Solution 17.3

The following factors, which provide a context from which to analyse the financial performance, should be considered.

The age of the business: Any young business is quite vulnerable to the many internal and external factors or shocks that can occur. Many young businesses are highly financed by debt and will be vulnerable to interest rate and exchange rate movements as they try to develop a brand name and reputation.

The size of the business: The larger the business, the less vulnerable it may be to external factors. Larger businesses may have diversified their investments and this again protects them or reduces their business risk.

The economic and political environment: The economy both local and global, inflation, exchange rates and interest rates all affect a business. In interpreting any financial statements one must take into account the prevailing economic and political circumstances. The effects of the September 11 terrorist attacks have to be taken into account when comparing a company’s performance over the period 1999 to 2003. The effects of inflation must be taken into account when looking at a company's performance over a few years. For countries experiencing high inflation, any profit made could be wiped out in real terms.

Industry Trends: Technology innovation and the trends towards deregulation are just two examples of industry trends. In interpreting any financial statements one must be aware of the trends and pressures within the specific industry.