E 3.2.1 growth* Flashcards
problems arising from growth
- diseconomies of scale
- internal communications
- overtrading
diseconomies of scale
when a business reaches beyond the optimum size, resulting in the business becoming les efficient and more difficult to control. this means that inefficiencies may occur leading to an increase in unit costs.
problems related to diseconomies of scale
➢Control- as layers of management are added to an organisation, decision-making may become slower
➢ Flexibility- owing to the issues of control and communication, a business may become less
flexible in its ability to adapt to the changing business environment.
➢ Motivation- workers might feel less valued as they find it difficult to see the impact they
have on the business.
➢ Communication- see internal communication.
the problems with diseconomies of scale is that it can be difficult to measure or quantify.
internal communications
Growth can lead to a worsening of communication. Larger organisations tend to rely on written forms of communication with no guarantee that messages are received, more layers of management mean that messages must be passed through these layers, whilst poor motivation can have an impact on the effectiveness of communication and whether messages are understood as intended
overtrading
when a business experiences cash-flow problems as a result of expanding too
quickly without sufficient cash in the bank.
Overtrading can lead to a strain on financial resources. In a growing business, there may be time lags between cash inflows and cash outflows:
Expansion means that a business must spend, whether this is higher levels of stock or non-current assets
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This increases cash outflows
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Cash inflows will take time to arrive: manufacturing takes time and stock of finished goods must be sold- often on trade credit
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The company must wait for customers to pay up before cash flow improves
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If a business runs out of cash needed to run the business, it will be in trouble
