Updated: Jul 2
Business growth is a key business objective
There a many reasons why a business should grow. Among them
To achieve economies of scale
Increase market share
Better ability to get financing
A higher return to shareholders from more profits
Enable diversification that will reduce risk of business failure
Economies of Scale
A business that achieves economies of scale will reduce its average cost and increase its profits as revenues peak from maximizing output, while cost minimizes from economies of scale.
When a business grow, it can increase market share as it increases output, as it increases the possibility of selling more products or services. This gives the firm an opportunity to increase its market share.
Larger firms are considered as established businesses that have grown because they were successful. As such, investors, creditors and banks have more confidence that these firms will be able to use the funds from loans to make a profit and repay their loans.
Higher Shareholders Return
As large firms are more likely to be able to get financing from external sources such as banks, most profit earned would be distributed to shareholders or kept as retained profits.
Large firms are likely to have accumulated large funds from years of retained profits. This enables them to acquire other businesses through mergers and acquisitions. Whether it is from internal growth or external growth (vertical, horizontal or lateral integration), diversification ensures that should one business fail, the firm may rely on other businesses (they acquired) to earn profits and survive.
Economies of scale
Sources of Finance
PAST YEAR QUESTIONS
Identify and explain two disadvantages of business growth (4 marks) Feb/Mar 2018/12
Identify two advantages of being a large business (2 marks) Oct/Nov 2019/13
Do you think a firm should take over the other businesses? Justify your answer. (6 marks) May/June 2019/11
Do you think a business should move to a larger shop? Justify your answer. (6 marks) Feb/Mar 2019/12
Identify two advantages to RGO of being a large business. (2 marks) Oct/Nov 2019/13
Identify two reasons why a business might want to expand. (2 marks) Oct/Nov 2020/13
What other reasons should a business grow? How does business growth benefit each business stakeholder group? Comment on post for discussion.