To what extent will the achievement of the 5% target reduction in Goodprice Supermarkets Ltds indirect costs be dependent upon external factors?
External factor are any factors stemming from outside the business that can affect decisions over, or success in achieving market objectives. For example, changes in economic circumstances or competitor activities. Indirect costs are defined by expenses that are built up by using a service or making a product such as rent or depreciation.
One external factor which could determine whether Goodprice achieves its 5% target reduction of indirect costs is economic activities. If the market is suffering from inflation, then the business is more likely going to have to pay higher rates of indirect costs such as rent to compensate for sudden increase in market prices. This could lead a minimal amount in profit for the business to use on inventories, thereby lowering the volume of stock sold and prohibiting the business in maximizing on their monthly profit. Such problems could only result in reduced cash flow, making the business look unattractive to potential minority stakeholders.
Another external factor that could determine whether Goodprice achieve its 5% indirect costs reduction are social factors. Seeing as the company is looking to rent out town centre stores, indirect costs such as the cost of security may have to be increased due to a higher possibility of theft. This could mean that the business may have to invest in additional CCTV facilities or security guards for the store which would limit chances of achieving a reduction of 5%, because provisions would have to be made for monthly wages of security guards and the maintenance of CCTV.
However, it is not just external factors which would affect the achievement of the businesses financial objective of reducing their indirect costs. The size of the business would also influence the company’s liabilities concerning their indirect costs. The fact that Goodprice want to increase their number of stores by 25% over ten years means that they may suffer from diseconomies of scale. For example, the cost of rent for numerous stores opening would increase in price, along with electricity and refrigerator rental; basic services which are vital if the store wishes to continue retaining their customer base.
The businesses corporate objectives are arguably one of the most important factors in deciding whether the business achieves its 5% reduction in indirect costs, because ultimately, it is down to the businesses directors to choose the overall goals of the entire organization. Furthermore, if the directors decide that a reduction in indirect costs will be a crucial factor in the businesses success, they are likely to make it a corporate objective.
On the whole, Goodprice Supermarket will have to review the businesses corporate objectives if they are serious about lowering their indirect costs by 5%. Conversely, they may need to lower the amount of new stores in which they wish to open in the next ten years as this will mean they have to pay for facilities such as rent, security and additional wages for new workers such as sales assistants and security. However, despite the fact that they can take these precautions, factors such as the current economic climate and may still increase the businesses running costs due to inflation. Social factors such as the location of the business, in the case, a busy town centre, could also prevent them from reaching their target, if they fail to organize finances properly.