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Business expansion

3 types of reasons for business expansion and growth Defensive, aggressive and psychological.
Defensive reasons for business expansion Protecting essential raw material supplies, labour supplies, Economies of scale, Profitability/financial strength, Diversification., Eliminate competition, Reduce costs and risk, Survive economic shocks
Protecting essential stock of supplies Reverse integration into the chain of supply may safeguard the company’s supply chain, guaranteeing a supply of stock for resale.
Economies of scale As a firm expands the costs fall because of bulk buying, savings in transport, lower storage costs etc. Lower costs mean cheaper goods, higher sales and more profits for the company
Profitability/financial strength Strength through sheer size. A large business enterprise commands prestige, influence and power, Being a big player with a large market share will obviously strengthen the enterprise in the market place. Also able to weather the storms of recession.
Diversification A business spreading its risks by getting into a different line of business. For example adding products, or selling to foreign countries.
Aggressive reasons for expansion Increase profits, Acquire new products and new technologies, Empire building (creating the largest business in their area), Acquire assets that can be kept or sold on.
Eliminating competition This is often a reason for expansion whereby one company may merge with or take over a competitor to eliminate a threat to its market share.
Access to new technology and products Expansion may allow a company to acquire new technology and new products developed by competitors. Helps to acquire certain patents, processes, expertise or technologies that enhance the overall profitability of the business in the short and long term.
Psychological reasons for expansion Build an empire, ambition & drive.
Short Term Sources of Finance Bank overdraft, accrued expenses, trade credit.
Bank Overdraft Bank allows current account holders to withdraw more money from their account than in it. Interest is charged, can be recalled by the bank at any time. Used to purchase stock or pay the wages or working capital in day-to-day business operations.
Accrued Expenses This source of finance frees up money by delaying the payment of regular bills such as utilities, rent or insurance. This would free up cash to pay for supplies which in turn could be sold allowing these bills to be paid later
Trade Credit A company may buy stock for resale on a “buy now and pay later” basis. The amount of credit available is influenced by the creditworthiness of the company. There is no direct charge but cash discounts may be forgone.
Medium Term Sources of Finance Medium term loan. Hire Purchase, Leasing.
Hire Purchase Over a five year period or less. Immediate possession of good however ownership doesn’t transfer until the last instalment is made. Expensive source of finance. No security is required but the HP Co. may repossess the asset if default.
Leasing Involve the renting of an asset from a finance company. A lump sum is not required,full use and possession of an asset provided,fixed and regular payments to the company. While leasing costs more than cash purchase it can help the cash flow of a business.
Long Term Finance Mortgage, long term loan, debenture, equity capital, share capital, owners capital, government grants.
Equity/Share Capital/Owners Capital If the company is a Private limited company and the money needed to purchase an asset could be raised by selling ordinary shares to new or existing shareholders. No security or repayments are required for the company.
Equity capital Is money invested by the owners or shareholders and is low risk and does not require security. A firm financed mostly by Equity is lowly geared.
Debt capital Is loans from financial institutions, is high risk as interest and capital must be repaid, irrespective of profitability.
Methods of expansion(organic methods) Growth, Exporting, Licensing, Franchising.
Methods of expansion(inorganic methods) Merger, Takeover/Acquisition, Strategic Alliance/Business Alliance/Joint Venture.
Merger A friendly/voluntary amalgamation or joining together of two or more firms for their mutual benefit, trading under a common name. It involves mutual consent of two equal companies to combine and become one entity.
Takeover/acquisiton This occurs when one company purchases 51% or more of the shares in another company in either a hostile or friendly manner.
Strategic/Business Alliance/Joint Venture An agreement between two or more independent businesses to pool resources and/or expertise to work together for their mutual benefit over a specified period of time or to complete a specified project, while all parties maintain their separate identities
Franchise Arrangement whereby the existing business with the proven business mode grants a contractual licence/permission to the person setting up the business to use its name, logo & business idea in return for a fee or percentage of profits/sales
Organic Growth A business expands gradually through the use of its existing products or by developing new products.
Subsidiaries Another company called a Holding Company owns 51% of its voting shares
Debentures Long Term Loan that has a fixed interest rate and fixed repayment date.
Name 3 agencies that give grants County Enterprise Boards (for small firms) Enterprise Ireland (for Exporting Firms) IDA Ireland (for foreign owned firms in Ireland)
Created by: Lanaftz
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