2. 3-2: Business Growth and Expansion 1. Growth Through Reinvestment Business owners can use their profits to update and expand their firms. Keep track of business operations with financial statements. Income statement – report showing sales, expenses, net income, and cash flows over a given period. Net income – profits determined by subtracting all expenses from revenues. Depreciation – gradual wear on capital goods Cash flow – total amount of new funds a business generates from operations.
3. Income Statement Sales of goods and services $1,000 Less: Cost of goods sold 400 Wages and salaries 250 Interest payments 50 Depreciation 100 Earnings before taxes $200 Less: Taxes at 40% 80 Net Income $120 Plus: Depreciation 100 Cash Flow $220 Generates Investment in new plant, equipment and technology Allows Stockholder Dividends
4. 2. Growth Through Mergers Two businesses decide to join together into one business. One of the businesses must give up its separate legal identity, but the name of the new company will often reflect the identities of both. Horizontal Merger – Two firms that produce the same kind of product join forces. Vertical Merger – Companies involved in different stages of manufacturing or marketing join together. Reasons for merging: Grow faster Become more efficient Acquire or deliver a better product Eliminate a rival Change image
5. Conglomerates Firm that has at least four businesses, each making unrelated products, and none responsible for a majority of its sales. Multinationals Corporation that has manufacturing or service operations in a number of different countries.
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7. Many are legally incorporated to take advantage of unlimited life and limited liability.
