Identify a UK based small or medium enterprise (SME) that you are familiar with that has grown, or is attempting to grow, using internal or external expansion, funding and other assistance. The company I have decided to concentrate on for this essay is a small enterprise in Coventry, England. The enterprise is a family owned business, called BTC (Builders Trade Center). BTC was set up in September 2004, and it sells a wide range of building products and therefore is classed as builder’s merchants.
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The Business employs six full time workers, and six part time workers. From September 2005 till September 2006, BTC had an annual turnover of i?? 364,000 (Appendix a). This is therefore complying with the EU definition of a small enterprise and it also complies with section 248 of the companies’ act of 1985. (Appendix b & c) BTC is owned by two equal owners and therefore is a partnership. A partnership is ‘where two or more partners own a business in the same field as sole proprietors’, (Sloman and Sutcliffe Economics for Business third edition, page 47).
The advantage of a partnership is there is more opportunity for growth because funding and finance can be raised more quickly than sole traders, as there are more partners. A sole trader is ‘where the business is owned by one person’, (Sloman and Sutcliffe Economics for Business third edition, page 45). Another advantage a partnership has over a sole trader is that the partners in the partnership might specialise in different areas of the business and share the workload, which makes the business run more efficiently.
However, a disadvantage partnerships have compared to a sole trader is that the profit has to be split with the partners, which could be legally between 2-20 partners. Another disadvantage a partnership has in comparison to a sole trader is that, like a sole trader, a partnership has unlimited liability, which means that if the business is not performing well the owners are liable for any losses. Therefore, a partnership could be risky, because if one partner makes serious mistakes and the company makes losses, all the partners could be liable, and could be forced to sell their personal assets to recover the losses.
Over the last year, BTC has seen a healthy rise in sales, as well as a rise in the number of new customers. This has been achieved by the use of internal expansion. Internal expansion is ‘where a business adds to its productive capacity by adding to existing or by building a new plant’, (Sloman and Sutcliffe Economics for Business third edition, page 293). When BTC was set up in September 2004, it was selling cement, sand, plaster, and plasterboard and building sundries, such as screws.
However, after a while BTC noticed that people would buy items from them and go to other builder’s merchants to buy the other things they needed, which BTC didn’t stock. To overcome this, BTC started by diversifying their product range and increasing the amount of stock they hold. They added to their product range by adding decorating stock, timber stock, ironmongery stock and plumbing and heating stock. Besides diversifying their products, BTC has additionally set up a free delivery service on bulky and large items.
The benefit of this allows the customer to be able to buy more stock without them having to overload their vehicles or make two journeys. By diversifying their product range and increasing the amount of stock they hold, BTC has spread the risk and gained stability. BTC has reduced the chance of instability, which arise in times of changes in the market condition. BTC has also become a more profitable business, because customers are probably attracted by the idea that they can get all the products they require in one place and the fact that they can get it delivered anywhere in Coventry, on the same day.
BTC has also gained new customers through advertising campaigns in the Yellow Pages, this is evident because people who phone up are usually asked how they heard of the business, and the most responsive answer is ‘Yellow Pages’. BTC could use internal finance to finance growth. Examples of internal sources of finance include selling assets, sale and lease back, savings and plough back. BTC could sell assets to fund growth. Even though this does generate cash, it is not a good idea because the firm might be dependent on that asset.
To overcome this problem, a firm might use sale and lease back. This is where a firm sells an asset and leases it back over a period of time. This is a good way of generating funds as it releases money tied up in assets, however the disadvantage is that the asset is no longer the companies and in the long run it will prove to be more expensive. Instead of selling assets and leasing them back, the owners of the company could decide to either plough back profits or use personal savings to fund the growth of a firm; however the owners might not be willing to fund more money in to the business.
BTC could also use external financing to fund growth. External finance is used by 80% of small or medium enterprises. Examples of external finance include overdrafts, credit cards, short term and long term loans. Overdrafts are used by 53% of small medium enterprises, the advantage of an overdraft you can use money that you haven’t got in your account; however there is interest on overdrafts for businesses. Credit cards are the most widely used finance tool for small and medium enterprises.
The advantage is again you can use money that you haven’t got, however there is an interest to be paid. BTC’s internal expansion is being financed through retained profit, borrowing from family members, credit cards, loans and overdrafts. Using retained profits and ploughing it back in to the business is probably the most economical and effective way to fund internal expansion. An advantage of using this method is that the company is not borrowing, so it does not have to pay interest.
However using retained profits might not be ideal for BTC, as they are a fairly new organisation and might not be making enough profit and using the small profit might have unfavourable effects on the business. This could be the reason why small enterprises have such a high number of failures, (Appendix d). ‘Approximately 10% of small firms fail each year’, (Financial Business Environment 2006-07, Ian Sharpe, Lecture 4), spending most of profit on growth could have major effects of the day to day running of the business.
At this current moment in time, BTC is considering opening a second store in another area, in Coventry. The reason why BTC is planning on opening another store is because they want to be in a better position, so they can demand more discount from suppliers and they want to buy in bulk, as this reduces the cost per unit. This could be classed an economy of scale. Economies of scales are ‘when increasing the scale of production leads to a lower cost per unit output’, (Sloman and Sutcliffe Economics for Business third edition, page 179). However, in order for BTC to open another store they will need a huge amount of funding.
They will have to rent/lease or purchase the premises, buy more stock, spend on fixtures and fittings and recruit more staff. BTC are likely to take out a mortgage if they wish to purchase the premises. A mortgage is loan which is used to buy a property. Mortgage would be the best option for BTC if they had the funding for a deposit, because you can also look on buying the premises as an investment. However, the disadvantage is that you have to pay interest which can fluctuate and it is not guaranteed that the property will increase in value.
BTC might have to take out a loan if they want to buy more stock and complete fixtures and fittings in the new store. A loan is money borrowed from a bank, the advantage of a loan is that the money is available as soon as the loan has been approved, however BTC will have to pay monthly instalments with interest and this could have setbacks on BTC as they may struggle to pay for other expenses such as creditors. However, BTC would have already known how much they have to pay back and should budget consequently. As I mentioned before BTC is a family owned business, the partners of the company are brothers.
When started up BTC they required a lot of finance. Even though they used personal savings it was not enough start up the business, so they decided on borrowing from family members. Borrowing from family members might be able to again be used for the growth of BTC. The advantage of borrowing from family members is that little guarantee is required about the money; however the disadvantage of borrowing from family members is that it could lead to family members wanting to make decisions on how the business is run, as they have invested money in to the business.