Advance financial management

Reasons for expansion of business and forms of expansions

Growth is always essential for the existence of a business concern . A concern is bound to die if it does not try to expand its activities . There may be a number of reasons which are responsible for the expansion of business concerns . Predominant reasons for expansion are economic but there may be some other reasons too . Following are the reasons for expansion :

1. Existence – The existence of the concern depends upon its ability to expand . In a competitive world only the fittest survives . The firm needs to control its costs and improve its efficiency so that it may be achieved if the activities of the firm are expanded . So , expansion is essential for the existence of the firm otherwise it may result into failure and may be out of business .

2. Advantages of Large Scale – A large scale business enjoys a number of economies in production , finance , marketing and management . All these economies enable a firm to keep its costs under control and have an upper hand over its competitors . A large scale concern can also withstand the cyclical changes in the demands of their products .

3. Use for Higher Profits – Every businessman aspires to earn more and more profits . The volume of profits can be increased by the expansion of business activities . Undoubtedly , profit is the main motive behind all types of expansions . The incurring of higher costs at the time of expansion may not be associated with higher profits . If a new concern is purchased at a higher price without considering economic aspects , it will not be wise expansion plan . One should be very careful while planning expansion scheme and economic factors should be the motivating forces to enable a concern to increase its profits .

4. Monopolistic Ambitions – One of the important factors behind business expansion is the monopolistic ambitions of business leaders . They try to control more and more concerns in the same line so that they may be able to dictate their terms . So expansions also result out of monopolistic ambitions .

5. Better Management – A bigger business concern can afford to use the services of experts . Various managerial functions can be efficiently managed by those persons who are qualified for such jobs . On the other hand , a smaller concern is generally managed by the owners themselves and they may not be experts in all departments of the business .

6. Natural Urge – The expansion is also a way of life . As everybody wants to go higher and higher in his private life and this is applicable to a business concern too . Every businessman wants to expand its activities in a natural way . It not only gives him more profits but also gives him satisfaction .

FORMS OF EXPANSION

The expansion of a concern may be in the form of enlargement of its activities or acquisition of ownership and control of other concerns . Thus , expansion may be : ( i ) internal expansion , and ( ii ) external expansion .

Internal Expansion – Internal expansion results from the gradual increase in the activities of the concern . The concern may expand its present production capacity by adding more machines or by replacing old machines with new machines with higher productive capacity . The internal expansion can also be undertaken by taking up the production of more units or by entering new fields on the production and marketing sides . Internal expansion may be financed by the issue of more share capital , generating funds from old profits or by issuing long – term securities . The net result of internal expansion is the increase in business activities and broadening the present capital structure .

External Expansion Or Business Combination – External expansion refers to ‘ business combination where two or more concerns combine and expand their business activities . The ownership and control of the combining concerns may be undertaken by a single agency .

Business combination is a method of economic organisation by which a common control , of greater or lesser completeness , exercised over a number of firms which either are operating in competition or independently . This control may either be temporary or permanent , for all or only for some purposes . This control over the combining firm can be exercised by a number of methods which in turn give rise to various forms of combinations . In the words of Haney , ” To combine is to become one of the parts of a whole , and combination is merely a union of persons to make a whole or group for the persuation of some common prupose . ” From this definition it is clear that combination may be of varying degrees and is always for the achievements of common objectives . Combination is the coming together of persons or organisations and the main motivation behind such assembly is to secure maximisation of profits by eliminating competition .

In the process of combination , two or more units engaged in similar business or in different related process or sages of the same business join with a view to carry on their activities or shape their policies on common or co – ordinated basis for mutual benefit or maximum profits . The combination may be among competing units or units engaged in different processes . After combination , the constituent firms pursue some common objectives or goals .

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Sarvesh Arora

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