9.1 NATURE OF BUSINESS- Business growth and decline

Question 1

Establishment stage

Answer 1

Birth of business, needs to establish a solid foundation by:

• Generating cash flow
• Build up customer base
• Relationship and success in sales and profits

Challenges can be reduced by detailed planning.

Consider:
GOALS: Setting a firm foundation.
SALES: Normally begin slowly and are somewhat erratic.
MARKETING: Highlight product advantages by accentuating the products strength.
PROFIT: Usually slow to begin with, occasionally a loss.
FM: Owners personal savings to provide good sources.
COST: Very high fixed costs.
CUSTOMER: Develop positive relationship with customers.
EMPLOYEES: Owner establish work routines and building up relationships

Question 2

Growth stage

Answer 2

Time of accelerating growth. Sales increase and the cash flow is normally positive
Business undertakes development of new products to satisfy different market segments

GOALS: To constantly increase the average level of sales, continue growing business.
SALES: Rapid increase, especially in the early stages of the growth phase.
MARKETING: Development of new products to satisfy market niches; price discounts due to lower production costs.
PROFIT: Should increase due to rising sales and falling production costs
FM: Use of sophisticates, computerised accounting procedures and systems.
COST: Production of costs tend to decrease due to economics scale
CUSTOMERS: Concentration on satisfying existing and new customer base.
EMPLOYEES: Increased specialisation of workforce requiring formal and informal training.

Question 3

Maturity stage

Answer 3

This is when the business has stabilised and is making steady sales and profits.

AREAS OF CONCERN

• Competition becomes more aggressive
• Obsolete products (products go out of date)
• Technology
• New products in the market
• Need to look at external influences
• Changes in economy, democratic, laws, competition, technology etc.

Question 4

Post maturity stage

Answer 4

Once a business reaches post-maturity, there are 3 possible outcomes;

RENEWAL:
Increase in sales/profits; new products developed and expansion of business through merger/takeover
MERGER: Two businesses join together
TAKEOVER: One business buys out another business.

STEADY-STATE:
Continues with features of maturity

DECLINE/CESSATION:
- Business is failing due to decline in sales, profits, customer base, competition.

Question 5

Factors that can contribute to business decline

Answer 5

MAIN:

• Undercapitalisation; company does not receive sufficient capital to conduct normal business operations and pay creditors
• Lack of management expertise; if owner does not fulfill roles/characteristics of a manager -> business decline as they are not fulfilling their important role.
• Poor marketing
• Out-of-date products
• Lack of planning and experiences
• Uncontrolled growth
• Poor financial management

Question 6

Voluntary and involuntary cessation

Definition

Answer 6

VOLUNTARY: Occurs when the owner stops to operate the business of their own accord

INVOLUNTARY:
Occurs when the owner is forced to stop trading by the creditors of the business

Question 7

Voluntary and involuntary cessation

liquidation definition

Answer 7

Occurs when an independent person sells off assets of a company to try and obtain capital to pay creditors

FEATURES:

• Basically bankruptcy
• Result in company coming to an end
• Normally occurs when company is insolvent
  - Creditors VOLUNTARY liquidation
  - Court INVOLUNTARY LIQUIDATION

MAIN FUNCTIONS:

• Take possession of and convert into cash the company’s assets
• Investigate and report to creditors financial related business affairs
• Determine debts owed by company
• Report possible offended by people in company
• Deregister the company

Question 8

Voluntary and involuntary cessation

Bankruptcy and liquidation structure

Answer 8

Bankruptcy -> unincorporated business -> sole trader/partnerships -> unlimited liability

Liquidation -> Incorporated business -> public/private company -> limited liability

Question 9

Voluntary and involuntary cessation

Key words

Answer 9

BANKRUPTCY: Voluntary or forces declaration that a business, sole trader and partnerships are unable to pay their debts.
REALISATION: When assets are sold to try and pay a businesses debts.
RECEIVER: Independent person appointed to try and sort out the financial problems of a business, if this isn’t possible, business will be liquidated.
LIQUIDATOR: Occurs when an independent person sells off assets of a company to try and obtain capital to pay creditors.
SOLVENT: Positive cash flows/ ability to pay debt
INSOLVENT: Negative cash flows/ inability to pay bills
CREDITORS: Include banks and their suppliers