3 Politically Economic Reasons to Hire a Financial Analyst
A recession can put anyone out of business.
All business owners know that the broader economy in which they operate could betray them at any time. Understanding the direction and impact of potential economic changes helps business owners prepare for the future. With the upcoming presidential election, understanding the effects of political campaign promises is important.
Are you strategically ready for what November could bring?
GOP Tax Cuts
Republican candidates are in a death match right now, but the top four candidates all have one thing in common: billions in tax cuts. Tax cuts are pure excitement to those who pay taxes, but the economic effects are more mixed. After all, that money will have to come from somewhere. Candidates have been more vague on that part.
Two possibilities exist. Either the candidate can find enough ways to trim federal spending enough to come up with the tax cuts…or the candidate cannot. Each has different economic effects.
Cutting taxes WHILE NOT cutting federal spending means the government will be forced to do one of three things: create new taxes, increase debt, or print money. There are no other options. Creating new taxes would solve the problem, but that defeats the purpose of a tax cut. Printing money would create runaway inflation. That leaves only increasing debt. Historically, increasing debt is exactly what other presidents have done when they wanted to spend more than they taxed.
Did you know that increased federal debt will affect both the economy and your business? The mechanics are complex, but when the federal government borrows more money, interest rates rise.
On the other hand, cutting taxes WHILE ALSO cutting federal spending affects the economy too. The mechanics are again complex, but the result is simple. It means that the total money spent in America (aggregate demand) will drop by exactly the amount of the cut in taxes/spending.
If you think a Republican will win and you think he will succeed in cutting taxes, you can do three things to prepare your business: decrease your total business debt, avoid variable interest rate agreements, and decrease your estimate of sales,
DNC Wage Hike
In August of 2015, the Democratic Party added to their national platform a proposed increase of the minimum wage to $15 per hour. Increased minimum wages are pure excitement for those below the proposed threshold, but the economic effects are more mixed. Hillary has been restrained in her statements, but Bernie has repeatedly emphasized his conviction for the idea.
A minimum wage amounts to what is called a “price floor” on labor. That means hiring someone below that wage is illegal. The economic effects are well documented. Two results are likely: higher unemployment or higher inflation.
If you think a Democrat will win and you think he or she will succeed in raising the minimum wage to $15 per hour, you can do two things to prepare your business: increase your total debt and make large investment purchases sooner rather than later.
International Trends
The decisions of OPEC and Iran leaderships have resulted in both of them flooding the market with oil. So far, that has meant a bad year for the American oil industry but a good year for anyone whose business transports or travels frequently.
China is struggling and the results of its leaders’ decisions remain to be seen. So far it has at least meant a high level of uncertainty and market fear.
Even when the explicit effects of international trends remain unknown, the side effects such as uncertainty, fear, and confusion can cause turbulence of their own.
Knowing what is known is good. Unknowing what is unknown is sometimes better. Having a trusted adviser on hand to differentiate between the known and unknown is sometimes best.
Next Steps
Weighing local effects of macroeconomic dynamics is difficult. The worst approach is to bet large investments on a guess.
Don’t guess. Get help.
You don’t need a full-time CFO to avoid guessing. With the right experience, a part-time CFO, temporary CFO, or project-based financial analyst can help with exactly these kinds of evaluations. In addition to our insights, we offer help with raising capital, financial reporting, forecasting, profitability analysis, and other small business services. You can reach us at 801-804-5800.
