What economic indicators should small business owners be aware of to respond to?

Small Biz Matters – a half hour program each week where you can work ON your business rather than IN it.
with Alexi Boyd from Boyd Office Management Services
Date: 30 April 2019

Whilst the economy isn’t in the driver’s seat when it comes to controlling  our business its a factor we should all have at the back of our minds. Why? Because although we Small Businesses  are the “engine room” of the economy the decisions made by the Reserve Bank of Australia mean they’re the ones with their hands on the steering wheel.

Aside from a couple of units of Ross Gittins inspired Economics at school, TAFE or Uni degrees from which we remember not much, our ongoing education around the economic drivers is non-existent. But we should have our finger on that pulse and really understand the affects their actions have on our small businesses.

Here today to share with us their expertise is Scott Shuttleworth, Founder and Portfolio Manager at Vega Capital. His background in economic analysis perfectly positions Scott to help us understand the butterfly effect the RBA’s decisions, actions and even words has on our individual businesses.

Welcome to the show Scott.

What economic factors have the biggest impact on your business?

• Firstly, Business centric factors (competition levels, your offerings, your team, your financial acumen) which are MUCH more important than economic indicators
• Economic indicators factor about a much smaller amount than the way you RUN the business

Other counctrie 9:17am

WHat does the RBA do? 9:20am

What is the RBA and how does the RBA control the economy?

• They control consumer & business patterns in a way they believe supports the long term prosperity of the nation. What’s their main factors they use to control & manipulate the economy?
  • Cash rate
  • Talking about it….

What is the RBA doing when it manipulates the cash rate?

• Raising = conditions are good, consumers spending more on average – great for consumer based businesses but the flow on effect occurs also
• Cutting – weakness, marginal improvement will happen in 12 months as this is how long it takes to
• Roughly a 12 month indicator
• How does it impact the currency?
  • g. 1.5% = the value of AUD in the bank
  • If our cash rate increases and other currencies like the USD remains steady then our dollar is more attractive. At the moment the US cash rate is 2.25 – 2.5% so is generally more attractive (mention the AUD USD currency pair)
  • Investors will “park” funds in a particular country to earn higher rates and then move dollars around as cash rates change
  • If the cash rate goes up or gives a “glowing report” of the economy its an indication that the economy is improving so more investors will buy AUD in view to invest here as the economy is on the rise. The reverse is also true.
  • More investment in the country = more jobs, business improvement through increased capital, more innovation leading to more tax revenue.
• Improvement in economy equates to controlled inventory, cater your resources to the demand which is improving if rates are going up, and the opposite is true for rate cuts.

What about the Unemployment rate?

• Less customers since they have less money to spend and therefore a downturn in business. Lower unemployment rate means its more difficult to find employees and your wage costs might go up!
• High wage costs should always be justified, by the way.

Economic theory around cash rate and employment

• Theory is lowering the cash rate = higher spending leading to greater employment

Learning from the past

• 10 years of expanding economy would suggest a turn towards recession. Typically business increases their debt when economy is good putting them in a vulnerable position.
• Lots of businesses use their family home as an asset to borrow against. What’s the bank going to take? The asset.
• Banks could take your assets (and even if you’re allowed to trade through to better times you’ll still lose those assets and therefore your business in the long term)
• You don’t want to go into a recession with a lot of business (or personal debt) because although the cash rate will fall you’ll be unable to repay the loan due to a likely downturn of your business.

To find out more go to their website: https://vegacapital.net