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.
Venture capitals, business angels and grants are possible external sources of finance that BTC may wish to consider. Venture capital involves specialist companies investing a minimum of £500,000 in small companies, the advantage to the small company is that such a large amount of funding has been received, however the larger firm would expect to gain some control over the business, and this could mean that the owners of BTC lose control over the business. Another similar sort of financing where business people give advice and invest in small businesses could fund the company for growth is called business angles. There is a network of business angels who want to invest in small firms. They have the same advantages and disadvantages as venture capital. Grants schemes can provide small firms, like BTC, with some finance. The advantage is that because it is a grant it does not have to be paid back however not every firm can apply for grants and the amount you get is generally low. To receive a grant the company has to go through strict criteria so therefore BTC should not totally rely on grants.
BTC could also raise finance by making deals with their suppliers. They could ask suppliers for a reduction in price of the stock they buy for a short term, as it could lead to an increase in the amount of sales and therefore increasing the demand of the supplier’s products. However, the chance of a supplier reducing its price is very unlikely as it could cause conflict among other businesses that use the same supplier. Another way of generating funds is to delay payments to suppliers and creditors. The business will have to agree trade credit terms before hand to achieve this. The advantage a business will have is that it does not have to pay its creditors until a later date, and consequently it will have more funds available which it could use for growth; however the credit has to be paid even at a later date which could be a problem if the company has already spent the money.
In conclusion, I think, for BTC to be more successful it will have to continue to grow. They have achieved a good rate of growth over the past couple of years and their plans to open up another store does show their ambition to keep growing. This is a positive step for BTC because a firm needs to keep competing to increase its market share. I think BTC should be aware of the problems they face if they start overtrading.
I think BTC should go ahead with the purchase of a new store, because I believe they will be in a better position to talk to suppliers about reducing prices and even discuss longer trade credit. This would mean that they could pass these benefits on to their customers, which would mean that BTC’s prices are more competitive and customers could have some credit. This would be a great opportunity for BTC to gain a competitive edge of rivals.
For future growth, BTC should start trading over the internet. By setting up a website, BTC could target potentially the whole of the UK. This would be cheaper and more realistic than setting up stores nationwide. The cost of setting a website and maintaining in very small compared to setting up stores nationwide.
To maintain and compete in a highly competitive market where you have large enterprises like B&Q and Wickes, BTC will have to keep diversifying through internal expansion and maintain a competitive edge over its rivals. BTC has done this during its first two years of operating.
(Word Count 2113)
Company Details:
Builders Trade Center (BTC)
64-70 Smith Street
Foleshill
Coventry
CV6 5EL
Bibliography
3rd Edition
Sloman & Sutcliffe
ISBN 0-273-68335-7
- Financial & Business Environment
Lecture Notes
2006-2007
Ian Sharpe
Useful Websites
Appendices
Appendix a
This interview was conducted on one of the partners.
1. What was the annual turnover for BTC last year?
£364,000
2. How many employees are currently employed at BTC?
6 full time and 6 part time
3. How has BTC grown over the past 2 years?
Increased Stock, offered free delivery, diversified stock.
4. What types of finance was used to fund growth at BTC?
Bank loans, overdraft, personal savings, borrowing from friends/family, loans, profit.
5. How do you plan to keep growing?
Open second store so we can get a better price from suppliers.
Appendix b
(Ian Sharpe 2006-2007 lecture notes, financial business environment)
Appendix c
Accounts of small and medium-sized companies
2. - (1) The table in section 247(3) of the 1985 Act (qualification of company as small or medium-sized)[] is amended as follows.
(2) Under the heading "Small company" -
(a) for "Not more than £2.8 million" (turnover) substitute "Not more than £5.6 million"; and
(b) for "Not more than £1.4 million" (balance sheet total) substitute "Not more than £2.8 million".
(3) Under the heading "Medium-sized company" -
(a) for "Not more than £11.2 million" (turnover) substitute "Not more than £22.8 million"; and
(b) for "Not more than £5.6 million" (balance sheet total) substitute "Not more than £11.4 million".
(http://www.opsi.gov.uk/si/si2004/20040016.htm)
Appendix d
(Ian Sharpe 2006-2007 lecture notes, financial business environment)
