2.1 growing the business Flashcards

Question

Public limited companies (plc)

Answer 1

Most of the largest businesses in a country will be public limited companies. Public limited companies are complicated and expensive to set up, but this type of company can raise large sums of money through listing its shares on a stock exchange. The trading of shares this way, can make the company vulnerable to a possible takeover. This could mean that the original owners/shareholders of the company lose control, if they end up holding less than 50% of the shares.

Answer 2

Limited liability – protects the personal wealth of the shareholders Can raise large sums of finance via the stock exchange. This finance is permanently invested and therefore does not need to be paid back Stable form of structure – business continues to exist even when shareholders change Firm is more prestigious

Answer 3

Shareholders may not agree with how the profits have been distributed or undistributed by the board of directors Flotation on the stock market is costly Greater administrative costs Finance can be limited by the stock market valuation of the company Public can see company information and accounts Risk of company being taken over

Answer 4

External: Stock market flotation Share capital Loan capital Internal: Retained profit Sale of assets

Answer 5

Retained profit is the most important source of finance for an established, profitable or growing business. When a business makes a net profit, the shareholders have a choice: either extract it from the business, by way of a dividend, or reinvest it by leaving profits in the business. In a plc, the board of directors will make these decisions.

Answer 6

* A cheap form of finance, as no interest has to be paid * Flexible – shareholders or the board of directors in a plc will have complete control over the proportion that is kept in the business for reinvestment and the amount that is paid out in dividends * Retained profits do not dilute or reduce the ownership of the organisation; for companies, there is no risk of a takeover

Answer 7

* If a business needs some temporary finance because it is facing difficulties, then it is unlikely to have any profits that it can use * Growth may be slow if it is dependent on retained profits, as profits may not be high enough to finance the growth quickly * Using too many profits in the business, may upset shareholders who may feel that their dividend payments are too low

Answer 8

Selling spare or unwanted non-current assets, such as spare land, buildings, machinery or equipment that are no longer needed by the business, can result in extra finance being generated on an one off basis.

Answer 9

Using this method will mean that no finance needs to be repaid and the business owners keep full control of the organisation

Answer 10

It is unlikely to be a long-term solution for most businesses that need to raise finance, as money will be raised on an one-off basis It reduces the value of the business, as the business will no longer own these assets When selling the asset, it is unlikely that the business will gain the value that it originally paid for it, due to depreciation

Answer 11

A loan is an amount of money borrowed for a set period with an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan, as well as the rate of interest.

Answer 12

Guaranteed the money for a certain period - generally three to ten years No need to provide the bank with a share in the business, so no control is lost Interest rates may be fixed for the term, making it easier for the business to forecast interest payments and cash flow Repayments are made in instalments, meaning the business can access substantial amounts of cash that does not need to be paid back in one-go

Answer 13

Time consuming - a business would need to apply for the loan Security - normally has to be given to the bank on some of the assets of the business; the bank will have control over these assets if the business fails Lack of flexibility - a business might take a loan out for £500,000, but finds it only needed £300,000; interest must be paid on the full loan amount, which increases the costs of the business

Answer 14

As a business gets bigger and its financial commitments increase, it often finds that its overdraft facility will also need to grow. For example, a growing business may allow customers trade credit when purchasing stock, which would therefore impact on their cash flow.

Answer 15

The big advantage of a bank overdraft is its flexibility. If a business experiences a short-term shortage of cash or an unexpected cost, then it can be paid by using some of the overdraft facility. Interest is only paid on the amount used.

Answer 16

An overdraft is repayable to the bank at any time. A business may have an overdraft facility of £100,000 i.e. it can owe the bank up to that amount, but the bank may lower or even withdraw that facility if it feels this action is necessary. This happened to numerous businesses with bank overdrafts during the credit crunch of 2007-8, many of which were relying on their overdrafts to stay in business. Usually have high levels of interest attached to them, making them an expensive form of finance when they are used.

Answer 17

Private limited companies can raise finance by selling its shares to friends and family. However, when a privately owned company reaches a certain size, it may consider selling its shares on a stock exchange. When a business offers its shares for sale for the first time to the general public by listing them on a stock exchange, this is called FLOTATION. This process will allow the business to raise large amounts of funds in the form of share capital that are not repayable. An existing plc can also raise additional share capital by issuing new shares for sale on the stock exchange.

Answer 18

Large sums of money can be raised Capital does not have to be repaid There is no interest – dividend payments can be missed if profits are low

Answer 19

Possible loss of control if the original owners sell more than 50% of the total shares Need to satisfy shareholders expectations of dividends and share price growth Can be costly and time consuming (particularly flotations)

Answer 20

Stock market flotation is an expensive way of raising new capital because of the costs involved in the sale of the shares. As a result of a flotation the shareholder base of the company becomes much wider; potentially many thousands of private shareholders invest in the business alongside the larger “institutional” investors, such as pension and insurance scheme funds.

Answer 21

Where businesses make decisions based on what is morally right rather than what is more profitable

Answer 22

* Higher revenues – customers are increasingly making purchasing choices based on ethics, with the actual selling price charged being less important in their decision-making * Improved brand/business awareness and recognition * New sources of finance are possible, for example from ethical investors

Answer 23

Higher costs, for example sourcing from Fairtrade suppliers rather than from suppliers offering the lowest prices Higher overheads, such as training & communication of ethical policy A danger of building up false expectations amongst consumers Bad publicity if business is found to be acting “unethically”

Answer 24

Over recent years, there have been increasing concerns about the environment. The number of UK laws on business regarding the environment have increased dramatically. Areas such as pollution, disposal of waste linked to recycling and energy use all increase business costs, as firms must meet these new standards. In some cases, this increase in costs can be passed onto the consumer in the form of higher prices. Consumers will expect to pay a higher price for goods and services that have been produced in a more environmentally friendly way, for example higher prices can be charged for organic products.

Answer 25

Provides good publicity and meets the requirements of environmental laws. Customers may be willing to pay higher prices.

Answer 26

Costs increase as the business has to pay more for waste disposal and to meet the requirements of anti-pollution laws.

Answer 27

Pressure groups are organisations that seek to influence public policy or business practices. They use a variety of tactics to achieve their goals - E.g. Greenpeace is a pressure group that campaigns for environmental issues and it has targeted companies like Nestle for using unsustainable palm oil In response, Nestle has committed to sourcing sustainable palm oil but this has impacted the company's marketing mix Nestle has had to change its packaging and labelling to reflect its commitment to sustainability and it has had to spend money on advertising campaigns to communicate this message to customers

Answer 28

Globalisation is the free movement of goods, services, people, capital, information and technology, enabling businesses to sell their products anywhere in the world. This boosts the economic integration of different countries.

Answer 29

* Expanded Market Access - Globalization enables businesses to reach a broader customer base by entering new markets in multiple countries. This helps businesses reduce reliance on a single market. This diversification can mitigate risks associated with economic downturns or fluctuations in specific regions and it can lead to an increase in revenue * Increased Competition and Efficiency - Globalization intensifies competition, compelling businesses to enhance efficiency and productivity. This competitive pressure often leads to improved processes and innovation with cheaper prices. * Access to Resources and Talent - Globalization allows businesses to Access to cheaper labour and raw materials from other countries. This can lead to cost savings and improved product quality. * Innovation and Knowledge Transfer - Businesses operating globally can benefit from the exchange of ideas, technologies, and best practices, promoting continuous improvement.

Answer 30

* Increased Competition - Globalization exposes businesses to intensified competition from both domestic and international rivals. This can lead to pressure on prices, reduced profit margins, and the need for continuous innovation to stay competitive. * Supply Chain Vulnerability - Relying on global supply chains makes businesses vulnerable to disruptions caused by events such as natural disasters, geopolitical tensions, or global health crises. These disruptions can lead to delays, increased costs, and supply shortages. * Impact on Local Economies - Globalization can result in the outsourcing of jobs to countries with lower labor costs, potentially leading to unemployment and economic challenges in the business's home country. This may also raise ethical concerns. * Currency Exchange Risks - Engaging in international trade exposes businesses to currency exchange rate fluctuations. This can impact the cost of goods, profit margins, and overall financial performance, adding an element of financial risk.

Answer 31

Imports are goods or services brought into one country from another.

Answer 32

Exports are when goods and services produced by one country are sold to another country.

Answer 33

Businesses want to keep costs of production low as this can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage

Answer 34

The quality of the workforce is important as this will directly impact the quality of the goods and services produced in an economy Businesses may choose to locate production in a market where the labour costs are lower

Answer 35

It is often important that a business has easy access to their raw materials as this can help to reduce transportation costs and help to reduce any potential delays to the production process

Answer 36

Assessing the return on investment in different markets will reduce the risk of the initial investment not being paid for

Answer 37

Businesses may be offered incentives (e.g. grants, business loans and tax breaks) by the government

Answer 38

A business located in a market within a trade bloc will be able to access many advantages such as reduced protectionist measures E.g. Japanese companies Nissan and Toyota have invested in manufacturing facilities in the UK (prior to Brexit) to gain access to the EU market

Answer 39

A multinational corporation (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries

Answer 40

* The MNC can gain access to cheap labour and/or raw materials * Producing closer to target markets may reduce transport costs (which will be important for bulky goods). * Local residents may benefit from job opportunities and growth in the local economy * MNCs often invest to improve infrastructure - Better roads, transportation and access to water and electricity would help the local community in addition to helping the MNC operate more efficiently * MNCs may have to pay taxes and business rates to local councils/ authorities - These funds may be reinvested back into the local community

Answer 41

* MNCs may cause damage to local habitats/environment during production process - E.g. Shell has a track record of oil pollution in vulnerable communities in Nigeria * MNC's may leave unsightly production facilities behind once they have extracted all of the resources and left the country

Answer 42

Barriers to international trade occur when a government imposes regulations to restrict the flow of international products into its country. This may be done through trade blocs or the introduction of tariffs or quotas on imported goods.

Answer 43

Protectionism is when a government seeks to protect domestic industries from foreign competition

Answer 44

A tariff is a tax placed on imported goods from other countries E.g. Tennis rackets imported into the UK from China have a tariff of 4.7% A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses

Answer 45

* They protect infant industries so they can eventually become more competitive globally * An increase in government tax revenue

Answer 46

* Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers * Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers * Reduces consumer choice as imports are now more expensive and some customers will be unable to afford them

Answer 47

Quotas are a limit to the volume or value of specific imports allowed into a country in a given time period

Answer 48

A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other Three of the largest trading blocs include The European Union (EU), The Association of Southeast Asian Nations (ASEAN), and The North American Free Trade Agreement (NAFTA)

Answer 49

Businesses outside the trading bloc will face higher costs from protectionist measures such as tariffs and trying to meet legal requirements inside the trading bloc This will make them less competitive when trying to sell goods to member countries within the bloc Being outside the bloc is likely to decrease their sales volume to countries within the bloc

Answer 50

**Access to more markets** * Businesses are able to sell to more customers due to free movement of goods **External tariff walls ** * An external tariff wall is a tax applied to imported goods from outside the bloc * This protects businesses within the trading bloc from competition from businesses outside of the trading bloc **Infrastructure support** * Businesses may gain additional support from the government to enable them to maintain their competitiveness against businesses in countries inside the trading bloc **Free movement of labour ** * Trading blocs may also have free movement of labour allowing businesses to source workers from a wider pool * A higher supply of labour may push wages lower, leading to reduced costs for business * E.g. Citizens of EU countries have the right to work in any Member State and to be treated equally as citizens of that State

Answer 51

**Increased competition :** * There is increased competition for businesses within the trade bloc which may be more of an issue for small businesses as they have less resources available with which to compete * Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc **Common rules and regulations** * In order to operate as one market, new rules and regulations may be put in place that all businesses must adhere to * E.g. The EU working time directive states that employees can only work a maximum of 48 hours per week **Retaliation** * External tariffs set against countries outside of the trading bloc may lead to retaliation from these countries **Inefficiency** * Although there is increased competition between countries within the bloc, there is less competition from businesses in countries outside of the bloc. This may reduce the incentive of businesses to be more efficient * Trading blocs also lead to trade diversion which means trade is taken away from efficient producers who operate outside of the trade bloc and replaced by trade within the bloc

Answer 52

Unintended meanings can arise when businesses use images, symbols, or language that have different connotations in different cultures E.g. The colour white symbolises purity and innocence in Western cultures, but it represents death and mourning in some Asian cultures Businesses must ensure that their marketing messages are translated accurately and appropriately - This involves understanding language nuances and idioms: E.g. When KFC entered the Chinese market, it translated its slogan "Finger-Lickin' Good" into Chinese as "Eat Your Fingers Off", which had negative connotations in the Chinese culture