Chapter 4

Question 1

Define ‘capital’

Answer 1

Capital is the money used to build, run, or grow a business.

Question 2

Define ‘cash flow’

Answer 2

Cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time.

Question 3

Define fixed costs

Answer 3

an expense that does not change when sales or production volumes increase or decrease.

Question 4

Define variable costs

Answer 4

Variable costs are costs that change as the volume changes. Examples of variable costs are raw materials,

Question 5

Define market niche

Answer 5

a specific portion of a market that is united by a common interest or demographic

Question 6

define ‘economies of scale’

Answer 6

As a company expands and produces more goods or services, its average cost per unit tends to decrease. This decrease occurs because fixed costs, such as machinery and facilities, are spread over a larger number of units, leading to a lower average cost.

Question 7

define delegation

Answer 7

Delegation is the act of assigning tasks, responsibilities, authority, and decision-making power from one person to another.

Question 8

define specialisation

Answer 8

Specialisation refers to the process by which individuals, organisations, or economies focus on specific tasks, roles, or areas of expertise.

Question 9

What is the main similarity between businesses and people?

Answer 9

Like people, businesses pass through a number of distinct stages as they develop.

Question 10

What are the four stages of the business cycle?

Answer 10

1. establishment
2. growth
3. maturity
4. post maturity

Question 11

What are the possible outcomes in the post maturity stage?

Answer 11

1. renewable
2. steady state
3. decline

Question 12

What is the main difference between people and businesses?

Answer 12

Unlike people, with the business life cycle, there is no set time limit for each of the stages. Some businesses can reach maturity in a short period of time, while others may take decades to move beyond the establishment stage.

Question 13

What is the establishment stage?

Answer 13

The establishment stage of a business is a vulnerable stage where the overriding concern is to get the business on a solid foundation. This requires a positive cash flow

Question 14

Provide five features of the growth stage?

Answer 14

• Accelerating growth.
• Sales increase and cash flow is positive.
• Introduce new products to appeal to different market segments.
• More emphasis is placed on marketing and the use of complex technology
• require long - term planning.

Question 15

What is a merger?

Answer 15

A merger occurs when the owner of two separate businesses agree to combine their resources and form a new organisation.

Question 16

What is an acquisition?

Answer 16

An acquisition (or takeover) occurs when one business takes control of another business by purchasing a controlling interest in it.

Question 17

How can a business grow during the growth stage?

Answer 17

A business can grow through a merger or acquisition.

Question 18

What are the three main types of mergers and acquisitions?

Answer 18

1. Vertical integration
2. Horizontal integration
3. Diversification

Question 19

What is vertical integration

Answer 19

Occurs when a business expands by taking up interests in different but related levels in the production and marketing of a product
eg. an abattoir purchases a cattle farm (a supplier of its inputs) and/or a butchery ( a distributor of its outputs).

Question 20

What is horizontal integration?

Answer 20

Occurs when a business acquires or merges with another firm that makes or sells similar products
eg. the abattoir mergers with another abattoir.

Question 21

What is diversification?

Answer 21

Occurs when a business acquired or merges with a business in a completely unrelated industry
eg. the abattoir purchases a sports retailer.

Question 22

What is the biggest problem faced by businesses in the maturity stage

Answer 22

One of the biggest problems in the maturity stage is complacency. If owners and management become too comfortable, a business can lose the energy and dynamism which led to earlier success.

Question 23

What is complacency in the business environment?

Answer 23

It’s when the employees lose interest and become disengaged in their work.

Question 24

Provide three pieces of advice to a business in the maturity stage looking to continue it’s success?

Answer 24

• Achieve/ maintain high level of customer service
• Find better/ more efficient way of operating ( to speed up service and reduce costs)
• Start planning for the renewal stage, looking to introduce new products and/or services

Question 25

Beyond the maturity stage, what does it mean if a business is performing at a steady state?

Answer 25

A business in a steady state is neither declining or expanding. It is satisfying consumer demand and maintaining levels of profitability, similar to the maturity stage. However, businesses can’t maintain a steady state indefinitely and will eventually lead to falling sales and business decline.

Question 26

Beyond the maturity stage, what does it mean if a business is facing a decline?

Answer 26

A business is facing a decline if their sales and profitability are falling which will eventually lead to business failure/ closure.

Question 27

Beyond the maturity stage, what does it mean if a business has a renewal?

Answer 27

increasing sales and higher profitability

Question 28

What advice would you give to a business who’s declining?

Answer 28

The best course of action is usually to cease operations, selling any assets of value rather than continuing to trade and experiencing a worsening financial situation.

Question 29

How can a business avoid decline?

Answer 29

A business can avoid decline by carefully planning strategies to generate a recovery in sales, cash flow and profitability. Accurate forecasting is vital during this step.

1. The business should have a refreshing mix of products.
2. Phasing out less profitable items and focusing on producing goods and services for which present and future demand is high.

Question 30

define undercapitalisation

Answer 30

Lack of sufficient money to operate a normal business

Question 31

2 main causes of business decline in SMEs

Answer 31

1. lack of management expertise
2. lack of sufficient money

Question 32

What are the two ways a business may cease operations

Answer 32

1. Voluntary
2. Involuntary

Question 33

What is voluntary cessation

Answer 33

When a business decides to cease operations voluntarily. This is done through the selling of the businesses assets. (liquidation)

For sole traders, voluntary cessation can be the result of death.
For businesses, they may be doing poorly and to prevent accumulation of debt, the owner decides to cease operating the business.

Question 34

What is involuntary cessation

Answer 34

The owner is forced to cease trading by the people who are owed money by the business (creditors).

Question 35

What is bankruptcy?

Answer 35

Bankruptcy is a declaration that a business, or person, is unable to pay his or her debts.
Bankruptcy can be either voluntary or involuntary.

Question 36

What is realisation?

Answer 36

The process of converting the assets of a business into cash.

Question 37

What is liquidation?

Answer 37

When a qualified person - the liquidator - is appointed to take control of the business with the intention of selling all the company’s assets in an orderly and fair way in order to pay the creditors.

Question 38

What does insolvent mean

Answer 38

When a business is unable to pay its debts when they’re due.