The Effects of Macro & Microeconomics in Decision Making

If you get wrapped up in the day-to-day financial pressures of running your business, you may overlook larger economic forces that could affect your company. You can't afford to look only at the microeconomic influences of the local economy, prevailing wages in your area, prices from area vendors and your regional bank's current lending policies. Macroeconomic factors such as inflation, government regulations and industry trends also deserve consideration when you make business decisions.

Your decision to enter into long-term contracts with suppliers requires you to look at the small picture and the big picture at the same time. From a microeconomic standpoint, you can get favorable terms and even discounts for signing a long-term agreement with a vendor. You can even lock in current prices for the long haul. This may sound good when you look at your current expenses. Your desire to keep them low is a solid business impulse. However, you must also evaluate the larger picture. If macroeconomic indicators suggest the economy could be headed for a downturn, your long-term contracts could be disastrous. It might be advantageous to go for a short-term agreement you can withdraw from more quickly if economic conditions warrant.

If your business is growing and sales projections look good, you may be tempted to add more employees to your payroll. After all, your microeconomic indicators are positive. However, your commitment to permanent salaries and benefits might not be wise if the larger economy seems to suggest that employers are cutting back. You could decide to go with temporary employees until the microeconomic and macroeconomic trends are both positive.

If you hear reports that inflation is expected to rise in the larger economy, you could consider buying extra inventory. This would lock in current prices and you could charge more for the low-priced inventory as prices rise. Of course, you would have to consider whether your local market would be able to pay the higher prices or whether customers would simply cut back on buying during inflationary periods.

Growing your company can be exciting. If your immediate market suggests that an expansion might be justified and you can receive favorable financing rates from a local lender, you might think your plans for expansion are justified. However, examine the macroeconomic news to see if companies overall are expanding. If they are, you may be in good company. If they are not, these other business leaders might be aware of forces not apparent to you. Remember, an expansion requires more equipment and employees in addition to new facilities. You want to be sure the larger business environment works in your favor.