Nature of Business: Continued page 9 onwards Flashcards
Define Business Life Cycle
Phases of growth and development a business goes through during its lifetime (4 stages)
Establishment Phase =
Characteristics:
- Goals: survival, establish a firm foundation for future growth
- Profit/sales begin slow, occasionally a loss, sometimes profit reinvested to ensure future growth
- Very fixed high costs e.g. equipment, premises
- High change of failure
Greatest Challenge:
- lack of finance, experience and customers
Growth Phase
Characteristics:
- Goal: increasing level of sales = increase in profit, and continual growth
- Growth and expansion occur through mergers, acquisition (takeover) and diversification
Merger = combining with another business to form a new organisation
Acquisition = a business takes control of another business by purchasing a controlling interest in it
- Regular customer base, development of new products and improvement of cash flow
Greatest Challenges:
- Rapid growth; not keeping up with demand
- Loss of control of direction
Maturity Phase
Characteristics:
- Goal: maintain profit
- Sale/profit: Rate of growth slows and flattens out
- Managers may need to restructure or reorganize the business
- If costs aren’t controlled, cash flow drops and risk increases
Greatest Challenges:
- Matching competition; price and quality
- Positive and committed
- Leaders remaining and flexible
Post Maturity Phase
Characteristics:
- Goals: increasing sales, cashflow and profit, diversify further – seek new markets
- Sales/profit increase in the long term
- Cash flow decrease in short term due to cost of research + development and restructuring – if successful increase in long term
- Risk associated with strategy e.g. new products, new markets
Greatest Challenge:
- Maintaining new sales
Two MAIN CAUSES of business growth and decline
- Lack of management expertise –> failure to prepare a business plan
- Lack of sufficient money –> without sufficient capital (finance) and a positive cash flow the business will not be able to purchase stock and materials (undercapitalisation - occurs when theres a lack of sufficient funds to operate a business normally)
Types of Mergers
Vertical: A business expands at a different but related level (back or forwards)
Horizontal integration: When a business acquires/merges another firm that sells similar products
Diversification: When a business acquire/merge with an unrelated industry
Post Maturity Phase - 3 possible outcomes =
Steady state – continues to operate at its level
Decline – falling sales and profits lead to business failure
Renewal – increasing sales and profit due to new growth areas
What is Voluntary cessation?
(of own choice) = when a business may cease operations and voluntarily wind up its affairs. Any assets owned by the business are sold
What is Involuntary cessation ?
(forced by others) = when the owner is forced to cease trading by the creditors of the business (creditors are those owed money)
What is Bankruptcy?
A declaration that a business or person is unable to pay his/her debts
How does Bankruptcy work?
- Can be voluntary or involuntary (either a business owner or creditor applies to court for a bankruptcy order.
- an appointed representative collects money owed to the business along with money raised from the businesses assets is divided among creditors (this process is called realisation > converting assets into cash
What is Voluntary Administration
- occurs in public/private company’s > when a company is experiencing financial difficulties it is placed in voluntary administration.
- an independent administrator is appointed to operate a business in the hope of trading out the present financial problems.
- The administrators role is to examine the financial affairs together with creditors. If successful the business may resume normal trading, if unsuccessful, it will go into liquidation.
What is Liquidation?
- When a company is experiencing financial difficulties, its shareholders, creditors or the court can put the company into liquidation (winding down the company)
- A liquidator is appointed to take control and sell all the company’s assets to repay creditors e.g. employees who are owned wages/salaries or governments who are owed taxes.
- Liquidation usually occurs because the company is insolvent (unable to pay their debts)
2 types of Insolvent liquidation:
Creditors (voluntary) liquidation - Creditors can vote for liquidation following a voluntary administration or company shareholders agree to liquidate the company and appoint a liquidator
Court (involuntary) liquidation - Court appoints a liquidator to wind up company usually after an application is made by a creditor, shareholder or company director
The liquidator then;
- takes possession of and releases is cash, company assets
- inspect reasons for company failure
- finally, dissolve the company
Main problems for Company Directors when liquidation arises:
- possible loss of directorship position and or qualification as a director
- could lose personal assets to pay for company’s debts
- possibility of a fine and/or imprisonment
Main problems for Creditors when liquidation arises:
- May not recover any of the money owed to them
Main problems for Employees when liquidation arises:
- loss of jobs
- have the right to be paid their outstanding wages and superannuation if funds remain
Main problems for Shareholders when liquidation arises:
- rank behind the creditors and unlikely to receive any payment
- The liquidator can request the holders of unpaid or partly paid shares in the company to pay the outstanding amount of those shares
Main problems for society/economy when liquidation arises:
- loss of production from the liquidated companies
- social and personal difficulties associated with job losses
- loss of economic confidence
Factors that contribute to business decline/failure
> Competition > Failure to adapt to change > Growing too quickly > Unfavourable economic conditions > Price, product, promotion factors > Undercapitalisation (lack of sufficient funds a business needs) and cash flow problems > Poor planning > Poor management skills
Responding to Challenges: ESTABLISHMENT STAGE
Main Challenges = a lack of:
• Experience
• Finance
• Customers
Strategies to respond =
• return profit (earnings) back to the business
• Lower variable costs
• develop positive relationships with customers
• Use Inexpensive marketing e.g. Social Media, buy one get one free, pamphlets, work with influencers etc.
Responding to Challenges: GROWTH STAGE
Main Challenges =
• Rapid Growth: not keeping up with demand
• losing control of direction
• lack of cash flow to pay for increasing expenses
Strategies to respond =
• merge to diversify business
• new products implement/stop slow selling products
• positive marketing
• delegate (transfer) responsibility
• concentrate on satisfying existing customers
• tap into new markets
Responding to Challenges: MATURITY STAGE
Main Challenges =
• matching competition: price and quality
• complacency
• leaders remaining positive and committed
Strategies to respond =
• Improve quality of products
• Manage costs and reduce where possible
• Strong leadership and vision
