Nature of Business: Continued page 9 onwards

Question 1

Define Business Life Cycle

Answer 1

Phases of growth and development a business goes through during its lifetime (4 stages)

Question 2

Establishment Phase =

Answer 2

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

Question 3

Growth Phase

Answer 3

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

Question 4

Maturity Phase

Answer 4

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

Question 5

Post Maturity Phase

Answer 5

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

Question 6

Two MAIN CAUSES of business growth and decline

Answer 6

1. Lack of management expertise –> failure to prepare a business plan
2. 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)

Question 7

Types of Mergers

Answer 7

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

Question 8

Post Maturity Phase - 3 possible outcomes =

Answer 8

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

Question 9

What is Voluntary cessation?

Answer 9

(of own choice) = when a business may cease operations and voluntarily wind up its affairs. Any assets owned by the business are sold

Question 10

What is Involuntary cessation ?

Answer 10

(forced by others) = when the owner is forced to cease trading by the creditors of the business (creditors are those owed money)

Question 11

What is Bankruptcy?

Answer 11

A declaration that a business or person is unable to pay his/her debts

Question 12

How does Bankruptcy work?

Answer 12

• 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

Question 13

What is Voluntary Administration

Answer 13

• 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.

Question 14

What is Liquidation?

Answer 14

• 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)

Question 15

2 types of Insolvent liquidation:

Answer 15

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

Question 16

Main problems for Company Directors when liquidation arises:

Answer 16

• 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

Question 17

Main problems for Creditors when liquidation arises:

Answer 17

• May not recover any of the money owed to them

Question 18

Main problems for Employees when liquidation arises:

Answer 18

• loss of jobs

- have the right to be paid their outstanding wages and superannuation if funds remain

Question 19

Main problems for Shareholders when liquidation arises:

Answer 19

• 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

Question 20

Main problems for society/economy when liquidation arises:

Answer 20

• loss of production from the liquidated companies
• social and personal difficulties associated with job losses
• loss of economic confidence

Question 21

Factors that contribute to business decline/failure

Answer 21

> 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

Question 22

Responding to Challenges: ESTABLISHMENT STAGE

Answer 22

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.

Question 23

Responding to Challenges: GROWTH STAGE

Answer 23

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

Question 24

Responding to Challenges: MATURITY STAGE

Answer 24

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

Question 25

Responding to Challenges: POST-MATURITY STAGE

Answer 25

Main Challenges =
• maintaining new sales

Strategies to respond =
• Introduce new products that fill a gap in the market
• Conduct market research (find out current consumer wants and needs)
• Realign objectives
• Set new goals
• Manage resistance to change within employees