2.1 - growing a business

Question 1

what is a plc?

Answer 1

a type of business where the company’s shares can be purchased

Question 2

what are advantages to a plc? (4)

Answer 2

limited liability, can raise large sums of finance via the stock market, business still exists despite the shareholders, firm is more prestigious

Question 3

what are disadvantages to a plc? (5)

Answer 3

shareholders may argue over distribution of profits, flotation on stock market is costly, greater administrative costs, risk of takeover, public can see company info and accounts

Question 4

what are types of finance available for a growing business? (5)

Answer 4

retained profit, share capital, loan capital, sale of assets, stock market floatation

Question 5

what are the benefits to retained profit?

Answer 5

cheap form of finance, its flexible

Question 6

What are drawbacks to retained profit?

Answer 6

-If business needs temporary finance, it’s unlikely they’ll have profits to use
-using too many profits may upset shareholders about their dividend payments
-growth may be slow if dependent on profits as they may not be high enough to help growth quickly

Question 7

What is selling unwanted assets?

Answer 7

Selling spare/unwanted assets like land, buildings and equipment

Question 8

What are the benefits of selling unwanted assets?

Answer 8

-No finance needs to be repaid
-Business owners keep full control of organisation

Question 9

What are drawbacks to selling unwanted assets?

Answer 9

• It’s unlikely to be long term solution for most that need to raise finance
• Reduces value of business as assets are no longer theirs
• Unlikely they’ll gain the original value due to depreciation

Question 10

What is a bank loan?

Answer 10

Amount of money borrowed for a set period of time with an agreed repayment schedule

Question 11

What are the advantages to a bank loan?

Answer 11

• Guaranteed money for a certain period
• No need to give bank a share of the business so no control is lost
• Repayments made in instalments meaning business doesn’t have to give away huge amount of money at once

Question 12

What are the drawbacks of a bank loan?

Answer 12

• Time consuming, business has to apply for it
• Sometimes you have to pay back the loan through your assets meaning the bank will have control over your assets
• There is a lack of flexibility , business may overestimate the amount they need to borrow but have to pay back full interest

Question 13

What is bank overdraft?

Answer 13

It allows a business to withdraw funds that they have not put into their bank account

Question 14

What are the benefits to bank overdraft?

Answer 14

• Interest is only paid on the amount used
• It’s flexible, if a business has unexpected costs and shortage of cash they can pay it with overdraft facility

Question 15

What are the drawbacks to bank overdraft?

Answer 15

• High levels of interest making them expensive sources of finance when used
• Bank may lower or withdraw facility if they think it’s necessary

Question 16

What is share capital?

Answer 16

Where a business puts shares of their business on a stock exchange, this is flotation

Question 17

What are the benefits to share capital?

Answer 17

• Large sums of money can be raised
• Capital doesn’t have to be repaid
• No interest , dividend payments can be missed if profit is low

Question 18

What are the drawbacks to share capital?

Answer 18

• Possible loss of control is 50% or more is owned by someone else
• Need to satisfy all shareholders expectations of dividends
• Costly and time consuming

Question 19

What is business growth?

Answer 19

Process of a firm getting bigger

Question 20

What is internal growth?

Answer 20

When a business grows by expanding its own activities

Question 21

What are some benefits to internal growth?

Answer 21

• Relatively inexpensive
• Firm expands by doing more of what it’s already good at so less risk of failure
• Easy to make sure quality isn’t suffer due to slow growth

Question 22

What are some methods of internal growth?

Answer 22

• Targeting new markets
• ## Developing new products

Question 23

What are the factors affecting methods of growth?

Answer 23

• size of business
• nature of product
  -position in the market
• financial position of the busines
  -regulations

Question 24

What is external growth?

Answer 24

This form of business growth tends to include two types such as merger or takeover

Question 25

What is a merger?

Answer 25

Two companies join to become one to become one new joint organisation

Question 26

What is a takeover?

Answer 26

Where one company takes-over another company or another business buys another business

Question 27

What are the ways a firm can merge or take over another?

Answer 27

Join with a - supplier - competitor - customer - unrelated firm

Question 28

What happens when you join with a supplier?

Answer 28

This allows firm to control the supply , cost and quality of its raw materials

Question 29

What happens when you join with a competitor?

Answer 29

This gives the firm a bigger market share so it will be a stronger competitor

Question 30

What happens when you join with a customer?

Answer 30

This gives the firm a greater access to customers and more control over the price at which its products are sold to the end user

Question 31

What happens when you join with an unrelated firm?

Answer 31

The firm will expand by diversifying into new markets, this reduces the risk from relying on only a few products

Question 32

What are the disadvantages to mergers and takeovers?

Answer 32

- Less than half are successful - there may be a bad feeling created especially if a business didnt agree to being taken over - it leads to a lot of cost cutting which may make many redundant and lead to tension and an uncertainty among workers

Question 33

What is horizontal growth?

Answer 33

A business joins a business at the same stage of production process

Question 34

What is vertical growth?

Answer 34

A business joins with its suppliers or its distributors

Question 35

What is conglomerate growth?

Answer 35

A business joins a business in a different market

Question 36

What are the benefits to a merger business?

Answer 36

There can be reduced costs and increased revenues

Question 37

What are the benefits of external growth?

Answer 37

- reduced comp and increased market share allowing more security and possibly increase prices - two businesses can transfer knowledge and skills and tech - larger businesses may able to be to raise money more easily and have more buying power - opportunity to diversify and enter new markets - risk is spread if products are different to the core product