Business Growth Flashcards
When must a business grow
When it sells more output over a period of time
Why may a business grow
help to increase market share
improve profits
increase revenue
help a business to open more branches
What 3 ways will a business use to enter a new market
entering overseas markets
amending its marketing mix (product, price, place and promotion)
taking advantage of technology
Adv of internal(organic) growth
a business can maintain its own values without interference from stakeholders
higher production means the business can benefit from economies of scale and lower average costs
Disadv of internal ( organic growth)
there maybe be a long period between investment and return on investment
growth may be limited and is dependent on the reliability of sales forecasts
What involves external( inorganic growth )
External growth (inorganic growth) usually involves a merger or takeover
Define merger
A merger occurs when two businesses join to form a new (but larger) business
Define takeover
A takeover occurs when an existing business expands
What are the 4 methods of takeover or merger
Horizontal integration
Vertical integration
Explain horizontal integration
occurs when two competitors join through a merger or takeover.
The new business then becomes more competitive and increases its market share
Explain foward vertical integration
occurs when a business takes control with another that operates at a later stage in the supply chain.
Explain backwards vertical integration
occurs when a business takes control of a business earlier in the supply chain.
Explain conglomerate integration
occurs when businesses in unrelated markets join through a takeover or merger.
This enables businesses to spread their risk over a wider range of products and services.
Adv of inorganic growth
competition can be reduced
market share can be increased very quickly overnight
Disadv of inorganic growth
it can be expensive to takeover/merge with another business
managers may lack the experience to deal with the other businesses
Define plc
Business where shares are sold on the stock market . People who owns a share is called a shareholder - now have a voice in how the business operates
When a business sells shares on a stock market
this is known as ‘floating on the stock exchange’.
Adv of being a plc
the business has the ability to raise additional finance through share capital
the shareholders have limited liability
there are increased negotiation opportunities with suppliers in terms of prices because larger businesses can achieve economies of scale
Disadvantages of being a PLC include:
it is expensive to set up, requiring a minimum of £50,000
there are more complex accounting and reporting requirements
there is a greater risk of a hostile takeover by a rival company
Definition of capital
Capital is the money used to build run or grow a business
What is the difference between internal and external capital
Capital found from within a business is called an internal source of finance, whereas capital found from outside a business is an external source of finance.
Definition of retained profits
profits held back in the business for reinvestment rather than being issued as dividends.
Advantages of retained profits
cheap, quick and convenient, and there is easy access to the money
Disadvantages of retained profit
once the money is gone, it is not available for any future unforeseen problems the business might face
Define selling of assets
An internal source of finance which includes selling unwanted assets e.g machinery and equipment
Adv of selling assets
convenient, can create space for more profitable uses, and can be quick
Disadv of selling assets
the business might not get the full market value of the assets or even sell them at all
the business might also need the assets in the future
Owners savings adv
Cheap quick and convenient
Ownersaving dis
the owner might not have enough savings or may need the cash for personal use
3 types of external source of finance
Loan capital
Share capital
Stock market flotation
Define loan capital
is a lump sum of capital borrowed from a bank and paid back in instalments.
Adv of loan capital
regular repayments are made over a period of time
Dis adv of loan capital
Can take a while for loan to be approved
Business may not qualify for a loan
Interest is applied can be expensive
Banks may ask for collateral ( security )
In case business fails to make repayment
Share capital definition
is money raised when a business becomes a private limited company by offering shares to a select group of people in return for capital.
Adv of share capital
does not have to be repaid and no interest is applied
a business can choose to whom it offers shares
Disadv of share capital
profits made by the business are paid to shareholders (these payments are also known as dividends), so control of the business gets diluted
Define stock market flotation
is money raised when a business becomes a PLC (public limited company) by offering shares to the public to buy.
Adv of stock market flotation
this option can raise large amounts of capital as it is easy for the public to buy shares through a stockbroker or bank
the shares don’t have to be repaid and no interest is applied
the business can also gain recognition through this method
Disadv of stock market flotation
it can be complicated and expensive and there is the possibility of losing control, as anyone can buy shares
the profits are paid to shareholders and the business records are made public
there is also the risk that some investors will only buy shares to make a quick profit by selling them when the share price increases
