How market volatility affects small business
Wed 7 February 2018 - 9:44 amEconomy | Expert | Featured | Industry Finance | Investment | Sponsored
It’s far from a secret that macroeconomic trends can have a major impact on small businesses. Among the trends that typically has the greatest impact on these small enterprises is volatility in the market. When markets become unstable, the results can make or break the small businesses that make up the core of most economies. Here’s what you need to know about how different types of volatility in the market can affect smaller and medium-sized business enterprises.
There are many different kinds of volatility that can emerge as trends within various global markets. One of the most obvious examples that has a direct impact on smaller businesses is that of price volatility in commodity and raw materials markets. When prices rise quickly, small businesses are often left in the position of accepting lower profit margins or charging their customers more. Though volatile prices for raw materials can negatively impact larger businesses as well, the fact that small enterprises rarely have enough warehouse space to buy their materials in bulk leaves them more vulnerable to rapid price increases. In the case of price decreases, however, small businesses can also benefit from volatility.
Another market in which high levels of volatility can affect small businesses is the Forex, or foreign exchange market. According online FX experts Compare Forex Brokers, the Forex market is effectively the sum of all global currency markets. In the Forex market, currencies are typically considered in pairs, with the value of the pair expressed as the ratio of the value between the two currencies. Though major currencies like the US dollar and British pound make up the largest share of the Forex market, all world currencies are, to some degree at least, represented in it.
Forex volatility is important for small businesses because of the effect that the value of different currencies relative to one another can have on international trade. A small business importing goods from a country with a weak currency into one with a stronger currency, for instance, is in a good position to make a profit because of the low comparative costs of the goods it is importing. When currencies become too volatile, the relationship between the purchasing power of different currencies may become unpredictable. This, in turn, can affect the regular affairs of a small business that imports or exports products. Just as with price volatility, currency market volatility can work either in favour of or against a business.
Domestic Downturns and Upturns
A final type of market volatility to be considered is that which presents itself in domestic markets in the form of general economic downturns or upturns. Though such trends rarely have direct effects on small businesses themselves, they can have a considerable effect on the customer bases those businesses rely on.
Market downturns often result in job losses and depressed wages, leading customers to be more frugal with their spending. Depending on the model of a given small business, the effect from this can take different forms. Restaurants and businesses that sell non-essentials will generally see the worst outcomes during a domestic downturn. Providers of essential goods and services may see decreased revenues but will usually not lose an appreciable amount of business.
Economic booms, by contrast, have precisely the opposite effect on businesses. Increases in employment and upward pressure on wages typically raise consumer spending, benefiting businesses of all sorts. This, in turn, allows businesses to invest in their own operations.
Why Volatility is Usually Regarded as Negative
Despite its potential to benefit businesses under the right conditions, market volatility is generally seen as a net negative for enterprises. The simple reason for this is the fact that long-term predictability is usually better for businesses than volatile conditions that temporarily favour them. Since business decisions usually reflect long-term planning, highly volatile conditions, even those that may work in the best interest of a business temporarily, are rarely desirable.