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Economic issues continually challenge businesses to adapt and change to meet current conditions. This means business owners and management must deal from one period to the next with inflation -- or even, rarely, deflation -- and periods of recession, high levels of unemployment and other economic factors. The issues that can affect the bottom line generally take priority for most business enterprises and tend to recur over time.
Rate of Inflation
Inflation has a direct impact on the day-to-day living expenses consumers experience. When the cost of living increases, employees may demand higher wages to maintain their accustomed living standards. In some cases, businesses must adapt or risk losing valuable, trained employees. Increasing employee compensation can pose a challenge to management to cut spending in other areas to prevent a decline in profits. Rising inflation can also reduce consumer confidence, leading to decreases in consumer spending.
During a recession, a decline in economic activity, many businesses face a decreased cash flow. Borrowing to get through the downturn is not always feasible because loan qualifications become more stringent as lenders too must deal with the economic decline. In addition, during periods of economic decline, a business may focus too narrowly on present conditions, failing to implement plans to reach long-term goals. For example, a business pressed for cash might elect to cut back on research and development or launching a new product.
High levels of unemployment can affect businesses. For example, the government can require businesses to pay higher federal unemployment taxes. Unemployed consumers have less to spend, causing a reduction in sales for some companies.
Interest rates on the rise means businesses will pay more to borrow. This can throw a monkey wrench into plans to expand capacity or modernize facilities. High interest rates can significantly affect small businesses that operate on credit. For businesses that sell on credit, the cost of servicing accounts receivable can increase. In addition, consumers may avoid the increased rates by reducing purchases, further eroding profits.
Cost of Employee Benefits
When the cost of healthcare and other employer-provided benefits increase, businesses must find ways to cope with the rising costs. Coping may mean cutting back on the number of employees and reducing benefits available to existing employees. Some companies choose to outsource, hiring part-time workers, freelancers or other contract workers. This can significantly reduce the costs of paying benefits such as healthcare premiums, paid leave, FICA and other taxes.
Businesses can also face challenges during times of prosperity. For example, high levels of employment can pose a challenge in recruiting new personnel or keeping skilled workers onboard, putting upward pressure on wages. Businesses may be unable to keep up with burgeoning demand, and wind up losing market share to their competition.
- Forbes: The "8 Great" Challenges Every Business Faces (And How To Master Them All)
- Forbes: What Happens If Interest Rates Go Up?
- Harvard Business School: An Economy Doing Half Its Job
- Ludwig von Mises Institute: What Has Government Done to Our Money? The Economic Effects of Inflation
- Reynolds Center for Business Journalism: How Will Ongoing Unemployment Affect Businesses, Hiring?
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.