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The Ripple Effect of Changing Economic Conditions on Small Businesses

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AuthorBob Press (TAP Financial Partners)

Businesses in certain industries are better suited than others to withstand even the most potent outside forces. The world will always need plumbers, for example, regardless of what’s happening in the global economy.

Still, even essential businesses can be impacted by global/regional/local economic conditions. Let’s look at some of the forces that can change the business landscape:


Much of the conversation around inflation centers on how much more it costs to buy goods and services, but the price of groceries and the aforementioned plumber are only part of the story.

For business owners in retail and manufacturing, inflation can increase the cost of the raw materials bought from suppliers, which cuts into cash flow. That can cause an increase in the prices charged to consumers, who may also be looking for ways to tighten their belts in reaction to rising prices. That change in consumer behavior can negatively affect businesses in other sectors.

At the same time businesses are challenged with paying and charging more, their employees are paying higher prices for everyday items while receiving the same paycheck. In time, they may demand higher wages or leave those companies for one willing to pay them more.

Interest rates

Central banks set interest rates, impacting how much it costs businesses to borrow money. When funded through loans, higher interest rates will cost those organizations more until the debt is repaid. This can limit growth or even jeopardize operations.

One solution for them may be to charge higher prices on goods and services. However, when interest rates are high, customers (especially consumers) often reduce spending until they start to lower.

Market fluctuations

Too many small businesses make the mistake of assuming that stock market highs and lows are something only big corporations and investors need to worry about. However, market conditions often reflect broader economic conditions that can impact small businesses.

For example, stock market crashes or recessions erode consumer confidence, making them less likely to spend. In contrast, stock market highs indicate higher consumer confidence and more willingness to part with their money.

These fluctuations can also impact larger companies and international markets, disrupting the supply chain. As we saw during the worst of the COVID-19 pandemic, these disruptions can spell disaster for small businesses that rely on specific parts and materials for their products.

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What’s a small business to do during a storm or in anticipation of one that may be just over the horizon? It’s important to remain agile and flexible. Also, a financial cushion created during good times can help manage higher costs without taking on loans and exorbitant interest rates. It’s also a good idea to diversify as much as possible to insulate your business against localized economic downturns.

Whether you are a new business or a seasoned veteran, TAP Financial Partners can help improve your business’s financial health. Get in touch with us to learn more.

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