Topic 2.1 Mindmap

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  • 2.1.1 Business growth
    • Organic Growth - business has grown from within without mergers or takeovers
      • A business can grow by developing new products
      • A: A business that grows can retain their own company culture & independence
      • A: Higher production means that the business can benefit from economies of scale & lower average costs
      • A: More influence comes with more market share, the business can start setting prices for the industry
      • D: Very high risk strategy
      • D: Growth may be limited & is dependent on reliability of forecasts
    • Inorganic Growth
      • Mergers: two businesses merge to become one new one
      • Takeovers: One business will takeover another business by buying more than 50% of the shares, can be hostile if shareholders don't agree
      • A: Greater economies of scale due to increased order size, bulk buying
      • A: Increased revenue & market share. Combined company increase market power and ability to charged higher prices
      • A: International expansion - buying a business in another country helps with cultural issues & foreign laws
      • D: Clash of cultures, may not work well together
      • D: Possible communicatio problems if business gets too big
      • D: Unreliable merger partners - effective merger depends on trust
      • Diseconomies of scale - As a business gets larger, costs rise with problems in motivation, communicatio & coordination
    • Becoming a Plc (Public Limited Company)
      • limited liability, business has its own legal status, owners cannot be sued
      • shares are open for anyone to buy
      • shares are bought and sold on the stock exchange
      • A: Easy to raise capital - issue more shares
      • A: Banks are more willing to lend money to a large well-established company; there is less risk
      • D: Expensive, lots of administrative work, raise at least £50,000
      • D: Prepare annual accounts - printed and sent to all shareholders to see how the business is doing
      • Accounts must be available to the general public and competitors - know business' plans
    • Internal Finance
      • Retained Profits -
        • A well-run business should continually re-invest in new staff/stock/       equipment/ premises/ vehicles etc.
        • A: There is no interest to pay
        • D: Once it has been used, it is gone
        • After a year or more of trading, a business may have some profits that they are able to re-invest into the business to help it grow
      • Sale of Assets
        • A business can raise finance by selling items that they already own e.g. Machinery, land, premises, vehicles etc.
        • Once the asset is sold, the benefit of the asset is lost
        • No longer appears on the balance sheet of the company - will look less attractive to investors
    • External Finance
      • Loan Capital
        • A business may ask the bank for a loan if they wish to expand
        • The business will have to pay back some of the loan each month
        • The business will have to pay interest on the loan
      • Share Capital
        • If a business is an ltd, it can sell shares to friends & family
        • These shareholders are then entitled to shares of the profits of the business
        • There is no interest to pay back so it is cheaper than a loan to issue shares
      • Float on the stock market
        • A ltd business may need more money to expand to a plc
        • This means that it can float shares on the stock market
        • Shares in the business can now be sold to the general public, generating more capital to expand

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