Impact of Macroeconomic Factors on Company Performance

This report analyzes the impact of macroeconomic factors on the financial performance of a chosen company. It also provides recommendations for improvement and discusses different investment appraisal techniques.

REPORT ON ECONOMICS

EXECUTIVE SUMMARY
The report summarise about impact of macro and micro factors on chosen company's
performance. In addition financial performance of company is analysed and suitable
recommendations are given so that deficiencies can be enhanced. The end part of report
summarise about different investment appraisal techniques.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
1.0 INTRODUCTION.....................................................................................................................4
2.0 Identify and evaluate the impact of economy on business organisations..................................4
2.1 Supply and demand of goods................................................................................................4
2.2 Micro factors.........................................................................................................................5
2.3 Macro factors........................................................................................................................6
3.0 Financial information of the organizations................................................................................8
3.1 Profitability Ratios................................................................................................................8
3.2 Liquidity ratio........................................................................................................................9
3.3 Leverage Ratio....................................................................................................................10
3.4 Efficiency Ratio..................................................................................................................11
4.0 Investment Appraisal Techniques ..........................................................................................12
4.1 Payback Period ...................................................................................................................12
4.2 Net Present Value................................................................................................................13
4.3 Internal Rate of Return........................................................................................................14
4.4 Accounting Rate of Return..................................................................................................15
5.0 CONCLUSION........................................................................................................................16
6.0 RECOMMENDATIONS.........................................................................................................17
REFERENCES..............................................................................................................................18

1.0 INTRODUCTION
The term economics is a key aspect of external which has a significant impact on
financial performance of business entities (Persson and Tabellini, 2016). In the project report a
company has been chosen that is Mother care plc. This company is a British retailer that provides
products for expectant mothers and for children up to 8 years. It is listed on London stock
exchange. In January 2019, Mother care plc faced that about 79 stores in UK, refused to take
products from them. The reason of this lower sales was increasing in online sales and increased
competition.
2.0 Identify and evaluate the impact of economy on business organisations.
2.1 Supply and demand of goods.
 Principle of supply and demand:
Principle of supply- The supply can be defined as amount of goods and services are
available to customers. It is based on a principle which is that keeping other factors
constant, a raise in prices may lead to increase in supplied quantity. In the aspect of above
mother care plc, if price of their products will raise then supply of products will also
increase vice versa.

Principle of demand- In the economics, demand can be defined as quantity of goods and services
which consumers like and able to buy at different prices during a particular time frame. Principle
of demand states that if prices of goods and services will increase then demand will decrease,
vice versa. In the aspect of above company, if they will decrease prices of products then demand
will raise.
 Elasticity of demand and supply-
Elasticity of demand- It is defined as a variation in price of a product which affects the
demand. This is computed by % change in quantity demanded by % change in a variable
on that demand depends.
Elasticity of supply- This is defined as % change in prices to % change in quantity
supplied of a particular commodity.
2.2 Micro factors.
The micro factors have a significant impact on companies financial performance. In the
aspect Mother care company, these factors can affect in such manner:
 Impact of immigration- In the case when there is no immigration then labour rate will be
higher and if there will be immigration then labour rate will fall down. In the aspect of
above company, they can be affected from this factor if rate of labour will fluctuate due
to higher immigration.

 Number of job increases- In addition, if number of jobs increases at the time of
immigration then labour force will be agree to do job at lower rate (Sahlins, 2017). In the
Mother care company, they can fulfil their vacant posts in the case when there is
immigration.
2.3 Macro factors.
Along with the micro factors, macro factors also affect companies performance. This is
so because: Unemployment- This is a key factor of an economy that can impact to financial
performance of companies. It is so because in a nation if unemployment rate will higher
then this will be difficult for corporations to provide jobs to freshers and attract more
number of customers because of lack of source of income. Along with demand of goods
will also lower. Below data of unemployment of UK in last three years is mentioned
which can affect above chosen company:
Year Unemployment rate
2016 4.9
2017 4.4
2018 4.1

2016 2017 2018
3.6
3.8
4
4.2
4.4
4.6
4.8
5 4.9
4.4
4.1
Unemployment rate
This chart shows that unemployment rate is decreasing and it will make a positive impact on
Mother-care company's performance. It is so because if people will have jobs then they will
demand for more products.
 GDP growth rate- This is also a key element of economy which can affect companies
performance. It is so because if growth rate will lower then companies will not be able to
do more expand and investment. In the aspect of above company, they are affected from
this factor because growth rate of UK has been decreased in some years that is presented
below:
Year GDP growth rate
2016 1.90%
2017 1.80%
2018 1.40%

2016 2017 2018
0
0
0
0.01
0.01
0.01
0.01
0.01
0.02
0.02
0.02 1.90% 1.80%
1.40%
GDP growth rate
 Inflation rate- This is rate which can impact companies performance negatively if there is
higher fluctuation (Gilman, 2018). In the aspect of UK's economy, this can be find out
that their inflation rate is higher after year 2016 and as a result above company affected
from this.
Year Inflation rate
2016 0.70%
2017 2.70%
2018 2.50%

2016 2017 2018
0
0.01
0.01
0.02
0.02
0.03
0.03
Inflation rate
3.0 Financial information of the organizations
3.1 Profitability Ratios
It is one of the branch of financial metrics that is used to evaluate the earning ability of
the company in comparison to revenue. It also helps in measuring company's performance for the
specific duration.
Gross profit ratio: It is profitability ratio which is calculated by the organizations to
identify operational performance of the business. It shows the relationship between gross profit
or net profit of the company. Its calculation mentioned below along with the formula:
Formula:
Gross Profit Ratio = Gross Profit / Net Sales * 100
Calculations:
Items 2016 (£'m) 2017 (£'m) 2018 (£'m)
Gross Profit 60.2 58.8 34
Net Sales 682.3 667.4 654.5
Gross Profit Ratio 8.82 % 8.81 % 5.19 %

1 2 3
0
0.02
0.04
0.06
0.08
0.18.82% 8.81%
5.19%
Gross Profit Ratio
Interpretation:
The chart shows that gross profit ratio of company is decreasing in all three years. Such
as in year, 2016 this was of 8.82% that became of 5.19% in last year. It is so because their gross
profits are decreasing with huge margin in all three years.
3.2 Liquidity ratio
This ratio used to calculate the debtor's ability in order to pay off their short term
obligations and it is only when company have enough liquidity. In order to measure liquidity of
business operations, company calculate different ratios such as current ratio or quick ration.
Current ratio: This ratio calculate to identify the resources and its ability to perform
their task or able to meet with short term obligations (Shiller, 2017). It is calculated by dividing
current assets with current liability and its ideal ratio is 2:1.
Formula:
Current Ratio = Current Assets / Current Liability
Calculations:
Items 2016 (£'m) 2017 (£'m) 2018 (£'m)
Current Assets 203.6 178.2 151.6
Current Liability 145.8 136.2 134.4
Current Ratio 1.39 1.30 1.12

1 2 3
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.61.39 1.3
1.12
Current Ratio
Interpretation:
On the basis of current ratio of company, this can be find out that it is not in ideal form
which is 2:1 times. The graph shows that current ratio of company is decreasing in all three
years. Like in year 2016, it was of 1.39 times that became of 1.3 times. It is so because of higher
value of liabilities.
3.3 Leverage Ratio
This ratio used to calculate the proportion of debt in comparison to equity or any other
capital. There are various ratios which business used to calculate such as shareholders equity or
debt to equity.
Debt ratio: It is financial ratio which is required to calculate for the identification of total
debt and its ability to pay off which helps in measuring company's leverage (Redding and Rossi-
Hansberg, 2017). Ideal ratio is 1:1, so company should focus on maintaining ideal ratio for the
effective performance.
Formula:
Debt Ratio = Total Liabilities / Total Assets
Calculations:
Items 2016 (£'m) 2017 (£'m) 2018 (£'m)
Total Liabilities 258.3 266.4 263.1
Total Assets 347.4 347.8 276.7

Debt Ratio 0.74 0.76 0.85
1 2 3
0.65
0.7
0.75
0.8
0.85
0.9
0.74 0.76
0.85
Debt Ratio
Interpretation:
On the basis of above presented graph, this can be interpreted that debt ratio of company
is increasing in a significant manner which is not a good sign. Like in year 2016, it was of 0.74
that raised and became of 0.76 in year 2017. This is so because of higher liabilities in all three
years.
3.4 Efficiency Ratio
It is another financial metrics where organizations use this ratio which indicate total
expenses in comparison to the revenue of the company for the period. Management try to
minimise this ratio so they can generate more profit or get higher growth.
Assets turnover ratio: This ratio used to measure company's revenue in comparison to
total value of assets (Rodrik, 2018). Those organizations have low profit margin, it founded that
they have high assets turnover. Calculation based on Mother care plc which mentioned below:
Formula:
Assets Turnover Ratio = Net Sales / Average Total Assets
Calculation:
Items 2016 (£'m) 2017 (£'m) 2018 (£'m)
Net Sales 682.3 667.4 654.5
Average Total Assets 278.2 347.6 312.25

Assets Turnover
Ratio
2.45 1.92 2.09
1 2 3
0
1
2
32.45
1.92 2.09
Assets Turnover Ratio
Interpretation:
On the basis of above presented chart, this can be find out that assets turnover ratio of this
company is fluctuating in all years. Such as in year 2016, it was of 2.45 times that reduced and
became of 1.92 times. While in next year 2018, it raised and became of 2.09 times. This shows
that company is unable to generate consistent return on assets.
Working Notes:
Average Total Assets = ( Beginning assets + Ending assets ) / 2
2016 = ( 6910 + 6908 ) / 2 = 6909
2017 = ( 7115 + 347.8 ) / 2 = 7012.5 or 7013
2018 = ( 347.8 + 7115 ) / 2 = 7332
4.0 Investment Appraisal Techniques
In this section of report, calculation based on Imad's luxury Ltd which has three different
opportunities. By using investment appraisal technique, managers have to make decisions that in
which products company should invest. Comparison will be based on different aspect such as
NPV, IRR, ARR or Payback period. Its calculation mentioned below:
4.1 Payback Period
It is one of the most effective method of capital budgeting which refer to the time which
is taken by the organizations to recover their initial investment (Eichholtz, Kok and Quigley,
2013). Basically it means, in how much time company will recover their invested amount in
particular project. Lower the payback period is beneficial for the organizations or managers can

make quick decisions on the basis of it. By using this method, managers of Imad's luxury Ltd
able to make judgement that which product the need to produce or sell in the market.
Payback Period:
Year Product 1 CCF Product 2 CCF Product 3 CCF
Year 0 80,000 - 150,000 - 80,000 -
Year 1 35,000 35,000 30,000 30,000 40,000 40,000
Year 2 35,000 70,000 45,000 75,000 40,000 80,000
Year 3 40,000 110,000 75,000 150,000 20,000 100,000
Year 4 50,000 160,000 75,000 225,000 25,000 125,000
Formula:
Payback Period = Year + Unrecoverable cost / cash flow during the year
Product 1 = 2 + ( 10000 / 40000 )
= 2.25 years
Product 2 = 3 years.
Product 3 = 2 years.
4.2 Net Present Value
NPV is the another method of capital budgeting which is used to evaluate investment
proposal and how effective or beneficial it is for the company (Camerer et.al, 2016). Basically it
is the difference between present value of cash inflow or present value of cash outflow. Higher
NPV means investment is profitable for the company. Management will adopt this method to
evaluate their investment and make further decisions accordingly.
Formula:
NPV = Present Value of Cash Inflow – Present Value of Cash Outflow
Product 1:
Year Product 1 Present
Value @
Dis Cash Flow Present
Value @
Dis Cash Flow

10% 35%
0 80,000 1 -80000 1 -80000
1 35,000 0.909 31818 0.741 25926
2 35,000 0.826 28926 0.549 19204
3 40,000 0.751 30052 0.406 16258
4 50,000 0.683 34151 0.301 15053
NPV 44,947 -3559
Product 2:
Year Product 2 PV @ 10% DCF PV @ 20% DCF
0 150000 1 -150000 1 -150000
1 30000 0.909 27272 0.833 25000
2 45000 0.826 37190 0.694 31250
3 75000 0.751 56349 0.579 43403
4 75000 0.683 51226 0.482 36169
NPV 22,037 -14,178
Product 3:
Year Product 3 PV @ 10% DCF PV @ 25% DCF
0 80000 1 -80000 1 -80000
1 40000 0.909 36364 0.800 32000
2 40000 0.826 33058 0.640 25600
3 20000 0.751 15026 0.512 10240

4 25000 0.683 17075 0.410 10240
NPV 21,523 -1,920
4.3 Internal Rate of Return
This method helps in identifying return of investment which is taken by the organizations
for the purpose of maximising their earnings (Ciaian, Rajcaniova and Kancs, 2016). At the time
of making decisions regarding investment, managers will compare different projects on the basis
of high IRR that is beneficial as well as profitable for the company. If IRR is high, then it will be
selected and if low then rejected. Imad's luxury Ltd follow this technique to make their decisions
regarding selection of product which they has to select to manufacture or sell.
Formula:
Product 1:
IRR = 10 + {44,947 / [ 44,947 - (-3559 )]} * ( 35 – 10)
= 10 + {0.926 * 25}
= 10 + 23.15
= 33.15%
Product 2:
IRR = 10 + {22,037 / [ 22,037 - (-14,178 )]} * ( 20 – 10)
= 10 + {0.608 * 10}
= 10 + 6.08
= 16.08%

Product 3:
IRR = 10 + { 21,523 / [ 21,523 - (-1,920 )]} * ( 25 – 10)
= 10 + { 0.918 * 15 }
= 10 + 13.77
= 23.77%
4.4 Accounting Rate of Return
It is the financial ratio which is used for capital budgeting but it does not consider the
time value of money. Basically it is the return which is calculated on the basis of net income of
the project. It help in comparing different project and managers will consider the higher return
project on the basis of ARR.
Formula:
 ARR = Average Net Profit / Initial Investment * 100
Initial Investment
Average Net
Profit Workings ARR
Product 1 80000 40000 40000 / 8000 * 100 50
Product 2 150000 56250 56250 / 150000 * 100 37.5
Product 3 80000 31250 31250 / 80000 * 100 39.06
Workings:
Product 1 Product 2 Product 3
160000 / 4 225000 / 4 125000 / 4
Average Net profit: 40000 56250 31250
Comparison of three different products by using investment appraisal techniques:
Product PP NPV IRR ARR
1 2.25 44,947 33.15 50
2 3 22,037 16.08 37.5
3 2 21,523 23.77 39.6

On the basis of above comparison it has been evaluated that Imad's luxury Ltd should
produce Product 1 and sell in the market because it will provide higher returns. Such as NPV of
this products is 44,947, payback period is 2.25 years which means company recover their initial
investment in this period. IRR is 33.15 and ARR is 50 that is maximum from among three
products. Company will decided to manufacture Product 1 that is more beneficial as well as
profitable for the organizations. After that, 3rd product is most suitable which has more attractive
returns. But, among three opportunities Product 1 is most suitable or profitable for Imad's luxury
Ltd.
5.0 CONCLUSION
From the above discussion it has been concluded that, there are various factors which
affect the business and its operational profit. Such as micro or macro factors which includes
mitigation of workers, unemployment, growth etc. In addition, with the help of financial analysis
managers able to understand the financial position as well as performance in the market. Its
analysis will helps making strategies or perform accordingly to improve productivity as well as
profitability.
6.0 RECOMMENDATIONS
On the basis of above mentioned financial performance of company, below
recommendation are needed to be followed by company:
 Mother care company should focus on minimising cost of sales so that their gross profit
may increase.
 As well as company should try to increase their current assets so that their liquidity
position can be improve.
 Company should focus on enhancing their operations and activities so that their turnover
ratios can be improve.
 Along with company must align their policies and plans with consideration of macro and
micro factors.

REFERENCES
Books and journal:
Persson, T. and Tabellini, G., 2016. Political economics. Cambridge, MA: MIT press.
Sahlins, M., 2017. Stone age economics. Routledge.
Gilman, C.P., 2018. Women and economics. In Inequality in the 21st Century (pp. 31-33).
Routledge.
Shiller, R.J., 2017. Narrative economics. American Economic Review, 107(4), pp.967-1004.
Redding, S.J. and Rossi-Hansberg, E., 2017. Quantitative spatial economics. Annual Review of
Economics, 9, pp.21-58.
Rodrik, D., 2018. Populism and the Economics of Globalization. Journal of international
business policy, 1(1-2), pp.12-33.
Eichholtz, P., Kok, N. and Quigley, J.M., 2013. The economics of green building. Review of
Economics and Statistics, 95(1), pp.50-63.
Camerer, C.F., Dreber, A., Forsell, E., Ho, T.H., Huber, J., Johannesson, M., Kirchler, M.,
Almenberg, J., Altmejd, A., Chan, T. and Heikensten, E., 2016. Evaluating replicability
of laboratory experiments in economics. Science, 351(6280), pp.1433-1436.
Ciaian, P., Rajcaniova, M. and Kancs, D.A., 2016. The economics of BitCoin price
formation. Applied Economics, 48(19), pp.1799-1815.

Risk management is a foundational element considered by the business entity when developing
any plans that contribute to the company's sustainability and progress. Risk management is
meant to recognize the potential ambiguity and its determination to what degree it may impact
the operations of the company. A higher risk factor is regarded and then efforts are made to
resolve from lower risk angle. The fundamental concept underlying risk management is
recognise and minimize the impacts of unexpected events that can adversely affect the operations
of the company.
From above report it has been articulated that Risk may emerge from finance market
volatility, pressures from government or labor unions, danger from program failure, legal
responsibilities, loan repayment, and other natural causes. Effective managing risk is therefore
possible if the company has correctly measured the organizational environment as well as its
external work environment that involves supervisors, administrators, workers, competitor's
strategies, technological advancements.

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