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Business 2.1 - Coggle Diagram
Business 2.1
Sources of finance
Retained profits
An advantage of retained profits is that they allow a business to keep finance in the business. This means they don't have to worry about interest rates, collateral or shares of the business given up. This keeps the business more stable as they don't have to involve others
A disadvantage is that businesses may not have the funds to put back in. If a business requires finance, it may not have enough retained profits. This means they'll still have to resort to other sources of finance
Selling assets
An advantage of selling assets is that it is convenient. By getting rid of unwated assets, it creates more space for more profitable uses. This means the business can get more finance in two ways
A disadvantage is that putting assets on the market does necessarily mean finance will be made. Used items are unlikley to sell for full market price; they might not even sell at all. This makes this source of finance unreliable and other ways should be considered
Personal savings
An advantage of using the owner's capital means they have no interest to pay back. A business will likely struggle to make not only a good amount of profit but also enough to pay back hefty interest rates, especially with deadlines. This maximises the business' overall profits
Entrepreneurs of small businesses may not have a large amount of personal savings. This means they have to decide whether or not they take a risk of leaving less than what they normally live off. This can be risky if the business fails and the entrepreneur is left broke
Bank loans
An advantage of a loan is that it allows a business to earn a signification amount of finance for a prolonged time of investment. This means that you get to keep all your shares and get time to pay back what you owe. This especially benefits business that may struggle to make enough profits quickly
A disadvantage is a lack of flexibility. All of the money given as well as interest must be paid back, even if it wasn't all used. This can result in an unnecessary loss of money and therefore isn't ideal for risk taking
Share capital
Share capital allows a part of the business to be bought in order for a large investment. This is a quick and easy way to make finance with limited liability in case they are unable to make more money . The shared responsibility allows for security in the small business, therefore, increasing its chance of survival
A disadvantage of share capital is a lack of control. By selling shares of your business means you no longer have full control- or the most power if you sell over half the company . This means personal gains and dependency aims can be lost
Stock market flotation
An advantage of stock market flotation is that large amounts of capital can be raised. This is because the public can easily buy shares through a stockbroker or bank. Giving easy access to the public like this increases the likleihood the right amount of finance will be raised
A disadvantage of stock market flotation is that it can result in a loss of control. Since anyone, including other businesses, can buy shares, there is a high chance over half the business will be sold. This means the entrepreneur no longer has dependency and power over the business
Globalisation
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Tariffs
Countries place tariffs on imported goods to make them more expensive for businesses and consumers to buy. They do this to restrict demand. By doing this, they aim to promote/ protect businesses in the country
An advantage is that businesses in the home country have better opportunities. Their products are cheaper as they don't have to face the extra finance of importing. This drives up demand for these products
Tariffs raise the price of imports. This means the products are likely to increase in price, making people in the country spend an unnecessary extra amount of money. This can lower its GDP and increase poverty
Trading blocs
A trading bloc is another barrier to international trade. It is a group of countries that work together to provide deals for trading. This promotes trade between specific countries within the bloc
An advantage of trading blocs is that they promote free trade. This means businesses won't have to spend extra money on exporting their goods. This lowers the price of the product and increases sales
A disadvantage of trading blocs is that countries can only be a part of one. This means trade outside the bloc may still have tariffs enforced. Therefore businesses will still have to pay extra if they don't want to restrict who they sell to
Types of trading blocs
Free Trade Area- Have no trade restrictions between members, no external tariff and each country has their own policy with non-members
Custom Union- No trade restrictions or border checks, policies for external tariffs, trade deals for whole unions
Single Market- Free trade area, no trade restrictions, policies for external tariffs and no trade restrictions
International trade
An advantage of international trade is that it allows businesses to enter new markets globally. This means they have more potential customers. This will likely increase and maximise sales
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A disadvantage of international trade is tariffs. Countries not in or outside their trading bloc have to pay extra costs just to be allowed in the country. This will cause products to cost more in order to make an equivalent profit
Internal growth
Pros and cons
An advantage of business growth is increased profits. As a business grows, so does awareness of the brand's name which can attract more customers. This increases sales and therefore profits earned.
A disadvantage of business growth is risk. Expansion plans can backfire and result in a loss of money. The owners are then worse off financially without any gains
New markets
A business may decide to enter new markets to try to achieve growth. However, this comes with a higher risk than developing new products. This is because the business will not have dealt with these markets before, and entering the markets may be complex and expensive.
Entering overseas markets is one way to achieve growth. A business that operates in a domestic market might consider trading in other countries. Operating in this way could give the business access to a brand new market, which could prove successful and increase profitability.
When a business enters a new market, it should re-examine its marketing mix. This is particularly important when a business is considering entering an overseas market. This is so the business can understand the market and customer needs
Businesses may also take advantage of new technology to target new markets. Therefore, a business could use e-commerce to enable customers to buy products wherever they live. This means the business does not need to learn about the new market in order to sell there
New Products
Many new businesses start out with one product idea. Once a business has a market it already sells to, it is less risky to expand its product range with related products. This attracts new customers which increases growth
External growth
Merges and takeovers
Horizontal integration occurs when two competitors join through a merger or takeover. The new business then becomes harder to compete with and increases its market share. This gives it more control when negotiating and setting price
Forward vertical integration occurs when a business takes control with another that operates at a later stage in the supply chain. This strategy eliminates various transaction and transportation costs. Thus, a company can achieve greater market share through lower product prices.
backward vertical integration allows businesses to obtain control over suppliers and improve supply chain efficiency. This merge allows a business to acquire their suppliers and their raw materials. This gains strategic advantages over competitors and lower costs
Conglomerate integration occurs when businesses in unrelated markets join through a takeover or merger. This enables businesses to spread their knowledge over a wider range of products and services. This increases market shares as their targeted customer range is much larger
Pros and cons
An advantage of external growth is reduced competition. By merging/taking over a business' competitors, they hold a higher percent of market share. This makes it harder for the remaining competitors to compete with them
A disadvantage of external growth is transactional cost. Merging or taking over a business can can range between 6-8% of both business' gross revenues. This mean growth may not be worth it if finances aren't fully stable
Public Limited Company
One advantage of being a PLC is having limited liability. Personal wealth is not liable if the business crashes; only the amount invested can be lost. This increases the chances of business survival and is less risky overall
One disadvantage of being a PLC is that in order to have limited liability, shares must be sold. This increases the chance of a lack of control and perhaps a takeover. Therefore, the company is at risk of being lost and there is no/less independence
Ethics & The Environment
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Pros and cons
Being eco-friendly
An advantage of being eco-friendly is a good reputation. Concerned customers who are aware of environmental issues are more likely to buy from these businesses. This attracts customers who avoid places that do more damage
A disadvantage of being eco-friendly is that it can increase costs. Producing goods in this way can often mean spending more money, as it can require investment in new production methods. This will lead to products costing more, which customers may not be willing to buy
Being ethical
An advantage of being ethical is a good reputation. Customers and investors don't want to support sweat-shops etc so they are less willing to buy from places that do. This attracts customers and increases sales
A disadvantage of being ethical is that it can increase costs. This is because ethically sourced supplies are often more expensive to buy. This will lead to products costing more, which customers may not be willing to buy
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