Question

What are the likely cost implications for a business which expands rapidly? Discuss in 120–150 word

Answer 1

Solution:-

If demand begins to increase exponentially, you may find yourself in a situation where your profits are actually shrinking, as the outgoing cost of meeting demand begins to outpace your cash flow. You may find that you need to pay employees overtime to keep up with demand, or stock ever greater amounts of inventory at substantial cost. This can lead to an expensive spiral of constantly needing to borrow money just to keep up -- a situation in which an unforeseen expense can potentially bankrupt your company.

Possibly the greatest competitive advantage of business growth is the ability to capitalise on the economies of scale. As you increase your production output, you can bring down costs per unit and achieve savings across:

• purchasing - by getting discounts for buying in bulk
• marketing - by spreading the cost of promotion over larger sales
• overheads - by spreading the staff or administrative costs across a greater output

shortage of cash - you may need to borrow money to meet expansion costs, eg buy new premises or equipment.