Economic Factors Affecting A Business

There are different economic factors that affect a business venture (Piercy, 2012). Most entrepreneurs desire to fulfill their clients’ needs, but most business are affected by various economic trends (Heirman, 2004). It is therefore crucial for business owners to account for trends to ensure better decisions. Economic factors that affect most business in all industries include interest rates, employment, confidence of consumers and inflation.

Consumer Confidence

Consumer confidence is vital indicator that checks on the consumer optimism about the economy. Consumers with high level confidence tend to spend more money compared to consumers who have low confidence (Schick, 2002). With high level of confidence, consumers tend to purchase more leading to prosperity for businesses. Periods with high confidence lead to the emergence of new business and increased economic growth as a whole.

Employment

Sahlman (1997) states that “there is a business cycle that is followed by the economy and this can lead to periods of stagnation or decline in the business arena. Boom periods present economies with more jobs hence more workers for organizations to satisfy the rising demand in the market”. Subsequently, unemployment leads to low spending activities because consumers usually have little to spend.

Interest Rates

Lenders charge an interest rate to individuals when they borrow money from various institutions (Cessar, 2004). Most small and medium corporations rely on banks and other financial institutions to borrow money for their operations. Businesses with debt find it hard to run their operation when interest rates increase. Consumer spending also decreases when interest rates are high because most of the consumers find it hard to take loans and purchase various products and services for their consumption (Shepherd, 2000, P. 449).

Inflation

Arias (2010) confirms that inflation refers to the rising prices in an economy. Inflation always increases business expenses such as utilities, rent and the cost of all the raw materials required for production. Due to high costs, businesses often increase their prices to cater for the rising costs in the market. This is done with a view of maintaining profits and overall operation of business in various industries. Consumers tend to have low purchasing power during inflation leading to low purchases.

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