Analyse the impact of the economic environment of business performance.

AO7 – Analyse the impact of the economic environment of business performance

For this assessment objective there are four options which I will interpret.

Option One

Option one is to invest the money in a Building Society high interest account in order for it to earn some interest and retain the capital.

Investing the money in a building society:

Inflation

Inflation is looking at the increase of price in goods over time. Inflation has its own target which needs to be met every year and is set by the central bank of England. The rate has to be 0.5 percentages above or 0.5 percent below 2%. The banks of England have meetings every month to discuss the inflation rate. They check whether any particular product is going to have a major affect on the inflation rate.

Impact on the option

The money invested in a saving’s account will lose value if the interest is paid on the account is at a lower rate the current rate of inflation. A highly inflationary rate will often provide a low return on the investment.

Interest Rates

The interest rate is the amount that individuals or businesses are given back on their investments.

Impact on the option

Interest rates need to be higher then the rate of inflation and provide a better return in any other investment. The interest rate needs to be high as possible to get a better rate of return. She will gain interest so the money will increase. If the £15,000 is invested in a building society then all of that £15,000 will have gone and you will not have a chance of investing the lump sum in any other way. It is better in investing in a building society then in buying shares For example if the £15,000 is invested in a building society then she will not be able to invest it in Whitbread, pay of the mortgage, or start a new pottery business.

The opportunity cost needs to be considered in many ways. For example if the money was to be invested in Whitbread PLC you could either earn more money back. For example you get dividend and also get more for your shares if they are at a higher price. But you can also lose your money if the value of the shares go down.

Option Two

The second option is to pay the lump sum of £15,000 off the mortgage which currently stands at £90,000 with an interest rate of 5.4%. The money borrowed as a repayment basis of 25 years, there are 12 years remaining. If this option is followed then the mortgage repayment would be reduced from £494.42 per month to £322.74 per month.

Paying off part of the mortgage

Inflation

Inflation is looking at the increase of price in goods over time

Impact on option

If the inflation rate is rising it is worth while to pay of the mortgage early this is to minimise the overall value of the payments in the future. It also may be worth while paying some or the mortgage early as the inflation rate may continue to rise in the future.

Interest Rates

The interest rate is the amount individuals or businesses are charged on there debt.

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Paying off part of the mortgage

Inflation

Inflation is looking at the increase of price in goods over time

Impact on option

Interest Rates

The interest rate is the amount individuals or businesses are charged on there debt.

Impact on the option

It may be possible to get a better rate of return from a saving’s account then using the £15,000 to pay off the mortgage. On the Lloyds TSB website it showed me that if the £15,000 was to be put in a savings account after two years the £15,000 she put in would raise to £16,613.54. The interest rate would be 5.25% AER/Gross.

From option two the monthly mortgage repayment would reduce by £171.68. The £15,000 could have been invested into a better alternative with a higher rate of return. If you could get more money in saving’s then paying off the mortgage then its better to put the money into a savings account.

Option three: Investing in Whitbread Shares

Barry has always wanted to invest in the stock market. He is thinking of Whitbread PLC which includes Pizza Hut, David Lloyds Leisure and Travel Inn amongst its portfolio.

If she was to choose this option she would have to look at what the share value was at the period in the potential investment. If she was to sell the shares at there peak price than reinvest that money in the bank she would see a good return. She would then have to see how good Whitbread shares return is, and then compare this to the interest rates and see what gives the best return. This is dependent on inflation.

Interest Rates

Interest rate is the amount individuals/ businesses are given on their investments.

Impact on the option

You should only invest in shares if the return on those shares lay dividend. This means that you should only invest in shares where there is guaranteed return of a dividend. It is risky as you can lose all your money as it is more risky. It may be necessary at some point to switch options. By this I means the shares would have to be sold at the right time so that the money could be invested else where for a better return.

If the £15,000 was to be put in a bank/building society rather than investing in shares I think that investing in a bank/building society is safer as she would always be getting money at the rate you choose. The value of the shares could increase or decrease at anytime.

When buying shares you are always depending on the economy. If the economy is not very strong at the time you want to sell your shares, it is less likely that the price of the shares will be high.

We need to consider the opportunity cost.

Could we get a better rate of return by putting the £15,000 in a in a bank/building society then investing in shares. You could get a better rate of return by putting the £15,000 in a building society/bank this is because if the interest rates are high you will have a higher return.

Stock Markets

The stock market is an exchange for the purchase and sale of stock shares and commodities. The economic health of the stock exchange is measured through FTSE. A rise in FTSE shows confidence in the stock market. A fall in the FTSE may suggest that share holders are trying to sell their shares. The FTSE will rise and fall daily.

Impact on the option

The state of the economy will affect the share prices of companies. This is because if the economy is strong more people will have money to spend and if it is strong the share prices are going to be high because there is more demand. For example countries like china have a strong economy, and are in the middle of a massive boom.

Could there be a better return obtained on other investments rather then investing in Whitbread PLC. There can be better rate of return in other investment options for example investing in a building society will always guarantee a return, and the interest rate can go up which means you can get a higher return.

Exchange Rates

The exchange rate reflects the relationship between the two currencies – as far as the UK is concerned it is how much of a foreign currency that we can purchase against. If a business was to sell abroad the customers would have to sell in euros to sell in pounds.

Impact on the option

Before investing shares in Whitbread PLC we would expect to have to investigate whether or not we get a better rate of return in another business or investment opportunity out side of the UK.

Option Four

Sue has always had a secret dream of owning her own pottery and making specialist pots for the garden alongside garden ornaments. At the moment she is currently working for someone else and is pretty sure that she could generate sufficient interest in her work and would be able to earn more.

Sue starting a pottery business

Interest rates

Interest rate is the amount individuals/ businesses are given on their investments.

Impact

If sue was going to invest the £15,000 into a bank/building society then she would receive interest. However by investing in the pottery business this interest that has been given up is known as an opportunity cost. When sue does borrow money from the bank it comes at a cost. By this I mean that sue has to pay interest when borrowing money. The interest rate is also dependent on the economy. By this I mean if inflation goes down then interest rates will increase leaving sue to pay more interest on the money she borrowed.

Exchange Rates

The exchange rate reflects the relationship between the two currencies – as far as the UK is concerned it is how much of a foreign currency that we can purchase against.

Impact

Sue need to consider the exchange rate between the pound sterling and the Euro as part of her sales are in France. By trading in France Sue is dependant on the exchange rate mechanism. There will be a difference in the value of her sales between Euros and pounds.

Existence of the Euro

The Euro is a form of currency that has been adopted by some of the E.U. member states. The Euro has an important role in international investment and trade.

Impact

Sue’s business will be affected by the existence of the Euro by the following:

Prices

Setting a selling price can be difficult as predicting the exchange rate in the future is also difficult as the exchange rates vary. This can be difficult to plan ahead and forecast sales. If there is a niche market for her product than the demand for her product will rise so she will be then able to increase the price. Sue will be also competing in the French market so prices will have to decrease in order to increase the demand and in time she will be then able to increase the price. The profits will also be affected further due to exchange rates as the Euro is weaker then the pound sterling.

Production Level’s

It can be difficult to predict how much to produce due to exchange rates. So if the exchange rate changes to a higher price than she will have to raise the price of her products and might lose customers due to this because they may be used to paying a lower price in the past.

Impact on Investment

If sue operates in France with Euros she will be able to invest some of that money in the French markets or French investment opportunities. Sue can have more investment as she can invest in both UK and in the French market and she can use this to her advantage as she could research the market and find the best investment options for her money in order to see the best return.

Wages and Salaries

There will be a greater level of competition of skilled employees who can work freely within the Europe. Sue could employ more skilled workers in France more efficiently. This is because it is cheaper employing a worker in France then in the UK. This is because the French do not have a minimum wage law.

The European Union and the single Market

The European Union has one central philosophy, which is that there should be free trade in goods, services, and Labour between EU member states.

Being part of the EU will affect the business in many ways.

Production and Trade Level’s

Sue is able to trade freely with French customers as there are fewer barriers to trading. Sue has access to larger markets not just in the UK i.e. France. If Sue’s productivity was efficient she would be able to have an extensive place in the market and become well established.

Impact on prices

Sue will be competing in French market so sue will need to reduce her prices in order to be competitive and increase demand. If sue becomes established in a niche market for her goods the she maybe able to increase her prices.

Investment

Sue may be able to invest her money in French investments opportunities rather then in the UK.

Wages and Salaries

The setting of the minimum wage from the EU may have EU member states must follow the social chapter that provides directives on working conditions