Growth and Decline Flashcards
Identify the four stages of the business life cycle.
Establishment
Growth
Maturity
Post-Maturity
Identify the three possible paths a business can take during post-maturity.
Renewal
Steady State
Decline
Describe five characteristics of the establishment phase.
High failure rate No well known brands Low sales High expenses Poor cash flow Runs at a loss
Describe five characteristics of the growth phase.
Failure rate decreases Increase in sales Increase in revenue Developing goodwill Business can grow
Describe five characteristics of the maturity phase.
Failure rate increases Increased competition Growth slows Costs increase Requires innovation
What is horizontal integration?
A business buying a similar business.
What is backwards vertical integration?
A business buying its supplier.
What is forwards vertical integration?
Business buying a business it supplies.
What is diversification?
A business buying an unrelated business.
A McDonald’s buys a cattle farm that supplies their beef.
What type of expansion is this?
Backwards Vertical Integration
A steel mine is buying an electronics company it supplies.
What type of expansion is this?
Forwards Vertical Integration
A hairdressing business is purchasing a competing hairdressing business.
What type of expansion is this?
Horizontal Integration
A cafe is purchasing a hairdressing salon.
What type of expansion is this?
Diversification
Identify four challenges in the establishment stage.
Managing cash flow
Promotion costs
Long work hours
Managing expenses and wages
Identify four challenges of the growth phase.
Customer satisfaction
Increasing wages
Delegation of duties
Maintaining trained staff
Identify five challenges during the maturity stage.
Competition Need to innovate Conducting R+D Utilising a competitive advantage Maintaining goodwill Avoiding complacency
Describe the two most common reasons for business decline.
Lack of experience
Required skills are often underestimated
Undercapitalisation
Hidden costs can add unexpected expenses
A contingency fund is required to avoid these costs
Identify five strategies to help avoid undercapitalisation.
Have a contingency fund Keep budgets accurate Minimise spending Spread out payments Collect debts
Describe voluntary cessation and give three reasons for voluntary cessation.
When an owner closes a business by choice.
Retirement, lifestyle or death.
Describe involuntary cessation and give two examples of involuntary cessation.
When a business is forced to close.
Bankruptcy and administration.
What is bankruptcy?
When creditors apply to the courts for a ‘bankruptcy order’ to force a business to close if it is insolvent.
Define insolvent.
When a business is unable to pay back its debts.
What happens when a business goes into bankruptcy.
The business is liquidated to repay debts.
What happens when an unincorporated business becomes insolvent?
It goes bankrupt.
What happens when an incorporated business becomes insolvent?
It goes into administration and share trading is suspended.
What happens when a business goes into administration?
An administrator liquidates the business and pays back: -Secured creditors -Unsecured creditors -Shareholders (In that order)
What is a lien?
An asset held by secured creditors to guarantee the repayment of a loan.
