9 Must-know Economic Factors Affecting Business
Entrepreneurs tend to focus on identifying and fulfilling consumer needs or finding profitable niche markets. Still, every business can be affected by a more extensive and hard-to-predict force: The economy.
Understanding trends in the overall economy and how they affect a business is essential. With a bigger picture, you can make smarter decisions and guide your online store to a greater height. You can not only analyze the economy and predict future trends to prepare your business for unexpected events.
No one thought there would be a pandemic or lockdown in 2020, yet here we are in 2021, still working from home. Do you get the idea?
With that in mind, here are the must-know economic factors that are affecting your eCommerce business. From interest rates to a country’s policies, you will have a general idea of what they are and analyze them for better future business decisions.
They can be new opportunities, threats, or challenges to the company. Still, with excellent knowledge and preparation, you will be able to sail your eCommerce business far despite any economic factor. Let’s begin with that confidence!
Table of Contents
- What are economic factors?
- The must-know economic factors affecting the business
- Other economic factors that may affect your business
What are economic factors?
The economy is all activities concerned with the manufacturing, distribution, and use of goods or services. The economy forms an environment with many external factors that have a significant impact on businesses. The influence of the economy on a business can be listed as the level of consumer spending, product prices, future investment decisions, and the number of workers that a company employs.
So economic factors are what affect the economy in the field of tax rates, law, policies, interest rates, wages, and many governmental activities. These factors don’t directly relate to the business but positively influence the investment value in the future.
For example, a common influence drive of business is labor cost, and it has always been a controversial economic factor. Your company has to follow the rules when paying employees inside the country, but many organizations outsource labor from other countries, leading to unequal wages.
Interest rate is also a major factor that affects the cash’s liquidity in the economy. Or a higher return on investment can attract more investors for your business. Despite not being an economic factor, management plays a vital role in the growth of a company by economic values and drives the business to reach maximum revenue.
Economic factors are connected with services, goods, and money. Despite affecting businesses, these factors refer to the economy’s financial state on a bigger picture— whether that be national or global. The economy’s state can decide many essential details involved in an operating company, including consumer demand, taxes, and asset value.
Analyzing economic factors is the process of looking at all of the different external factors that can affect a business. This is particularly useful for business owners to increase the revenue stream, grow the organization, and beat competitors.
The must-know economic factors affecting the business
As mentioned above, economic factors are included as the bread-and-butter of business analysis. This is because economic factors play an essential role in deciding how an eCommerce company makes its decisions (especially financial ones).
Some economic factor examples that are affecting your business are:
Laws and policies
Let’s look at these economic factors in more depth to see exactly how they can influence your business, and what you can do about it:
An interest rate is a specific amount that a lender charges a business or an individual when borrowing money.
Interest rates might appear in different places and imposed by different people in different fields. Obviously, the situation for interest rates is of great relation to banking institutions, but it can also affect businesses whose strategies rely on receiving large loans.
Some small businesses rely on banks’ loans or other financial institutions as their financing source. Higher interest rates often mean higher total expenses for companies with debt. Also, high-interest rates can reduce consumer spending, because it can be more difficult for consumers to get loans and buy more things like cars and homes.
If interest rates drop, shareholders and owners may invest more, while customers are more likely to spend and less likely to save money in the bank - which would also increase tax income for the government. This is where you can push your sales and promotion, especially for high-value products.
The tax rate is a crucial part of any country’s economy. It directly affects the price of goods and therefore any business’s price strategy. Taxes are applied to individuals, consumers, and companies. Types of taxes are:
Value-added tax (VAT)
National Insurance Contributions (NICs)
When the tax rate is low, business owners can receive higher dividends and profits, while employees have a higher level of wage. Also, consumers may have more money to spend on services or goods. If the tax rate increases, you may see the opposite happens to the economy.
Inflation is the rate for the increase of prices in an economy.
Inflation in each country causes increases in business expenses such as utilities, rent, and cost of materials used in the production chain. Rising costs would force businesses to raise prices on their products or services to keep pace with the inflation rate and maintain a healthy profit.
Inflation can also reduce the consumers’ purchase power unless employers get an increase in wages based on the level of inflation. Bad as it seems, inflation is unavoidable for any economy, so you should take it into account when starting a business.
The exchange rate comes into the picture in case of import and export. It affects the price of goods and international payment and that affects the economy.
If you are in the dropshipping business, you definitely need to keep an eye on the exchange rate. You should have prices that are suitable for your target market, or even better, have personalized prices for different countries.
The economy often follows a cycle of economic booms then periods of decline or stagnation.
During the booming period, jobs tend to be plentiful because companies need workers to keep up with the demand. When the unemployment rate is low, consumers tend to spend more because most people have income, which is good for businesses. When the unemployment rate is high, consumers tend to spend less because people don’t have excess income to spend.
When the unemployment rate is low, businesses can perform better and are more likely to expand their business. But this can negatively affect the local community. However, businesses can also employ more people from a local community, which is a good decision for many companies.
An economic recession (at whichever scale) has the potential to change the purchasing power of consumers, which might force businesses to drop their prices or clear smaller volumes.
Many people predicted a recession during the time of COVID-19, but as a matter of fact, only certain industries were affected like traveling, while other industries like eCommerce saw great growth. Recession can actually be an opportunity for entrepreneurs to find new business ideas.
Needless to say, labor and wage costs are always an important economic factor that affects businesses. Many countries have outsourced foreign laborers, or companies plant their production in countries where labor is cheap, take Apple as an example.
Wages is a direct cost to any company which is added to the total cost and price of goods or services. Also, with an increase in wages, the consumer’s purchasing power increases, and people tend to spend more.
Law and policies
Change or modification in the economic law of a country always affects a business, one way or another.
For example, if a government makes a law that bans liquor in the country, it will affect companies in the liquor industry, their employees, and shopkeepers, which at a broader level affects the economy.
Similarly, any law and policies made by the government may negatively or positively affect a business. Have yourself a lawyer which can update economic laws for your business when necessary.
Government activities are also an economic factor that affects eCommerce businesses.
A government often promotes certain industries during a period of time, like technology or medical. This activity will promote that sector and boosts its economy, which leads to many effects on interest rates, loans, and taxes. Choosing a promoted industry in the government may help your business access more benefits while growing.
Other economic factors that may affect your business
There is also the status of economic development, which can raise the average standard of living in a country. These are also notable economic factors that can affect your business, but more on the development side of your country:
Natural resources: Natural resources available like water, soil, trees, oil, coal, metal, etc., can affect the growth of your country, help job creation, and increase wealth.
Education: Education helps people grow and develop necessary skills, which results in the development of the economy.
Transportation: Transportation has a crucial role in business development as the circulation of goods requires facilities and means of transportation. You want your items to reach customers as fast as possible, resulting in good economic development.
Communication: Communication helps in the growth and the expansion of a company. These days, companies without communication tools like the internet or mobile will lack the speed to promote their goods and services.
Energy resources: This is the main resource required for the functioning of a country, industry, and company. The more advanced and stable a country’s energy resources are, the better its companies can grow.
These economic factors that affect a business are what you need to study and analyze if you want to know when and where to invest your resources. An entrepreneur needs to be prepared for a change in the economy and make the right decisions regarding a business.
Winners are born from those who can make the most out of these economic factors, whether positive or negative. Best of luck on analyzing the economic factors that affect your business, and feel free to share your thoughts in the comments section.