38. Impact on firms of economic factors

38. Impact on firms of economic factors

1. Economic growth and the business cycle

   • What is economic growth and why does it matter?
     • Caused by productivity advances - technology? Means that more good/services are produced with same population.
     • It improves standard of living.. produce more, therefore more to consume.
     • Important to firms. Creates more opportunities when consumer taste changes. Easier to set up/expand. New gaps emerge = budding entrepreneurs
   • The business (economic) cycle
     • Boom: grows rapidly. Recession: growth stops or 'two successive quarters of falling output'. Slump: sustained period of negative growth.
   • The impacts of the business cycle
     • Luxury good firms benefits from booms. Lidl may struggle.
     • Managers must predict the future state of the economy.
   • Impacts of recession
     • Aim to survive so you can benefit when the economy recovers.
       • The challenge for management is to have a long-term strategy that can keep the business healthy in good and bad times.
   • What actions should a firm take in an economic boom?
     • Increase dividends? - Won't improve long-term competitiveness
     • Invest in new products & production methods - more competitive.
     • Cash reserve?
     • Banks react by relaxing lending standards -> firms find it easier/ cheaper to expand.
       • This can lead to rising inflation!

2. The effects of inflation on a firm's financial position

   • Advantages of inflation
     • Makes real assets worth more -> more impressive balance sheet -> find it easier to get finance from banks/shareholders (looks secure).
     • Erodes real value of money owned. Borrowings more easily covered by rising income and profits.
   • Drawbacks of inflation
     • Inflation can damage profitability.
     • Damage cash flow as it pushes up price of machinery.
     • May damage industrial relations (business and staff)
   • Measures the percentage annual rise in the average price level. Reduces the purchasing power of money. Increases cost of living.

3. Unemployment

   • Created when demand for labour has fallen relative to the available supply.
   • Benefits created by unemployment
     • Force cost-saving changes
     • Labour turnover falls
     • Recruitment - easier. Quality - higher.
   • Costs/problems created by unemployment
     • Create insecurity - damage moral
     • Affect consumer spending - affect firms revenue/profit.
     • Affected by crime/ other social problems.
   • Can be affected by emigration and immigration

4. Exchange rates

   • Measures the quantity of foreign currency that can be bought with one unit of another.
   • The impacts of a high exchange rate
     • Rise in pound = increase in price of other currency to keep the same profit. (Exporters)
       • Exporters want currency to fall
     • Firms that import.. prefer high exchange rates.
       • Price of products is cheaper
         • = More profit
   • Impacts of low exchange rate
     • A weak pound make exports seem cheaper
     • Cost more to import stock - raise prices? = loss of customers. - do nothing? = less profit.