Every business plan has an economic forecast, most often implicit. That is, GDP predictions are absent from the plan, but the business leaders have an idea in their heads about the future. It may be a continuation of recent trends, or a slowdown or stronger growth, but there is an idea about the future in every plan.
A business executive comparing actuals against plan cannot tell at a glance whether the difference is due to the economy or the performance of the people executing the plan. The economy often gets blamed for under-performing, and the people take credit for over-performing. But good decisions require the truth. And the truth about people's performance can only be seen by removing the impact of the economy from total results.
Understanding how the outside world impacts a business is best done through an economic dashboard. Business CEOs usually have an idea of how the economy is doing, picked up from newspaper headlines, snippets of TV news and discussions with colleagues. However, the human brain tends to give big emphasis to information that supports a person's existing views, and the brain dismisses contrary evidence. Psychologists call this confirmation bias. So all through the year, the CEO and executive team members reinforce their prior ideas about the economy. Until reality smacks them in the head.
Before looking for data, sketch out an overall architecture based on the drivers of your company's profitability.
I think in terms of revenues, costs, and opportunities.
Revenues depend on the economic conditions of the end users of your products. Economic data divides spending in the economy among major sectors:
- Consumer spending
- Investment, further subdivided into
- Residential construction
- Non-residential construction
- Business capital spending
- Government spending
- Foreign Trade
Putting your own company's sales into these categories will help identify data needs. In many cases, categorization is straightforward.
Products and services that are sold to other businesses, but not capital expenditures, are a little more difficult. Track down end users as best you can. For example, the law firm serving business clients should estimate how much of their business is driven by consumer activity, construction activity, capital spending, and government business. Another example is a hotel that hosts tourists on weekends, but business travelers weekdays. For the business travelers, try to understand what industries drives those business customers, such as a large corporate headquarters nearby.
After revenues, think about costs. For many companies, labor is the biggest expense. Think through other purchases that impact profitability, which may include raw materials, rent, interest on debt, etc.
For opportunity, think about how you might grow your business: expansion into a new market, deepening relationships with existing clients, acquisition of competitors, and so forth. What would be necessary for growth to happen? More borrowing or equity? Would you be able to find the talent you would need? Office locations? Raw materials? If growth is part of your long-term strategy, put some opportunity variables onto your economic dashboard.
The last step is to clearly identify geographies that are important to your business. National data are easier to find than local, but general data about local population growth and employment are readily available.
Now that concepts for the dashboard have been identified, it's time to find specific data series to use. Begin with low expectations. The economic data system was not developed to make your life easier. Much of it was developed to help policymakers understand the economy, and the rest resulted from tax and regulatory reports. Look for a ballpark approximation of the right concept rather than a perfect indicator.
The easy approach is to look for existing reports on your industry. If there are publicly traded companies in your sector, find stock analysts reports on them to see what economic factors they are considering. Some trade associations put out statistical reports on their industries. There may be data services aimed specifically at businesses like yours. They may be a great investment, but even if you're doubtful about their worth, look at a sample of the reports they provide. Many privately-produced reports repeat publicly-available information.
If a news report seems particularly useful, track down the information sources. Business journalists often begin an article with a story or quote, then cite a statistical report. With a little searching, that statistical report can become part of an economic dashboard.
In the United States, most economic data is available for free on the wonderful FRED database, maintained by the Federal Reserve Bank of St. Louis. When you find sources on FRED that you want to use, download the FRED Add-in for Excel to get updates at the push of a single button.
An economic consultant may be helpful, but don't forget free resources, such as public librarians and colleagues from other companies who may have their own favorite indicators.
The benefits of an economic dashboard can be significant, enabling a company to understand what really drives profitability, while avoiding being whipsawed by ever-changing headlines.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.