Managing Your Business Through a Changing Economy

By Joseph Moser

The conversations I’ve had lately haven’t just been around current cash flow projections. Many business owners I know have also been questioning how to prepare for the recent economic changes. You don’t have to be an economist to know that the economy plays a major role in every business decision. Sometimes the only way to truly understand how to navigate the changing economic landscape is to simply live through a few economic cycles, or connect with someone that has. I’ve seen a few big shifts in the economy during my career, and it’s why I encourage local business owners to monitor the market.

Understanding how larger economic market trends may impact a local business can help when trying to plan for and navigate around them.

When Interest Rates Change

In the last few months alone, there have been several increases to the Federal Reserve’s (the Fed) Funds rates – these have been some of the highest rates seen since the ’08 financial crisis. It’s important to understand why the Fed changes interest rates, and it all comes down to growth. For instance, when the economy is growing too fast the Fed may increase interest rates to moderate that growth in the hopes of avoiding inflation. These rates don’t only impact the cost of borrowing money for your business, but also may impact how much disposable income your customers have to spend. So when rates change, it’s possible your bottom line could change with it.

Read Our Interest Rates 101 Guide for Business Owners

When Planning for Growth

You need to be realistic about your business. Anticipate what factors are changing, how they may impact your business, and how your potential expansion plans fit into your larger business goals. For example, if the rapid growth in the economy causes interest rates to rise, does that impact your customers’ spending habits? Does it impact the cost of producing your product? Should you consider raising prices?

You also need to consider how changing economic factors could impact your financing. For example, if you have a variable rate loan – as rates rise, your loan payment may increase but your income could stay the same. How will that decrease in available cash flow affect your business? Will it impact your plans to hire more employees or buy new machinery? In a changing interest rate environment, business owners must anticipate how the environment of their business and industry may change before making any big decisions.

When things like this happen, I always recommend that business owners think about three things:

• If you already have fixed-rate loans, make sure you know when the rate matures. Determine at what point you need to refinance the loan or extend the maturity date and decide if you’re comfortable with that strategy.
• If you need access to cash to pay bills or cover employee salaries, it may be time to lock in a fixed-rate loan, but make sure the choices you are making are in line with your business needs and not in reaction to the market.
• Pay attention to your borrowing costs and weigh your needs. During the past 15 months, rates have risen and that may continue. Business owners must weigh the cost of the funds with the potential for future return in order to make an informed decision.

Four Questions You Should Ask When Thinking About Expanding Your Business

Closing Points

It’s important to pay attention to the market but also the advice of those around you that you trust. Never be afraid to ask questions or seek input. You can also subscribe to receive our Economic Insights Newsletter, for monthly updates on the economy, labor market, interest rates, and more.

Economic Insights Newsletter Subscription