Four Critical Financial Indicators That Affect Business

Most entrepreneurs are too engrossed in the day-to-day operations of their company to pay attention to key financial indicators that can affect their business. You may think that your business is too small to be influenced by financial/economic news, and that you do not know how to interpret and react to them anyway. However, ignorance may cost you dearly if you fail to respond correctly to these signals.

You do not have to be an expert in finance to benefit from a basic knowledge of the most relevant indicators. In fact, knowing just four of these indicators will be very helpful. Later on, you can decide if you want to learn more, but more pressing concerns may not permit this. I picked four leading financial indicators which, in my opinion, have the most impact and are relatively easier to understand.

T-bill interest rates. Treasury bills are short-term obligations by the government. Usually the point of reference is the 90-day term treasury bills. Since they are backed by the government, they are considered virtually risk-free. The interest rate on T-bills is important because banks usually use them as a point of reference in computing the interest of the loans they give out. The interest in loans given by banks should normally be higher than the interest in T-bills because the risk is higher. It should be noted that the interest on T-bills is market driven, although the Central Bank has the option not to accept bids that it considers too low.

So why should T-bill rates concern you? Since bank lending rates are heavily influenced by T-bill rates, an increase in T-bill rates causes an increase in bank lending rates. When lending rates are high, firms are less likely to borrow to expand their business; this reduces economic activity which would reduce sales in general.

Stock market index. There are several stock market indices. Currently the PSEi is the main index of the Philippine stock market. It is composed of a group of selected prominent companies. The stock market is where ownership shares of companies are bought and sold. If there were no stock market, it would be more difficult to sell your shares of stock in a company. Of all the barometers of the economy, the stock market probably gives the most information because you can see industry sector trends as well as the projection for the entire economy.

So you may think, what does an increase in the stock index mean to a small business owner like you? If you know how to analyse the implications, there are plenty of information that may prove useful for virtually all kinds of business. For example, a rising stock market generally means good prospects for the economy. You can also have a more granular view by looking at the sectoral indices like the index for real estate-based companies. The stock market is a good predictor of economic prospects.

Be aware, however, that not all stock market booms are good for business. There are many times in history where prices of stocks become inflated beyond their reasonable value. There is sometimes a tendency to be overly optimistic. Time will come when the bubble will burst and a stock market crash occurs.

Inflation rate. Inflation refers to the increase in prices of goods. This is computed by tracking the prices of several basic items. The higher the inflation rate, the more frequently you should compute your costs. If it was customary to change prices once a year, if inflation becomes much higher, you may need to adjust prices twice or more in a year to avoid selling at a loss. You should also refer to the inflation rate when making investment decisions. It may turn out that your earnings may not even be enough to beat inflation.

Peso exchange rate. The effects of changes in the peso rate are more widely broadcasted as it has a quick effect on the prices of imported goods and the remittances of those working abroad. Generally, a peso appreciation is considered a good sign; however, the consequence for companies is not always pleasant because there are both losers and gainers. For importers or those whose goods have imported components, a strong peso is a bonanza. On the other hand, exporters will very much prefer that the dollar get stronger.

There are many other external factors to consider aside from the ones mentioned here. While your time and expertise may be limited, I highly suggest investing more time in studying and monitoring financial matters.

*Originally published by the Manila Bulletin. C-4, Sunday, December 2, 2012. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.