Question

Explain the relevance of the external environment as it pertains to financial planning

Answer 1

           Environmental factors are divided into two types 1)Internal factors and 2)External factors. Both these factors will posses influence on working of the organization.

                     The relevance of external factors of the environment on financial planning of the organization is explained as follows. Some of the external factors influencing financial planning are:

Economic growth in the country: Countries go through economic cycles. This means that there are a few years during which a country will grow at good rate and then it will be followed by a few years of slightly slower growth.

                    If a country is growing well, businesses do well. As a result, stock prices increase. On the other hand, interest rates and inflation remains moderate. When a country is in a down cycle, stock prices are relatively low and interest rates and inflation start to increase.

Political issues: When a country enjoys political stability, the economy prospers. Although both growth and social issues are equally important, there are certain political parties that give more importance to the former and others that give more importance to the latter.

                    As a result, the political party in power has an impact on the performance of stocks and other financial products.

Interest rates: Interest rates determine the rates at which businesses borrow and lend to the banking sector and other lending institutions.

             Usually, when business people want to borrow more money to grow their businesses. interest rates in the market increase.

Global issues: Our economy is affected by many global issues. If prices of oil rise internationally, we face higher fuel prices too.

              Directly and indirectly this pushes inflation upwards. Also, since money flows between the country and the rest of the world in the form of investments, if countries abroad are facing problems, it impacts their investments in the country and vice versa.

             As a result, the fate of the global economy makes our stock markets move up and down and finally could impact businesses.

            The above examples explains about the importance and relevance of external factors and their impact on the financial planning of an organization.