The Stability of Economic Environments

Some businesses operate in very stable, predictable economic environments; others do not. Economic stability is primarily a function of the demand for a firm’s goods and services, the degree of competition, and the price stability of the goods and services the firm needs to provide its products and services.

Certain goods and services are more essential than others. For example, because people need food, shelter, and medicine, there will always be a fixed demand for these goods and services. Certain goods and services such as cosmetics, sports equipment, and leisure travel are are not as essential.  The overall demand for essential goods and services generally is more stable than the demand for less essential services. Demand for essential services is less likely to fluctuate with upturns and downturns in the economy than demand for less essential services.

In general, a business that supplies essential goods and services will have a more predictable revenue stream than a business that supplies less essential goods and services. Thus, the revenue or sales component of the income statement of a business providing essential goods and services is more useful in predicting future revenue or sales than the income statement of a business providing less essential goods and services.

The degree of competition a business faces is another key factor in the predictability of a firm’s earnings. As a rule, the more competitors there are in a particular market, the less control each competitor has over the selling price of its products or services. The less control a firm has over the prices it charges, the less predictable are its revenue and sales.

Finally, the stability of factors of production varies from business to business. A business that sells coffee or chocolate can be adversely affected by rising prices of coffee and cocoa beans. Generally, the supply and cost of labor is more stable than the cost of many raw materials. Although labor shortages do occur periodically. Thus, the expenses of a service business tend to be more predictable than a business that sells or processes products.

Risk In The Small Business Environment

The most recent performance of a small business, as reflected in its income statement, may give little insight into its future performance, simply because there is a great deal of risk in running any small firm. Even the most stable small firms are vulnerable to unexpected disruptions. Because small businesses often rely on the services of the owner or a few key employees, these firms can be adversely affected or absolutely ruined if these contributions are lost or reduced. Death, disability, retirement, divorce, drug addiction, or burnout can turn a profitable business into a losing one in a very short period of time.

Any number of external events can rapidly reverse the fortunes of previously successful small retail businesses. A plant or military base closing can quickly turn a prosperous community into a struggling one. A highway relocation or reconstruction can adversely affect traffic flow and lead to dramatic declines in revenue. The appearance of a Wal-Mart, Home Depot, or Barnes & Nobel can spell doom to previously successful small businesses. The recent Covid epidemic has had a particularly severe impact on small retail and service businesses.