Economic data can be baffling but our Group Chief Economist explains the two key indicators SMEs should understand.

Small business owners can sometimes feel like they’re drowning in a sea of numbers. Bombarded with data, headlines, warnings and opinions from all directions, it can be hard to know just what to focus on when you’re thinking about what the months and years ahead will bring for your business, and how to plan appropriately.

So what do you really need to know? And what does it all mean?

There are two key indicators that SMEs really need to understand – business confidence and business conditions.

Understanding business confidence

Business confidence is a measure of what survey respondents are expecting in terms of business activity in their industry for the upcoming quarter. Confidence is significantly impacted by broad national and international issues such as interest rate cuts from the Reserve Bank of Australia, GDP rates, employment rates, what’s happening in the US or how global growth is likely to progress.

Given business confidence affects people’s willingness to spend, it’s a crucial dynamic for SME business owners to understand.

Tracking business confidence

To understand where business confidence is going, keep an eye on the following numbers: Interest rates going down, GDP moving up or down and employment data. It’s also a good idea to stay tuned in to what’s happening in the US and Chinese economies, and how global GDP is tracking.

Business conditions explained

Business conditions are a simple average of trading, profitability and employment indices, reported by respondents through a survey. In other words, it’s a measure of the money flowing in, how profitable businesses are and, therefore, how many staff they’re able to employ.

The trading, profitability, employment and other indices are calculated by taking the difference between the percentage of respondents nominating good or very good, or a rise, and those nominating poor or very poor, or a fall. For example, if 25 percent of respondents state that trading levels are good or very good and 10 percent state levels to be poor or very poor, the corresponding index of trading performance would be 15.

You need to watch out for business conditions because this measure tells you how your sector is faring overall.

Clue-in to Business conditions

The following data will help you understand how business conditions are likely to play out:Employment data, sales and orders, demand and capital expenditure.

Don’t be intimidated by the numbers. In the end, they’re just a guide to the overall health of your sector and the Australian economy which can help explain why people are or aren’t buying.

NAB’s Group Economics team publishes regular reports that monitor business confidence and conditions. For the latest findings visit nab.com.au/insights.

This article was first published in Business View Magazine.  Read more Business View Magazine articles.