Page 42 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 1 Understanding business activity
Sole traders, partnerships,
unlimited liability: see
Chapter 4, page 46.
40
Disadvantages of small
businesses such as sole
traders: see Chapter 4,
page 46.
TEST YOURSELF
Owner’s choice
Most businesses start off small. Once they become established in the market the owner
may set growth as an objective, but not always. There are several reasons for this.
■ The owner does not want the responsibility or workload of managing a larger
business. For some this is a lifestyle choice.
■ The owner wants to keep total control of the business and fears that growth
will reduce the level of control they have over decision-making and day-to-day
management.
■ The owner wants to maintain a close relationship with customers and provide a
personal service. This is much more difficult with larger businesses.
■ The owner does not want to take the risk of having growth as an objective. Oft en
additional capital must be borrowed to finance expansion plans. If growth is
too slow or profits do not increase, the business may not be able to finance its
borrowing. If so, then the business will not survive. The owners of unincorporated
businesses, such as sole traders and partnerships, have unlimited liability for the
debts of the business. They have to use their own wealth to pay business debts.
Market size
Some businesses have market size as an objective and this influences their growth.
But not all businesses have market size as their objective. For example, businesses
that serve a local market – such as hairdressers, taxi firms or dentists – may not
want to offer their services beyond the local neighbourhood. They know that
consumers in other neighbourhoods will not want to travel to their businesses
when there are similar businesses close to where they live.
Access and availability of capital
Another important factor influencing growth is the access and availability of
capital to finance growth plans. You will learn later that one of the disadvantages of
small businesses is the difficulty they have in obtaining loans from banks and other
lenders. This is probably the most important factor that prevents businesses of this
type from expanding.
Market domination
Some industries are dominated by a few very large companies and it is diffi cult for
smaller businesses to compete. Market domination often means that consumers
have a brand loyalty to the larger businesses that can offer lower prices than smaller
firms due to them enjoying the benefits of economies of scale.
1 Identify and explain two reasons why owners might want to grow their business.
2 What is the difference between internal and external growth?
3 State two reasons why some businesses remain small.
Why some businesses fail
Businesses are not always successful. Many new businesses fail within their fi rst
one or two years. Even long-established businesses fail.