outpace value. The economy begins to feed on itself in a way that drives prices and interest rates higher. The economy can reach unsustainable levels, resulting in a crash. When you see this happen, you may want to be cautious about spending but bullish on selling or manufacturing more products. This is not a good time to take on debt but may be a good time to lend if you are in the position.

Most governments track and publish GDP data through a national statistical agency. In the US, GDP is calculated by the Bureau of Economic Analysis using data collected by various governmental and private sources, including the Census Bureau, Internal Revenue Service, Federal Reserve, and Bureau of Labor Statistics.

While GDP estimates vary from various international agencies such as the International Monetary Fund, the World Bank, and the United Nations, the United States is generally regarded as having the largest GDP of any country in the world.

FOMC

While GDP is the most important statistic you can use to develop short-term strategies, look to the Federal Open Market Committee (FOMC) when you’re trying to read the economic tea leaves. The FOMC consists of the Chairperson of the Federal Reserve Banking System (The Central Bank) and the heads of all Federal Reserve branches across the U.S. This committee, along with the Treasurer of the United States, creates monetary policy and sets the Federal Reserve interest rates. The two rates you generally hear about are the discount rate, and the prime rate.

The discount rate is the rate set for bank-to-bank lending. Banks can borrow from each other in the form of repurchase agreements (REPOS), or they can borrow through the Federal Reserve bank, although it’s discouraged and is usually reserved for when a bank is having problems. This is usually the lowest of the rates that the FOMC targets. These rates are based on the FOMC’s view of the economy and trying to keep GDP at 2.8%.

The second rate, and the rate most people know when they borrow money is the prime rate. Prime rate is the lowest rate of interest at which money may be borrowed commercially. Mortgages, car loans, and credit card debt represent loans where the rate of interest you pay is calculated based on the prime rate. For example, if you’ve ever heard a banker or lender say “prime plus fifty,” that means your interest rate is equal to the prime rate plus fifty basis points, or .5%. Any number stated after the prime rate is the spread that the lender receives. So in our example above, the lender is typically borrowing the money to lend you at prime and then charging you an additional .5% which is what they’re making on your loan.

If the FOMC lowers interest rates, it’s usually in an attempt to head off a recession. When the FOMC raises interest rates, they are usually trying to reign in a steep rise in the economy.

Historically, measuring the money supply has shown that relationships exist between those measurements, inflation, and price levels. Since 2000, however, these relationships have become unstable, reducing their reliability as a guide for monetary policy. Although money supply measures are still widely used, they are only one of a wide array of economic data that economists and the Federal Reserve collect and review.

The U.S. is a net borrowing country. That means that our government borrows funds it needs to offset costs. The FOMC also decides when to increase the money supply or borrow money. They do this through treasury bills, notes and bonds. We’re also the only country in the world that can issue these treasury bonds, and they have complete liquidity. These instruments are backed by the “Full Faith and Credit of the United States of America.” If the U.S. were to default on any payments, the results would be cataclysmic!

Inflation

The final of the three statistics you should pay attention to is inflation. There’s a good reason why inflation has been mentioned in each of the indicators I’ve discussed so far. Economies are largely reactionary, meaning they reflect the actions and intentions of the businesses, governments and citizens. Inflation, by nature, is also a reaction to the actions and intentions of those who wish to invest in a country or lend a country money. In the U.S., we control and stabilize our economy through the Federal Reserve and the FOMC.

The FOMC has monthly meetings at which they will issue and publish the minutes of their conference. These minutes act as indicators to what they see happening and what they intend to do about it. They will have analyzed all the indicators we’ve discussed and more. Their minutes may show that they’re happy with the rate of inflation (less than 4%) and intend to leave interest rates alone for now, but might see interest rates increase the next six months. They rarely take any actions without significant clear warning.

Economies are delicate balances, and every detail will influence the others. It’s crucial to understand how economic occurrences in China or Europe, for example, can affect the economy here in the U.S. If you can keep an ear to the ground to monitor these indicators, you will make your business more successful. Money can be made no matter what the indicators say as long as you know which direction to go, and if needed you can always hire an expert.

Managing Financial Duties

How to Implement Proper Financial Controls in Your Small Business.  

Do you reconcile your books? Do you automatically download your bank transactions into your accounting software? What happens after that? Do you perform a manual reconciliation? If yes, congratulations because you are limiting your financial exposure. If not, you should be!  

Simply downloading bank statements is NOT reconciling your books. The purpose of reconciling your books is to ensure all financial transactions are accounted for properly and that no money has left your company without you knowing about it.  

Many small businesses struggle with controlling their finances, but that doesn’t mean that they have money flowing out the door and have no idea how much or where it’s going. Although that may be so in some businesses, many are likely to be cases of poor financial management. 

Conventional wisdom in the financial world involves segregation of duties. That means those that count the beans shouldn’t handle the beans themselves. Unless you’re a one-person shop, the person who handles cash and checks shouldn’t also be doing the bookkeeping. When the same person does both, there is a much higher chance for fraud or embezzlement.

Large companies resolve the issue by having a segregated accounting department. Financial transactions occur throughout the organization, records are created, and those records are sent to the accounting department to be recorded on the company’s books. Those books are then reconciled with the bank statements. In cases where the bank and the books do not match, the items are researched.  

Not every unreconciled transaction represents fraud or embezzlement. In fact, a very small number will ever be fraudulent. Most simply occur because of internal errors. Someone may have entered a six that looked like an eight. Those types of errors are resolved by the accountant. When the reconciliation is complete, a supervisor will review the reports and if satisfactory they will sign off on them. This is the most common and most secure way to ensure you have proper controls on your money.  

What if you are a small business that doesn’t have the resources to have separate departments of dedicated staff to perform these functions? Does this mean your business is more at risk of something going awry? Theoretically, yes. However, there are many workarounds to prevent that from happening. For small business owners, you must think in these terms and do your reconciliations on schedule. Develop a process that makes you feel comfortable that you have control over where your money is going.  

You can never prevent fraud or embezzlement completely, but you can stay on top of your business. If you have trouble doing that (many small businesses do), outsource.

 

Plan For The Worst, Expect Success

Stand Apart from Competitors When Disaster Strikes

Over this past year, I’ve seen many businesses claiming that “Due to the COVID-19 Pandemic we cannot offer the quality of service you have become used to…” While the turmoil of a global pandemic has affected us all, one of the essential parts of running a business is planning for setbacks that may come unexpectedly.

While it is extremely important to make sales and generate revenue, it is also extremely important to provide a high level of customer service. If you seem unwilling to back your product or service, word will get out and you will lose business. COVID-19 has been spreading out of control for over a year. As a consumer, I would think that you’ve had plenty of time to set a new plan into motion.

I recently spoke with a national package carrier about a very important package of live fish that I paid to have delivered by 10:00 am the next day. When the package hadn’t arrived by 4:30 I called and asked where my package was. I was told that I shouldn’t expect to receive it by 10:00 am because due to COVID-19 they had to cut their staff and didn’t have enough people to get everything done.  When the package finally arrived at 4:30, I asked the driver why I didn’t get the package by 10:00 like I paid for. His response was “I can’t get everything where it needs to go because of COVID-19. 

To me, it appears that this company’s management has made so many excuses about COVID that it has completely permeated throughout the organization. That can be dangerous for your business, and it sends a message that will begin to turn customers away. I order most things online and must deal with whatever carrier the seller chooses to use. If I could choose, I would NEVER choose this carrier again because of the lack of responsibility they’ve shown. We do not want our clients to ever feel that way. 

I ask my clients “what’s your plan B”, how will you be able to ensure that your doors will stay open no matter what happens. This “plan B” is better known as contingency planning. Many people believe that contingency planning is only for natural disasters or times of war. Done right, Contingency planning is much more than that. For a small business, even the small things can cause big problems. I’ve seen instances where a bad router can cripple a business. Training or lack of training can also cause problems. Computer or software issues, phones not working all should have workaround scenarios. 

A good contingency plan contains what you will do when certain situations arise AND how you will make it happen. It should include the procedures you will put in place to guarantee that you can keep the doors open, product and services flowing, and your clients happy and willing to keep doing business with you. I have been working with businesses for almost 40 years to help them plan for the worst-case scenario. It’s never easy to focus on bad things happening, but once you do, you can then turn a worst-case scenario into an opportunity you may have never gotten otherwise. 

So, no more “Due to the COVID-19 pandemic…” excuses; rise to the challenge.

 

So, you want to be an Entrepreneur?

Part 1 in our Entrepreneurship Series

For the past 40 years, my career has taken many interesting turns and sent me in many directions that I never anticipated. From Wall Street to Main Street, and everywhere in between. All the while, my dream was to own and lead my own business.

As a film student in college, my mission was to build a production company and produce artistic works like films, music, and videos. I took some accounting courses, business law along with all the classes I needed for my major.

After college, I joined the working world. I started to experience the practical side of business, the dirty guts of it as defined by Wall Street. I spent two decades on Wall Street soaking up everything I could about business, management, and leadership. After 20 years, 35 pounds, ulcers, and other fun unhealthy habits, I decided it was time to leave the Wall Street grind and get back to my roots. I had worked 85-hour weeks, never took a vacation, and often thought “I want more time to spend with family.” Four years later, I became CEO of a not for profit which I ran for 6 years and built into a $1.4 million business.

Since the late 1990’s I’ve been helping people start businesses and have been starting businesses myself. I have taken knocks, seen success and failure, changed lives, and I’ve loved every minute of it. It is in that spirit that I would like to help others build successful businesses by avoiding my mistakes and drawing wisdom from my successes.

What kind of person does it take to be an Entrepreneur? Well, let me tell you. For every Bill Gates or Steve Jobs, there are thousands of John or Jane Smiths. To be successful it is important to develop these traits of strong leadership. You must have confidence in yourself and your abilities to solve what problems you might encounter, plan carefully, remain resilient and determined, and always listen to learn. It is also essential to have a balance between managing “big picture” ideas and more detail-oriented plans.

Some of these traits are intrinsic and some can be acquired over time. If you believe in your idea and are willing to do what it takes to be successful, you can enjoy a profitable business. In the coming weeks, we will explore these traits and more as we expose the messy, often glamorized truths of Entrepreneurship.