The impact of general economic environment on costs/revenues
The economic environment affects firms at national and international level, both in the general level of economic activity and in particular factors, e.g. inflation, interest rates and exchange rates.
Inflation affects the decisions taken by businesses. An increase in interest rates affects cash flow especially for those businesses which carry a high level of debt. Exchange rates affect the imports and exports of the company.
Even the state of the economy will influence the planning process of an organisation. In times of boom, consumer demand and consumption increases.
In times of recession, the company has to focus on its survival through cost effectiveness and competition.