1.

4 Business Growth and

Decline
Syllabus Points
business growth and decline

● stages of the business life cycle

○ establishment
○ growth
○ maturity
○ post-maturity
● responding to challenges at each stage of the business life cycle
● factors that can contribute to business decline
● voluntary and involuntary cessation – liquidation
1.4.1/2 Stages of The
Business Life Cycle
The Business Life Cycle
● The business life cycle is a
simplified model that refers to
the stages of growth that a
business can experience.
● Businesses are confronted with
challenges and opportunities at
each stage of the business cycle.
● No set time limit for each stage.
● Some small business owners may not
want to expand and are happy to
stay the same and if enough income
is generated.
The Business Life Cycle
● The nature, operation and organisation of the business
changes as it moves through the stages of the business life
cycle.
● It is important for the owners to assess the business’s
position on the life cycle as they need to develop
appropriate strategies (relevant to the current stage) to
expand the business.
● If an inappropriate strategy is used it could jeopardise the
potential growth of the business.
● It is often difficult for owners to determine their position
on the life cycle as fail to recognise the changes taking
place.
Stages of the Business Life Cycle
 This

The Business Life Cycle

terminology
is different
to the
syllabus.

This is helpful
to see how
sales, cash and
profit change
over the course
of time.
Establishment
Stage 1 - Establishment Features
● “Birth” of the business
● Outline of goals with the aim of future growth.
● Marketing techniques would be designed to
introduce and highlight the benefits to potential
customers with the aim of being inexpensive.
● Management is informal and often made as problems
arise.
● Small number of employees.
Stage 1 - Establishment Features
● High level of risk, 33% fail in the first year of trading.
● Sales are slow and unpredictable.
● High fixed costs (premises, insurance, equipment,
materials).
● Small amount of profit that is usually put back into the
business.
● Cash flow is erratic and in the early stages constant cash
outflow.
● The aim is to attract a large customers base for viability
for the future. Therefore building positive relationships
with customers.
Stage 1 - Establishment Challenges
● Difficulties in obtaining the necessary funds for the business.
● High costs associated with the setup of the business.
● Slow growth in sales putting pressure on cash flow.
● Difficulties in attracting employees with appropriate skills.
● High costs associated with the promotion (marketing) of the business.

Establishing a business is not always easy. The owners need to be

involved in the business planning to overcome these problems. If the
business can conquer these challenges it will experience growth, move
into the second phase of the business cycle and be confronted with a
whole new set of decisions to be made.
Growth
The Business Life Cycle
STAGE 2 – GROWTH FEATURES
● Goals are aimed at increasing current sales. This can be done
through mergers and takeovers.
● Marketing techniques include lowering price (due to lower
production costs), introducing new products, extensive promotion
and mass marketing techniques to increase market share.
● Management is more formalised and delegation of some
responsibilities. Communication is essential between management.
Outsourcing of some functions is an option.
● Risk has been reduced therefore it will be easier to obtain
capital. Although this can lead to liabilities becoming greater
than assets.
● Need for long-term planning (management).
STAGE 2 – GROWTH FEATURES
● Sales increasing rapidly.
● Production costs decrease due to cheaper unit costs due to larger
production (economies of scale). Increases in efficiency in
administration, finance and production.
● Increasing profit (increasing sales and falling production costs)
● Adequate cash flow must be maintained to continue expansion.
Difficulties arise when growth is too rapid. Forecasting of sales and
expenditure becomes crucial.
● Employees are more specialised therefore formal and informal training
is required.
● There is a focus on satisfying existing customers while at the same
time entering new markets (domestic and international). This is where
mass marketing becomes and option.
STAGE 2 – Growth Challenges
● Ensuring the quality of service or production is maintained
as output grows.
● Developing appropriate accounting and financial information
systems which provide management with detail about the
business.
● Managing the cash flow and being aware of the financial
requirements involved in expanding the business.
● Sustaining growth and not letting the successes of the
business create a sense of self-satisfaction or laziness.
● Redefining the role of management so that the manager’s
workload is not overwhelming.
● Recruiting new employees and delegating responsibility.
STAGE 2 – Growth
Maturity
The Business Life Cycle
STAGE 3 – MATURITY FEATURES
● Goals usually involve maintaining current levels of
profit.
● Leadership is crucial; management needs to redefine
objectives and vision.
● Increase in competition therefore market share may
decline. Marketing strategies will therefore be aimed at
maintaining customer and brand loyalty through
advertising.
● A work team approach is introduced. Employees
responsibilities are reduced to avoid complacency.
STAGE 3 – MATURITY FEATURES
● Rate of growth slows (sales) and eventually
flattening out (plateauing), therefore profit is
also slowing.
● Maintaining low levels of costs are becoming more
important as it is impacting on the level of profit.
● Costs have a high impact on cash flow and if costs
can not be controlled the cash flow position will
deteriorate.
● Risk will increase if costs are not controlled and
if management becomes slow to react to change.
STAGE 3 – Maturity Challenges
Because it is now harder for the business to increase its sales or
prices, the firm tends to focus on reducing its production costs. This
may involve changes to management, reducing staffing levels, using
different equipment, or scaling back on expenses such as marketing.

Other challenges are:

● Staying responsive to changes in consumer demands.

● Identifying opportunities for innovation in products and services.
● Reorganise business operations and minimising costs.
● Sustaining the motivation of management and staff and avoiding
laziness and complacency.
Post-Maturity
The Business Life Cycle
STAGE 4 – POST MATURITY FEATURES
Three possible outcomes:

1. Steady State – operating at the same level.

2. Decline – falling sales and profits which lead to business
failure.
3. Renewal – increasing sales and profits due to new growth
areas.
POST-MATURITY – STEADY STATE
● Neither declining or expanding.
● A business is satisfying consumer demand and maintaining
profit levels (some businesses are comfortable in this
position).
● Similarities with businesses in the maturity stage
although it does not spend expenditure on research and
development (R&D).
● This position can not be maintained forever. Eventually
the business environment will change (new competitors or
changes in consumer preferences) and the business be
forced into decline or renewal.
POST-MATURITY – DECLINE
Customers stop purchasing the product due to product not meeting consumer
needs, eventually profits decline. Cash flow is also affected and more
money is leaving the business than what is coming in.

The process of decline becomes difficult to reverse for the following

reasons:

1. Difficult to borrow money due to the high risk of failure.

2. Suppliers restrict their credit facilities and may insist in cash
payments.
3. Product is outdated, leaving the business with unsold stock.
4. Well-qualified employees leave for better employment opportunities.
Therefore employee retention is low.
POST-MATURITY – RENEWAL
● Business decline can be avoided with carefully planned
strategies that tap into new markets and satisfying a
previously unmet market (consumers).
● A business heading for decline can be turned around and
placed on the path of renewal although this is very
difficult.
● The main key to achieving renewal is for the business to meet
changing consumer demands. They may need to abandon
once-successful products and focus on the ones that will be
successful in the future.
● Market research should be conducted so that forecasting
future consumer trends can be completed.
POST MATURITY – RENEWAL CHALLENGES
● Funding research and development (marketing research).
● Understanding the changing tastes and needs of the
customer base.
● Moving into new or related markets where there are greater
growth opportunities.
● Leading the management and staff towards change.
MERGERS AND ACQUISITIONS (TAKEOVERS)
A merger occurs when
the owners of
businesses agree to
combine their resources
and form a new
organisation. This
decision is usually
mutual between both
firms.
MERGERS AND ACQUISITIONS (TAKEOVERS)
MERGERS AND ACQUISITIONS (TAKEOVERS)
An acquisition (takeover) occurs
when one business takes control of
another business by purchasing a
controlling interest in it.

Benefits include removing a

competitor from the marketplace.
Google acquired
Facebook Acquisitions – The Complete YouTube in 2006 for
List (2022)! [Infographic] $1.65 Billion.
MERGERS AND ACQUISITIONS (TAKEOVERS)
Group Work
In groups, you have 5 MINUTES to outline the
benefits of mergers and acquisitions to
businesses.
(Mergers and acquisitions (takeovers) are on
page 96-98 of the textbook)
Mergers and Acquisitions
Businesses can benefit from mergers or
takeovers as they can:

● Access new markets,

● Taking advantage of economies of scale
(reduction in costs due to sharing
resources),
● Have more cash available.
MERGERS AND ACQUISITIONS (TAKEOVERS)
INTEGRATION AND DIVERSIFICATION
There are several types of mergers and acquisitions. Three types
are:

1. Vertical integration – occurs when a business expands at

different but related levels in the production and marketing of a
product.
2. Horizontal integration – occurs when a business acquires or
mergers with another firm that makes and sells similar products.
3. Diversification - (conglomerate integration) occurs when a
business acquires or mergers with a business in a completely
unrelated industry. For example CSR began as a sugar manufacturer
and added Gyprock, Monier roof tiles and Viridian glass.
INTEGRATION AND DIVERSIFICATION
Are There Any Other Ways to Expand?
Franchises
or starting
up new
branches
 1.4.2
Factors That
Contribute to
Business Decline
FACTORS THAT CONTRIBUTE TO BUSINESS DECLINE
Business decline is not due to one factor but a combination
of several.

External factors Internal factors

Government policies. Lack of management knowledge.

Unexpected competition. Lack of (Inadequate) planning.

Natural disasters. Lack of adequate cash flow and finance.

Incorrect location.

Failure to meet customers’ needs.

FACTORS THAT CONTRIBUTE TO BUSINESS DECLINE
The two main causes of business decline are:

1. Lack of management expertise – Includes management staff

who may not have the skills. It also includes when a
business does not prepare a business plan or does not
update the business plan.
2. Lack of sufficient money (undercapitalisation) – many
businesses start out with a small amount of capital.
Without sufficient capital (funds/money) and a positive
cash flow the business will not be able to purchase stock
and materials. This can lead to lost sales and profit.
Importance of Cash-Flow
● Cash-flow is the movement of
money in and out of the
business.
● If money going out of the
business is greater than money
coming in then this will lead to
the business running out of
money.
● If money going out of the
business is smaller than that of
money coming into the business
then the business will continue
to operate.
Importance of Cash-Flow
Cash-flow is of great concern to small to medium enterprises
(SME’S) as they do not have a lot of cash in reserve.

This is where monitoring cash-flow, through the cash-flow

statement, is important as the business can predict whether
it will have enough funds to pay debts.
 1.4.3
Voluntary and
Involuntary
Cessation -
Liquidation
The Business Life Cycle
Voluntary Cessation
Voluntary cessation occurs when the owner
decides to stop operating the business. Any
assets owned are sold by the business. Most
businesses fail due to:

● Increasing debts
● Negative cash flow.
Involuntary Cessation
Involuntary cessation occurs when the owner is forced
to stop trading by the creditors (people and
businesses owed money) of the business.

Creditors start to worry when the business continues

to decline (decrease in sales and profit) and they can
force the business to close.
VOLUNTARY AND INVOLUNTARY REASONS FOR CESSATION
Voluntary reasons Involuntary reasons
Owners wish to retire. Death of the owner.
Unable to trade/operate
Bankruptcy (individuals only).
profitably.
The business was intended to
Insolvency (not being able to
operate only for a short
pay debts).
period of time.
Owners decide to reinvest
capital elsewhere or decide to
go into another business
venture.
DIFFERENT METHODS AVAILABLE TO WIND UP A BUSINESS
The legal structure of the business determines the process
that it has to follow to cease trading. These legal forms
are:

● Sole traders and partnerships may end up being declared

bankrupt, this can be voluntary and involuntary.
● Companies can be placed in:
○ Voluntary administration – an independent administrator is appointed to
operate the business in hope of fixing the financial problems.
○ Liquidation – this can be voluntary or involuntary and it is when the
business is wound up.
Bankruptcy
Bankruptcy is a declaration that a business or person is
unable to pay their debts.

Sole traders (owned and operated by one person) and

partnerships (owned and operated by 2-20 people) may end up
being declared bankrupt (voluntary or involuntary).
Liquidation
Liquidation occurs to companies. It
occurs when an independent and
suitably qualified person
(liquidator) is appointed to take
control of the business with the
intention of selling all the
company’s assets in order to pay
the creditors. Once the creditors
have been paid the surplus of cash
is paid to the owners of the
company.
Receivership
A company in liquidation can
also be in receivership.
Receivership is where a
business has a receiver
appointed by creditors or the
Courts to take charge of the
affairs of the business.
Unlike liquidation, the
business may not be wound up.
Liquidation
The main features of liquidation are:

● It can be regarded as the equivalent of

bankruptcy for a company (corporation)
● Results in the company coming to an end.
● Normally occurs because the company is
unable to pay its debts when they are due
– it has become insolvent.
Liquidation
There are two types of insolvent liquidation:

1. Creditors’ (voluntary) liquidation – this is the most

common type of liquidation process and can come about in
two ways. The first is method involves creditors voting
for liquidation following voluntary administration. The
second method involves the company’s shareholders agreeing
to liquidate the company and appoint a liquidator.
Liquidation
2. Court (involuntary) liquidation – in this
situation a court appoints a liquidator to wind up
the company, usually after an application has been
made from either a creditor, a shareholder, a
company director or, in some circumstances, the
Australian Securities and Investment Commission
(ASIC).
Liquidation
When a company is being liquidated because it is insolvent, the liquidator’s
prime responsibility is to the company’s creditors. The liquidators main
functions are:

● Take possession and convert the company’s assets into cash.

● Investigate and report to creditors about the company’s financial and
related affairs
● Determine debts owed by the company and pay the creditors
● Scrutinise the reasons for the company failure
● Report possible offences by people involved with the company to the
Australian Securities and Investments Commission (ASIC).
● Finally, to deregister or dissolve the company.

A liquidator is not required to do any work unless there are enough assets to
pay their costs.
Impact on Stakeholders due To Liquidation
The full effect of a company being
liquidated can be described as the
ripples on a pond, they radiate out,
impacting on the wider community.

It is estimated that on average 30-40

people are personally affected by one
company’s insolvency.
Impact on Stakeholders due To Liquidation
Stakeholder Problems occurring from liquidation
Could lose personal assets and the possibility of
Company directors
fine and/or imprisonment.
Creditors
May not recover any of the money owed.
(unsecured)
Loss of jobs. They have the right to be paid their
Employees outstanding wages and superannuation (if funds are
left over after liquidator’s fee).
Rank behind the creditors and unlikely to receive any
Shareholders
payment.
Loss of production from the liquidated companies.
Society/ economy Social and personal difficulties associated with job
losses.