2.1 Flashcards
What is business growth?
A: Business growth refers to the expansion of a company’s size, operations, and influence over time.
Can you provide an example of a company that started small and grew significantly?
Yes, Amazon started in a garage and evolved into a multinational corporation.
What are the two types of business growth?
Organic growth (internal expansion) and inorganic growth (mergers, takeovers).
Why do owners and managers desire to run a large business?
Owners and managers seek to operate a sizable enterprise.
Q: How can businesses benefit from lower unit costs through growth?
A: Businesses can benefit from lower unit costs by taking advantage of bulk order discounts from suppliers as output increases.
What is the motivation for growth in terms of product diversification?
A: Growth provides opportunities for product diversification, expanding the range of products offered in the market.
Q: Why do larger firms often have easier access to finance?
Larger firms often have easier access to finance due to their established reputation and financial stability.
Q: What is organic growth in the context of business expansion?
A: Organic growth is expansion from within the company, achieved through internal strategies.
Q: How is inorganic growth achieved in business?
Inorganic growth is achieved through mergers and takeovers, involving external strategies for expansion.
Q: What does retrenchment involve in a business?
A: Retrenchment involves a business scaling down its operations and may include reducing the workforce, closing less profitable outlets, and exiting existing markets.
Why might a business choose retrenchment?
: Retrenchment can help a business reduce costs, making it particularly relevant for businesses with a survival objective
Q: Define organic growth in business.
A: Organic growth is driven by internal expansion using reinvested profits or loans.
Q: Name four ways organic growth is typically generated.
A: Gaining a greater market share, product diversification, opening a new store, and international expansion into new markets
Q: What is the impact of product diversification on a business?
A: Product diversification opens up new revenue streams for a business.
Q: How might a business create new revenue streams?
A: Businesses may invest in research and development or innovate existing products to create new revenue streams.
Why might firms grow organically before considering integration
A: Firms often grow organically until they are financially positioned to integrate (merge or buy) with others
Q: What challenges does integration bring to a business?
Integration speeds up growth but introduces new challenges.
What are the advantages of organic growth in terms of pace and risk?
The pace of growth is manageable, and it is less risky as growth is financed by profits with existing business expertise.
Name a disadvantage of organic growth related to pace.
The pace of growth can be slow and frustrating.
Q: Why might organic growth not benefit from lower unit costs?
A: Organic growth may not benefit from lower unit costs (e.g., bulk purchasing discounts) as larger firms would.
What limitation might a business face in terms of access to finance with organic growth?
A: Access to finance may be limited when relying solely on organic growth
Q: What is external or inorganic growth in business?
A: External growth occurs when firms integrate through mergers or takeovers, resulting in rapid expansion.
Q: How does a merger differ from a takeover?
A: In a merger, two or more companies combine to form a new entity, while a takeover involves one company purchasing another, gaining control of its operations.
Q: What is a strategic reason for pursuing a merger or takeover?
A: A company may acquire another to expand into new markets, diversify product offerings, or access new technology
Q: How can mergers or takeovers lead to the elimination of competition?
A: Takeovers are often used to eliminate competition, increasing the acquiring company’s market share.
Q: What is an advantage of forward vertical integration?
A: Forward integration adds additional profit as profits from the next stage of production are assimilated.
Q: What is a disadvantage of vertical integration related to culture clash?
A: There can be a culture clash between merged firms, possibly leading to inefficiencies.
Q: How does horizontal integration impact market share?
A: Horizontal integration results in a rapid increase in market share.
Q: What is a disadvantage of horizontal integration related to unit costs?
A: Unit costs may increase due to unnecessary duplication of management roles.
Q: Why might a rapidly growing business choose to become a Public Limited Company (PLC)?
A: To secure significant capital for expansion, a business may transition from a private limited company (LTD) to a public limited company (PLC) through a stock market flotation.
What is a key aspect of the advantages of becoming a PLC?
A: Access to capital becomes easier, and significant amounts can be raised quickly.
How does becoming a PLC impact the risks associated with ownership?
A: Risks are shared among a larger group of shareholders, reducing the financial risk to any individual.
: What happens to a company’s shares when it becomes a PLC?
A: Shares become more liquid on a public stock exchange, making them easier to buy and sell.
How does the decision-making process change when a company becomes a PLC?
A: Decision-making can be extended as the company’s board of directors includes individuals from outside company management and representatives from major shareholders.
Q: What benefit does a PLC gain in terms of public profile?
A: Becoming a PLC can raise a company’s public profile, increasing visibility with customers, suppliers, and potential investors.
Q: What is a major disadvantage in terms of regulation for a PLC?
A: Increased regulation requires adherence to legal and financial regulations, which can be costly and time-consuming.
Q: How does selling shares to the public impact control in a business?
A: Selling shares means many shareholders have a say in how the company is run, potentially leading to a loss of control by the founders.
Why is setting up a public limited company considered costly?
A: Costs include fees for legal and accounting advice, along with expenses associated with the initial public offering (IPO).
What market pressure do PLCs often face?
A: PLCs are expected to deliver consistent growth and profits, placing pressure on the management team for short-term financial performanc
Q: What is a risk associated with publicly traded shares for a PLC?
A: A risk of hostile takeover exists, where a competitor may acquire a controlling interest, as seen with Kraft’s purchase of Cadbury’s in 2010.
Q: Why do businesses need finance?
A: Businesses need finance for startup, growth, and ongoing activities, including capital expenditure on fixed assets and revenue expenditure on day-to-day expenses.
Q: What is the distinction between internal and external sources of finance?
A: Internal sources come from within the business (owner’s capital, retained profit, sale of assets), while external sources come from outside the business.
Q: Name three types of internal sources of finance.
A: Owner’s capital, retained profit, and the sale of assets.
Q: What is owner’s capital, and when is it often used?
A: Owner’s capital is personal savings introduced by business owners. It is often used when starting a business or addressing specific needs like short-term cash flow problems.
Q: What is retained profit, and how is it reinvested?
A: Retained profit is the profit generated in previous years and not distributed to owners. It is reinvested back into the business without borrowing, reducing the need for external financing.
Q: How can a business generate finance through the sale of assets?
A: By selling assets no longer required (e.g., machinery, land, buildings), a business can generate internal finance. A sale and leaseback arrangement may also be made.
Q: How can a business manage cash flow to generate internal finance?
A: By negotiating extended payment terms with suppliers and incentivizing customers to pay promptly for credit purchases.
Q: Why is internal finance often considered free?
A: It does not involve the payment of interest or charges.
Q: How quickly can internal finance usually be organized?
A: Internal finance can usually be organized very quickly and without significant paperwork.
Q: Why might internal finance not be sufficient for a business’s needs?
A: Internal finance may not be sufficient to meet the needs of the business, especially during periods of rapid growth.
Q: Why is internal finance rarely as tax-efficient as external methods?
A: Internal finance methods are rarely as tax-efficient as external methods, such as loan repayments being treated as a business cost and offset against tax bills.
What advantage does internal finance have for businesses that may fail credit checks?
A: Businesses that may fail credit checks can access internal finance sources more easily than external sources.
Q: What is external finance, and where does it come from?
A: External finance comes from outside the business. Common forms include bank loans and share capital.
Q: How is share capital sourced for private limited companies (Ltd)?
A: Share capital for private Ltd companies is usually sourced by selling shares to family, friends, or private venture capitalists
