Forecasting is crucial to any business's success, especially for seasonal businesses that are common across Food, Beverage, and Agribusinesses (FBA). However, the strength of your forecasting relies on the quality and types of data that go into your models. Small business owners can leverage macroeconomic data to gain insights into trends that may impact their business.
Here, we'll discuss the importance of economic indicators for forecasting, how critical economic indicators impact FBA, and share strategies to create strong financial forecasts.
What are Economic Indicators?
Put simply, economic indicators are data that quantify various aspects of the economy, such as the performance of the stock market, inflation, and unemployment. Economists and business owners use economic indicators to learn about the economy's current strength and likely future direction.
There are two main types of economic indicators, both of which can be useful for forecasting:
- Leading indicators are forward-looking indicators intended to help predict future trends. For example, new housing starts can be a leading indicator of consumer activity.
- Lagging indicators, on the other hand, look to the past and can be used to confirm trends after the fact. For example, the consumer price index (CPI) uses the price of goods to calculate inflation.
Key Indicators to Watch
Ultimately, the indicators you track depend on your unique business and goals. However, food, beverage, and agriculture businesses could benefit from tracking the following metrics.
Consumer Price Index
FBA companies today face two key challenges from CPI and inflation: rising supply and labor costs, which drive up the cost of production, and increased consumer cost awareness, creating pressure to keep prices low.
Even when food price inflation returns to baseline levels, certain foods may experience elevated inflation.[1] Tracking inflation in categories most relevant to your business can help you anticipate costs going forward.
Employment Figures
Unemployment directly and profoundly impacts consumer spending, which extends into essential categories like food. For example, households impacted by involuntary unemployment during the COVID-19 pandemic reduced food spending by 15%.[2]
As a result, tracking employment figures in your market—as well as upcoming layoffs and business closures—may signal changes in customer demand ahead.
Building Permits and Housing Starts
Building and construction trends can play a pivotal role in shaping the local economy, and they may be worth including in your business forecasts.
Tracking new commercial building permits can offer insights into upcoming changes in your market's competitive landscape. You might learn that a direct competitor plans to set up shop nearby or that a new housing development may bring an influx of customers.
How to Leverage Economic Indicators in Your Forecasting
Three strategies to help set your forecasting up for success.
1. Look at economic indicators along with internal KPIs
While economic indicators are helpful in forecasting, they're one piece of a larger puzzle. Inflation, for example, may impact different subsets of consumers differently, and comparing historical inflation rates to your sales records help you determine how sensitive your customers are to inflation.
2. Examine a mix of national, regional, and local economic indicators
If you're a small business serving a local market, include regional economic indicators in your forecasting.
Regional data will offer deeper insights into the factors affecting your target customers — and, in the case of building permits and housing starts, lets you know about upcoming changes in your area. However, more significant regional and national indicators are still important, mainly if your business works with suppliers outside your region.
3. Consider leveraging technology in forecasting
Forecasting doesn't require crunching the numbers yourself, and a strategic investment in technology can assist with forecasting and planning. Data-driven algorithms can combine economic and internal data to help you create forecasts for multiple aspects of your business, from inventory management to pricing strategy, to help you create plans — and contingency plans — that will help you reach your goals.
Get Support Creating Financial Forecasts
A trusted team of financial experts is invaluable for helping to create strong financial forecasts. PNC's dedicated team of experts in Food, Beverage, and Agribusiness can offer insights into industry trends, help you create your financial plan, and connect you to solutions designed with FBA in mind.
To learn more, contact PNC today.