CIMA F3 Syllabus A. Financial policy decisions - Changes in economic and business variables - Notes ^{11 / 12}

All entity's ability to meet its financial objectives

will be sensitive to the following changes in economic variables and business variables:

Economic variables

• Interest rates

  When interest rates rise, consumer spending tends to fall because higher interest rates mean higher costs of credit for customers, leading to less disposable income for spending. 

  Forecast sales figures should therefore be revised downwards for increases in interest rates. 

  Interest rate risk can be mitigated by hedging against interest rate rises with derivatives such as interest rate swaps.

• Exchange rates

  If a company's domestic currency increases in value against currencies of overseas customers, it will be harder for the company to export, since the cost to the overseas customers is higher. 

  This could cause sales to fall if exports are significant.

  Furthermore, If a company's domestic currency increases In value against currencies of overseas suppliers, costs will fall, since the cost of imports will be lower.

  Currency risk can be mitigated by hedging against adverse changes in exchange rates with derivatives such as currency swaps.

• Inflation

  A low stable rate of inflation, eg up to 3%, enables businesses to increase their prices on sales and potentially higher profits.

Business variables

Sales volumes

In addition to changes in economic variables having an impact on sales, sales can be also affected by other factors such as:

1. weather

2. seasonal chances

3. technology

4. location

5. demographics.

This can also affect costs and therefore profit margins will be affected.