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Chapter 3

The impact of external forces on

financial strategy

3.1 External influences on financial strategy

When setting the company's financial strategy the financial manager is often
influenced by external economic forces.

The main influences are:

 The need to maintain good investor relations

 Limited access to sources of finance either due to weak creditworthiness
or lack of liquidity in the banking sector and capital markets

 Gearing level – introducing borrowings into the capital structure attracts
tax relief on interest payments, but it introduces financial risk into the entity

 Debt covenants

 Government influence

 Regulatory bodies

 Major economic influences such as interest rates, growth in GDP, inflation
rates and exchange rates

 Accounting concepts.

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