Growth and Decline

Question 1

Identify the four stages of the business life cycle.

Answer 1

Establishment
Growth
Maturity
Post-Maturity

Question 2

Identify the three possible paths a business can take during post-maturity.

Answer 2

Renewal
Steady State
Decline

Question 2

Describe five characteristics of the establishment phase.

Answer 2

High failure rate
No well known brands
Low sales
High expenses
Poor cash flow
Runs at a loss

Question 3

Describe five characteristics of the growth phase.

Answer 3

Failure rate decreases
Increase in sales
Increase in revenue
Developing goodwill
Business can grow

Question 4

Describe five characteristics of the maturity phase.

Answer 4

Failure rate increases
Increased competition
Growth slows
Costs increase
Requires innovation

Question 5

What is horizontal integration?

Answer 5

A business buying a similar business.

Question 6

What is backwards vertical integration?

Answer 6

A business buying its supplier.

Question 7

What is forwards vertical integration?

Answer 7

Business buying a business it supplies.

Question 8

What is diversification?

Answer 8

A business buying an unrelated business.

Question 9

A McDonald’s buys a cattle farm that supplies their beef.

What type of expansion is this?

Answer 9

Backwards Vertical Integration

Question 10

A steel mine is buying an electronics company it supplies.

What type of expansion is this?

Answer 10

Forwards Vertical Integration

Question 11

A hairdressing business is purchasing a competing hairdressing business.
What type of expansion is this?

Answer 11

Horizontal Integration

Question 12

A cafe is purchasing a hairdressing salon.

What type of expansion is this?

Answer 12

Diversification

Question 13

Identify four challenges in the establishment stage.

Answer 13

Managing cash flow
Promotion costs
Long work hours
Managing expenses and wages

Question 14

Identify four challenges of the growth phase.

Answer 14

Customer satisfaction
Increasing wages
Delegation of duties
Maintaining trained staff

Question 15

Identify five challenges during the maturity stage.

Answer 15

Competition
Need to innovate
Conducting R+D
Utilising a competitive advantage
Maintaining goodwill
Avoiding complacency

Question 16

Describe the two most common reasons for business decline.

Answer 16

Lack of experience
Required skills are often underestimated

Undercapitalisation
Hidden costs can add unexpected expenses
A contingency fund is required to avoid these costs

Question 17

Identify five strategies to help avoid undercapitalisation.

Answer 17

Have a contingency fund
Keep budgets accurate
Minimise spending
Spread out payments
Collect debts

Question 18

Describe voluntary cessation and give three reasons for voluntary cessation.

Answer 18

When an owner closes a business by choice.

Retirement, lifestyle or death.

Question 19

Describe involuntary cessation and give two examples of involuntary cessation.

Answer 19

When a business is forced to close.

Bankruptcy and administration.

Question 20

What is bankruptcy?

Answer 20

When creditors apply to the courts for a ‘bankruptcy order’ to force a business to close if it is insolvent.

Question 21

Define insolvent.

Answer 21

When a business is unable to pay back its debts.

Question 22

What happens when a business goes into bankruptcy.

Answer 22

The business is liquidated to repay debts.

Question 23

What happens when an unincorporated business becomes insolvent?

Answer 23

It goes bankrupt.

Question 24

What happens when an incorporated business becomes insolvent?

Answer 24

It goes into administration and share trading is suspended.

Question 25

What happens when a business goes into administration?

Answer 25

An administrator liquidates the business and pays back:
-Secured creditors
-Unsecured creditors
-Shareholders
(In that order)

Question 26

What is a lien?

Answer 26

An asset held by secured creditors to guarantee the repayment of a loan.