A business owner’s sense of economic trends is often at the center of his or her decision-making. However, gathering information to make an educated guess about the right next moves — when it’s time to reinvest in the company, expand, acquire another business or make capital improvements — is not an exact science.
“Business owners rely on foot traffic — how many people they see coming through the front door — and their revenue trends to determine when and how much they should reinvest in their business,” says John Augustine, Chief Investment Officer at Huntington Private Bank.
While business owners’ decision-making is largely influenced by revenue trends, they still rely heavily on gut feeling, for better or worse.
Smart Business spoke with Augustine about decision-making and where to get reliable, local information that can be used for strategic planning.
How do business owners typically gauge the state of the economy?
Primarily, owners rely on what they see as an indicator of economic health. Downtown business owners might look up and down main street to get a sense of the foot traffic; those operating in strip malls may watch the traffic and count the cars in the parking lot. They also talk to their peers through different local associations. This informal, cross-industry survey gives them a sense of how a swath of businesses are performing and offers a better picture of the health of the community.
There are also more general economic indicators that can be used. For instance, businesses like to know if people’s incomes in a municipality or region are growing or stagnating. The regional unemployment rate versus the state and national rates also can be informative, as can the performance of the housing market.
Business owners, ideally, will take both a top-down and bottom-up approach, using their own perception of the local economy’s health and combining that with a broader perspective that accounts for regional economic factors, such as unemployment and confidence.
What information should be used when forecasting?
To forecast, business owners should get information that’s as local as possible, such as data from a specific municipality or state agency. Then they should look at historic trends to understand the business’s performance through different conditions, which can give a sense of how it might perform in the future.
Businesses also can connect with peers in their region to find out how they see trends playing out. They also can compare their thoughts and determine where their assessments align and diverge. This exercise should either validate a business owner’s gut feeling, or give him or her a reason to reassess.
It’s difficult to project and estimate forward economic activity because it’s impossible to predict when something might happen to change circumstances. So, make an educated guess, but don’t get so many sources that the information becomes burdensome and confusing. Peer groups are a good way to distill the information into the more useful data points.
What should businesses consider as they look to expand?
Businesses considering an expansion should first be comfortable with the soundness of their business model. There should be a high degree of confidence that the model can be successfully replicated.
In addition to the soundness of a business model, business owners should consider employees — are the right people in place, or available, to be able to make a move? Owners can’t be in all places at once, and a tight labor market might make staffing an expansion difficult.
Also, they should consider how the expansion will be funded. There are many options, including loans, equity or a mix.
Banks can offer companies a different perspective by using anonymous peer comparisons to give a sense of how similar businesses are performing. This helps with benchmarking. They can also offer an informed economic view of the region as well as funding options for upcoming projects. It’s an exercise that may expose companies to opportunities they otherwise might not have recognized.
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