Theme 2 - External Influences Flashcards
Inflation (impact on cost of sales) (drwback)
Increase inflation
Increased in the cost of goods and services
Increased in the cost of raw materials
Increased cost of sales
Lower gross profit
Lower operating profit
Pressure to increase prices
Fall in demand for the businesses goods
However, inflation (impact on demand if a business sells price inelastic good)
If a business sells price inelastic goods (look at the case)
The increased in price (caused by the increase in costs)
Will lead to an insignificant fall in demand
Therefore gross profit will not fall significantly or at all
Reducing the impact of inflation
Impact of inflation (using income elasticity)
Increase in inflation
Increased consumer spending on necessities
E.g. milk gas electricity fuel
Lower disposable income for luxury and normal goods
Such as fashionable clothing
Customers switch to inferior goods
Lower demand for luxury and normal goods
Lower sales revenue leading to lower gross profit
HOWEVER Impact of inflation (using income elasticity)
If wages rise more than the rise in inflation
Real wages will increase
Rise in income rather than fall in income
Increased demand for luxury and normal goods
Such as fashionable clothing
Stronger pound benefit
The pound buys more foreign currencies
Fewer pounds required to buy foreign currency
Therefore, fewer pounds required to buy foreign goods
Cheaper to import raw materials
Lower cost of sales
Can lower the price
Higher gross profit
Stronger pound drawback 1
Foreign currency buys fewer pounds
More foreign currency needed to buy pounds
Therefore, price of UK goods increases for foreigners
UK exports are dearer and less competitive
Fall in demand for UK goods
Pressure to lower prices
Stronger pound drawback 2 (domestic businesses)
The pound buys more foreign currency
less pounds required to buy more foreign goods
Foreign competitors products appear cheaper
Customers switch to foreign imports
Fall in demand for domestic businesses
Weaker pound benefit
Foreign currency buys more pounds
Less foreign currency needed to buy pounds
Therefore, price of UK goods falls for foreigners
UK exports are cheaper and more competitive
Rise in demand for UK goods
Economies of scale
Weaker pound benefit for domestic businesses
Pound buys less foreign currency
More pounds needed to buy foreign currency
Foreign goods become more expensive as more pounds required to purchase them
Foreign competitors unable to compete on price
Increase in demand for domestic businesses
Weaker pound - drawback
Pounds buys less foreign currency
More pounds needed to buy foreign currency
Foreign goods become more expensive as more pounds required to purchase them
Increasing cost of raw materials if business relies on foreign goods
Increasing the cost of sales
Lower gross profit margin
Drawback if interest rates are higher, (luxury and normal goods).
Increased costs of borrowing
Increased cost of consumer loans and mortgages to individuals
Leads to lower spending on luxury and normal goods
Leading to lower demand for luxury and normal goods but higher for demand for inferior goods
Reduced sales revenue for luxury and normal goods
Lower gross profit leading to lower operating profit
reduced retained profit limiting long term investment in staff training or R+D
However, higher interest rates (if wages rise)
If wages rise by more than the rise in interest rates and inflation
There will be increased income
Reducing the impact of increased mortgage and or loan costs
Consumers continue to buy luxury and normal goods
Demand remains stable or increases if wages rises significantly
Drawback on increase in national insurance for normal and luxury goods.
Increase in national insurance
Increases tax for all workers
Proportionally greater for lower income workers
Leading to reduced disposable income for all income for all income demographics
Fall in demand for luxury and normal goods
Fall in sales revenue for businesses such as supermarkets e.g. M&S as customers switch to inferior goods
Businesses reduce capacity
Loss of EOS
Falling GDP
Benefit of an increase in national insurance
Increase in notional insurance
Increases tax available for fiscal spending
Increased government spending on education, e.g. increasing government subsidiaries to universities
Increased number of people attending universities as it is now cheaper to attend
Increase skill level within a population
Meaning businesses will have an increased supply of skilled labour
Improve business productivity as a result of increased skilled labour/innovation
Decrease unit costs, reduce prices
Drawback of a recession
Falling demand for goods and services in an economy
Falling production of goods and services in an economy
Falling GDP
Businesses reduce capacity by making staff redundant and selling non-current assets such as robots and factory space
Increased unemployment
Fall in average incomes
Increased demand for inferior good but falling demand for luxury and normal goods
Fall in tax revenue/ Fall in sales revenue
However the long term benefit of recession
Presents and opportunity
If a business has high cash reserves, they may be able to sustain losses
Caused by falling revenue
During this time, competitors lower cash reserves may go out of business
Reducing in the market (long term)
Due to lower buyer power as there will be less choice long term
Can increase prices when the economy recovers
Increase in long term sales revenue
However, benefit of recision (spred risk)
The impact of a recession will be reduced if a business has spread risk
This may achieved by having a wide product portfolio
For example, selling luxury and inferior goods
Therefore, the falling demand for luxury goods (due to the recession) will be offset by the increase in demand for inferior goods
Ensuring that demand stays stable
Resulting in sales revenue remaining stable
Avoiding losses
Boom period benefit
Increase demand for goods and services in an economy
Increased production of goods and services in an economy
Increase GDP
Businesses increase capacity by making recruiting staff and buying non-current assets such as robots and factory space
Increased employment and wages
Rise in average incomes
Increased demand for normal and luxury goods but falling demand for normal goods
Increase in sales revenue
However, boom drawback (inflation risk)
Boom leads to increase average incomes caused by business demand increasing
Rise in wages (more bonuses and pay rises)
Increased demand in the economy
Demand pull inflation
If inflation is higher than rise in wages
Consumers spending more on necessities
Fall in real wages
Potential falling demand for luxury and normal goods
The effect of economic uncertainty on the business environment
Uncertain what economic variables e.g. inflation will be in the future
Uncertain consumer incomes
Uncertain demand
Uncertain profits, therefore difficult for shareholders to invest in confidence
As their return will be uncertain
Reduced share capital when selling shares
Reduced expansion
Benefit less from EOS
Consumer protection legislation
Consumer protection legislation
Ensure that businesses products must sell products that are fit for purpose
And are truthfully advertised
This means that customer can trust the products
Making them more likely to purchase them, leading to an increase in sales volume
Increase in revenue
Increase in gross and operating profit
Increased retained and profit to reinvest
Employee protection legislation
Ensures that businesses must meet employees basic needs
By giving them a minimum wage and allowing them to have adequate rest
This means that employees hygiene factors are likely to be met
Which will prevent them from being demotivated according to herzberg
Increased productivity
Increased output per worker
Fixed costs of wages spread over more units
Lower fixed costs per unit
Increased operating profit margins
Health and safety legislation
Health and safety legislation
Businesses are responsible for making sure that employees are kept safe from danger
Meaning that employees are trained and working conditions are safe
Ensuring that employees saftey needs are met
Increase motivation
Increasing productivy
Fixed costs of wages spread over more units
Lower fixed cost per unit
Increased OP
Health and safety legislation
Legislation leads to increased bureaucracy
As procedures and processes needed to be implemented to ensure legislation is followed
Experts will be hired in order to ensure that this is followed
Increasing the cost of wages
Increased fixed costs
Reduced operating profit margins
Reduced retained profit
Reducing capital for reinvestment into….
Environmental protection.
Enviromental protection
Prevent businesses from causing excess pollution and producing large amounts of waste
If busineses follow the legislation
Then they can appear more enviromentally friendly
Making them seem more ethical
Giving them a strong brand image
More price inelastic
Able to increase prices without a significant fall in demand
Increased revenue
Increased gross and operating profit
Competition Policy
Competition Policy
Prevents a businesses suppliers from colluding or forming monopolies
More choice between different supplies
Reducing bargaining power of suppliers
Meaning suppliers are unable to charge high prices
Reducing the cost of raw materials
Lower variable costs
Increase gross profit margins
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