The Multiplier Effect: Three (3) key factors to look out for when opening a new business
Except a business links up to the overseas market to draw revenues it has to compete fiercely for the total money in circulation within the local market. Therefore, the business financial health, in order words its success, is tied to the financial events within its main market. This is why it is important for entrepreneurs to feel the pulse of the operating environment before launching sail.
Every business is an adventure in learning the principles of how to increase commercial advantage. Value is built into products or services to attract proportional monetary rewards. Fundamentally, overcapacity in product and service delivery may not attract commensurate value, which may lead to wasted efforts. This occurs where a business hasn’t done its home-work properly by evaluating its market to ascertain market demand level and the availability of funds, on the parts of consumers, to make purchases.
Market demand and consumers current purchasing power are key determinants of business success in any given market. Where the demand level is sufficient and there is enough cash in circulation entrepreneurs can launch business ideas – products and services – and turn-in sufficient return-on-investment.
The flow of money into or out of an economy influences the demand and purchasing graphs. This is what is called the multiplier effect by economists. Successful entrepreneurs have learned to master and adopt this vital economic ebbs and highs in making key business decisions.
Take for instance the analysis provided by The Barcelona Field Study Centre. In explaining how higher tourist visits impact an economy, the Field Centre explained, “Money spent in a hotel helps to create jobs directly in the hotel, but it also creates jobs indirectly elsewhere in the economy. The hotel, for example, has to buy food from local farmers, who may spend some of this money on fertiliser or clothes. The demand for local products increases as tourists often buy souvenirs, which increases secondary employment. The multiplier effect continues until the money eventually ‘leaks’ from the economy through imports – the purchase of goods from other countries.”
Capital infusion into an economy at the governmental and corporate levels have strong impacts on the supply of money within a system. The government may choose to stimulate an economy through tax rebate, monetary policies and investment in infrastructural projects which puts money in the hands of local contractors who hire more workers and consequently strengthen household incomes to boost family purchasing power.
Likewise, foreign investors participation is often a boost to an economy. Through a syndicated loan network, investors mop up a global fund and plough it into high yielding investment environment. This investment will generate employment for the citizenry, further strengthening household incomes.
Precisely, the level of supply of money within a system affects incomes which affect market demands for varieties of goods and services. Without any indication of an imminent increase in consumer purchasing power or change in consumer behaviour, it is not tactically safe to launch a business venture.
In sum, these are the key factors to look out for when launching a new business venture:
- What is the government money policy – Government policy drive always robs off on businesses. The Central Bank of Nigeria (CBN) refusal to make forex available to some importers of a range of agro-produce is likely to throw some firms out of business. Likewise, tax rebates and protectionist acts within an economy can serve as advantage or disadvantage to entrepreneurs launching new businesses. The key is to look at where government policies are heading and measure the likely effects. Where the effects are positive on the enterprise targeted industry, it is safe to launch the intended business venture.
- What is the level of private corporate participation in the economy – A higher level of corporate participation in an economy indicates a prosperous operating environment. It is safe to launch new products and services in this kind of environment. Whereas economies such as the United States, Rwanda and Kenya are increasingly encouraging private corporate participation in their economies, Nigeria is slowly loosening up through PEBEC initiatives and focus on investing in capital infrastructure that aids individual prosperity.
- What is the rate of foreign participation in the economy – No country thrives in isolation. The largest economies are consistently working to loosen travel restrictions as well as aid tourism. Higher tourist visits and foreign direct investments in any economy are critical indicators of confidence in such an economy. Besides, they also act as a stimulus for business prosperity.