{"id":40174,"date":"2022-08-08T20:14:41","date_gmt":"2022-08-08T20:14:41","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=40174"},"modified":"2023-03-26T10:27:08","modified_gmt":"2023-03-26T10:27:08","slug":"relationship-between-a-companys-external-environment-business-model-and-financing-needs","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/relationship-between-a-companys-external-environment-business-model-and-financing-needs\/","title":{"rendered":"Relationship between a Company&#8217;s External Environment, Business Model, and Financing Needs"},"content":{"rendered":"<p>[vsw id=&#8221;-IPznmasNJg&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<br \/>\nA firm\u2019s financing needs and risk profile depend on its business models and other factors. These factors can be classified into external and firm-specific factors.<\/p>\n<h2><strong>External Factors<\/strong><\/h2>\n<ul>\n<li><strong>Economic conditions<\/strong>: Macroeconomic variables such as GDP growth, exchange rates, interest rates, inflation, and unemployment influence the financing needs of a business. Security markets and the financial sector are typically sensitive to short-term economic data. Most businesses, on the other hand, are concerned with long-term trends.<\/li>\n<li><strong>Demographic trends<\/strong>: Developed and urbanized markets have an aging population, sometimes declining populations, and increasing labor shortages. On the other hand, emerging economies, such as Africa, have a high population and labor productivity.<\/li>\n<li><strong>Industry cost characteristics<\/strong>: Industries such as hotels and utilities are capital-intensive. Internet-based service providers, on the other hand, require less capital. Industries with high operating leverage are considered scalable as revenue increases.<\/li>\n<li><strong>Sector demand<\/strong>: The consumer staples industry\u2019s demand is steady and predictable, while some other industries\u2019 demand is cyclical and economics-dependent.<\/li>\n<li><strong>Socio-political trends<\/strong>: Public opinions, pop culture, and taste impact consumer purchasing behavior. The same can be said of the political and legal environment. Notable social changes include a shift to renewable energy and remote work.<\/li>\n<li><strong>Political<\/strong>, <strong>legal<\/strong>,<strong> and regulatory environments<\/strong>: Laws, regulations, and policies (such as licensing and trade regulations) impact business. For instance, regulations can guard profit margins and add business value.<\/li>\n<\/ul>\n<h2><strong>Firm-specific Factors<\/strong><\/h2>\n<ul>\n<li><strong>Stage of development of the business (firm maturity)<\/strong>: Startups require more capital than mature businesses.<\/li>\n<li><strong>Competitive position<\/strong>: A firm with a strong competitive advantage faces lower business and financial risks. Moreover, market leaders have scale and brand advantages.<\/li>\n<li><strong>Type of business model<\/strong>: Some business models require more capital, while others are more labor-intensive. Based on the inherent business model, a firm\u2019s decision on which assets to own and what to rent impacts financing decisions. Examples of businesses influenced by the type of business model include:<\/li>\n<\/ul>\n<ol>\n<li style=\"list-style-type: none;\">\n<ol style=\"list-style-type: lower-roman;\">\n<li><em>Pay-in-advance <\/em>business reduces or removes working capital requirements since firms can generate sales cash before paying suppliers.<\/li>\n<li><em>Asset-light <\/em>business transfers the ownership of high-cost assets to other firms. An example is a hotel with physical assets owned by a franchisee instead of a parent company.<\/li>\n<li><em>Lean startups <\/em>outsource as many functions as possible to increase growth and agility.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<blockquote>\n<h2 style=\"text-align: left;\"><strong>Question<\/strong><\/h2>\n<p style=\"text-align: left;\">Which of the following is <em>least likely <\/em>an external factor that may influence a firm\u2019s financial needs?<\/p>\n<ol style=\"list-style-type: upper-alpha; text-align: left;\">\n<li>Inflation.<\/li>\n<li>GDP growth rate.<\/li>\n<li>Strong barriers to competition.<\/li>\n<\/ol>\n<p style=\"text-align: left;\">The correct answer is <strong>C<\/strong>.<\/p>\n<p style=\"text-align: left;\">Strong barriers to competition influence a firm\u2019s competitive position (which is a firm-specific factor). Strong barriers to competition lower business risk and financial risk.<\/p>\n<p style=\"text-align: left;\"><strong>A and B are incorrect<\/strong>. Inflation and GDP growth are examples of economic conditions (external factors) that influence a business, almost in its entirety.<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;-IPznmasNJg&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] A firm\u2019s financing needs and risk profile depend on its business models and other factors. These factors can be classified into external and firm-specific factors. External Factors Economic conditions: Macroeconomic variables such as GDP&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[25],"tags":[],"class_list":["post-40174","post","type-post","status-publish","format-standard","hentry","category-corporate-issuers","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Relationship between a Company&#039;s External Environment, Business Model, and Financing Needs - AnalystPrep | CFA\u00ae Exam Study Notes<\/title>\n<meta name=\"description\" content=\"A firm&#039;s financing needs and risk profiles depend on its business models and other factors. 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