(a) Growth
Growth over this period has been extremely rapid, sales having increased 3.44 times, profit having increased 11.78 times and profitability (net profit/ turnover) having increased from 2.48% to 8.49%.
Problems of growth
When a business tries to do too much too quickly with too little long-term capital, it is in danger of overtrading. Some of the problems associated with this rapid growth include the following.
(i) Cash flow shortages may occur as companies have to finance a larger amount of working
capital and non-current assets. Even if an overtrading business operates at a profit, it could
easily run into serious trouble because it is short of money.
(ii) The management style and the skills demanded from management are likely to change,
particularly if the process is labour intensive resulting in a large increase in the number
employed. This may put pressure on the existing management, some of whom may not be up
to working at a senior level in a much larger firm, with probably a much more specialised brief
than previously. In the short to medium term this may lead to some loss of control.
(iii) Although in this case growth in sales has not been at the expense of margin, if the additional sales are achieved by offering low prices there may be a decline in the productivity of labour and/or assets. |
