Economic Factors Impacting Business Operations
Business Management and Enterprise (Year 12) - Environments (U4)
There are different factors that impact business operations in a global market. They can be remembered using the acronym ‘DICE’.
This refers to spending by consumers on non-essential goods and services. This is mainly influenced by discretionary income, which is one’s income after taxation. When there is higher discretionary income, this results in increased spending on goods and services. Along with helping the economy to grow, this is better for businesses, who can see higher revenue and profits.
When the economy develops, there are more people earning wages in stable employment. This results in more discretionary (available for use) income.
Inflation levels are often monitored, ensuring there are suitable levels of discretionary income in the economy. This means consumers are able to spend more on goods and services stimulating economic growth.
Profit must be reinvested back into market research, to analyse shifts and emerging trends in discretionary spending patterns. When demand is growing, successful firms will reinvest funds into new, innovative goods and services to meet those needs.
In a market full of such changes, it is important for businesses to react quickly and stay nimble. It is often harder for larger businesses to change.
Interest rates refer to the cost of borrowing. They are monitored by the Reserve Bank of Australia (RBA).
When interest rates rise, one’s disposable income falls, as their interest payments increase. This means they have less money to spend on discretionary goods and services. Profits for businesses will also fall, due to lower revenue and potentially higher costs. There is also a reduction in business and consumer confidence. However, a higher interest rate may also symbolise a strong economy. High interest rates tend to be risky for businesses, especially if they have financial problems and are looking to expand globally.
Lower interest rates allow consumers to purchase more, due to having to pay lower interest. They can use this income for discretionary spending. Businesses benefit from increased revenue and lower costs. However, a lower interest rate tends to symbolise a weak and recovering economy. Lower interest rates tend to be beneficial for business, who are looking to expand and need additional capital.
Currency fluctuations are changes in the dollar value of a country’s currency relative to another country’s currency. The bilateral exchange rate (ER) is the value of currency in terms of the other. The exchange rate can appreciate (get stronger) or depreciate (get weaker).
The below table can be used to consider different situations.
When there is an appreciation, importers pay less and can pass on savings onto their consumers. They can also import goods/services to expand their product range and use in production.
In a depreciation, exporters would have a higher level of sales and potential increases in revenue and profit. They become more competitive in the international market.
Economic activity is mainly influenced by GDP (value of all final goods and services produced in an economy, in a year) in an economy.
GDP is impacted by macroeconomic goals, such as inflation (price stability of 2-3%), economic growth (3.4%) and unemployment (natural rate of unemployment of 4-5%).
When the economy is in a period of economic boom, GDP is high, inflation is high and unemployment is low. Due to low unemployment, it is likely there would be higher levels of consumers spending. This would help the economy grow further and would also help businesses, due to the increased demand.
During periods of economic downturn (e.g., during the COVID-19 pandemic), GDP is low, inflation is low and unemployment is high. Due to the poor prospects of the economy, spending is often low, which is harmful for businesses.
Overall, stronger levels of economic activity are better for helping a business grow, however, if inflation gets too high, this can become problematic.