Financial and Economic Analysis

Financial and Economic Analysis

I. Introduction

The war in Ukraine and its outcomes are generating new fears of an impending global recession. Omega Enterprise, a wholesaler that has traded in lorry tires for more than 35 years, and has in recent years, been mulling over market diversification. There are two project proposals: the food and beverage industry and the clothing and apparel industry. Market diversification can be an alternative risk-reduction approach that Omega Enterprises can use to expand into a new industry and achieve higher rates of profitability. However, the company’s executives should evaluate the economic climate and sources of financing to consider the viability of the project.

Businesses thrive in stable economic climates because of a higher demand for goods and services and a lower cost of production. Typically, a stable economy is associated with higher consumer demand for products, whereas a weaker economy results in reduced consumer spending. Also, the economic environment affects the business through competition in industry because intense competition is often apparent during strong economic conditions and less during weaker economic environments.

II. Economic Climate

A recession refers to the slowdown of the economy. During a recession, the general economic activities of firms and households’ general dwindle. The last recession to hit the UK was caused by the Covid-19 pandemic. In Q1 and Q2 of 2020, the UK’s economy receded by 2.6 percent and 18.8 percent, respectively (Partington, 2022; Elliott, 2022). The Covid-19 pandemic contributed to severe economic disruption and extensive shortages of supplies magnified by nationwide shutdowns.

The thought of an economy entering a recession is not a positive one for firms and individuals. However, recessionary periods do not automatically have to be painful, provided that business owners can prepare for them. A recession is a period of an economic slump and is often defined as when two quarters experience negative growth when adjusted for the economy’s real national income. A recession can last for just a few months, and in certain scenarios, they make years for an economy to turn around. In the last two decades, the 2008/2009 recession was the longest one to be experienced in the UK because it lasted 5 quarters beginning with the second quarter of 2008 until the second quarter of 2009 (Allen, 2010). The business might suffer from declining profits because as the economic growth stunts, competitors and consumers become wary when it comes to spending. It means that the business might find it more difficult to generate sales, and it will be forced to cut costs to meet the things that are needed. Lenders tighten their belts during recessionary periods, and this makes it a challenge for the business to access their typical lines of credit. Subsequently, interest rates often increase during an economic slowdown, while covenants are often known to increase while the lender requirements often become stricter.