Edexcel GCSE Business: Business growth and changing aims (1BS0) – Revision Notes

These notes condense Topic 2.1 Growing the business (items 2.1.1 and 2.1.2) of the Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0) specification, Issue 2, July 2022. For full explanations and worked examples, read the study guide. Test yourself with the practice questions.

Course links: the Business hub, the printable checklist and the free diagnostics. The earlier page on limited liability and business location covers the other ownership types.

Key terms

Term	Meaning
Internal (organic) growth	Growing using the business’s own resources, for example new products or new markets
External (inorganic) growth	Growing by merger or takeover
Innovation	Bringing in a new or improved product or way of working
Research and development (R&D)	Work to create or improve products before they are sold
Merger	Two businesses agree to combine into one (standard form of the definition)
Takeover	One business buys enough shares in another to control it (standard form)
Public limited company (plc)	A limited company whose shares can be offered to the public and traded on the stock market (general description)
Retained profit	Profit left in the business once tax is paid and dividends are deducted (standard form)
Loan capital	Money borrowed and repaid with interest
Share capital	Money raised by selling shares
Flotation	A company offering its shares to the public on the stock market
Aim and objective	An aim is the broad long-run purpose; an objective is a specific target set to reach it

Growth methods at a glance

Method	Type	Advantage	Drawback
New products (innovation, R&D)	Internal	Own design, keeps control	Costly, may fail
New markets: change the marketing mix	Internal	Reaches a new group using existing skills	Needs market knowledge
New markets: technology	Internal	Wider reach, no new site	Competition from many sellers online
New markets: expand overseas	Internal	Large customer base	Transport costs, unfamiliar tastes
Merger	External	Combined strengths, shared costs	Clashing cultures
Takeover	External	Immediate size and market share	High price, job losses, staff may leave

Method boxes

Percentage change.

1. Find change = new - old.
2. Use the OLD figure as the divisor.
3. Multiply by 100 and state increase or decrease.

Interest on loans (Appendix 3). (total repayment - borrowed amount) / borrowed amount × 100.

Average rate of return (Appendix 3). Average annual profit (total profit divided by years), over the cost of investment, times 100.

Net profit margin (Appendix 3). net profit / sales revenue × 100.

Answering “Analyse” or “Justify”.

1. Make a point.
2. Explain why it matters, using the numbers or facts in the case.
3. Link back to the question. For “Justify” pick one option and say why the other is weaker.

Plc ownership

• Limited liability and the right to offer shares to the public.
• Raises large sums and can make a business better known.
• Many shareholders, so founders may lose control.
• Open to takeover because shares can be bought by anyone.

Sources of finance

Source	Internal or external	Remember
Retained profit	Internal	Cheap but depends on past profit
Selling assets	Internal	Quick cash, lose the asset
Loan capital	External	Interest and repayments, lender takes no ownership
Share capital	External	No repayment, but shares ownership
Stock market flotation	External (plc)	Large sums, loss of control, public attention

Matching finance to the situation. A business with weak profit has little retained profit, so it may need a loan or shares. A business already heavily in debt may prefer shares. A short-term cash need might suit selling an unused asset.

Why aims change, and how

Reason	Example
Market conditions	A new rival cuts prices, so a business drops its growth target
Technology	An online platform makes selling abroad possible
Performance	Falling margin leads to a survival aim
Legislation	A new rule adds costs, so a product line is dropped
Internal reasons	A new owner wants a bigger business

How aims show up	Example
Survival or growth	A start-up targets survival; a strong firm targets growth
Entering or exiting markets	Opening in a new region, or closing a loss-making branch
Workforce	Hiring for expansion, or reducing staff to save cost
Product range	Adding lines for new customers, or dropping weak ones

Must-know distinction. Organic growth keeps control and grows slowly. Inorganic growth is faster but costs more and brings integration problems.

Worked reminder: Teelan Tools

Teelan Tools makes garden tools. Its revenue rose from £45,000 to £58,500 after it started selling through its own website.

• Change = 58,500 - 45,000 = £13,500
• 13,500 / 45,000 × 100 = 30% growth. This is organic growth through new markets and technology.

Worked reminder: choosing finance

Rossiter Candles needs £60,000 for a new workshop. It has retained profit of £20,000 and plans to sell an old van for £4,000. It will borrow £30,000 and raise the rest from share capital.

• Internal finance = 20,000 + 4,000 = £24,000
• Loan = £30,000, so share capital = 60,000 - 24,000 - 30,000 = £6,000

The mix is a judgement. More loan capital means more interest and fixed repayments. More share capital means no repayment but the owners share control. Always link the choice to the business’s profit, existing debt and how quickly the cash is needed.

Command words for this topic

Command word	What the specification says	Use it here to
Define	Define a term from the content	Give the meaning of merger, takeover, plc, flotation
State	A sentence at most, using the contextual information	Pick organic or external growth from a stem
Calculate	Use the data; workings should be given	Percentage change, interest, ARR
Explain	A fact with two expansion points, no context	Advantages of retained profit or share capital
Outline	Two linked points placed in context	A problem after a merger in a named business
Analyse	Extended, placed in the question’s context	Why a case business changed its aims
Justify	Recommend one of two options using the information	Organic growth versus takeover
Evaluate	A supported conclusion about a business situation	Survival versus growth aim

Quick self-test

1. Name the two types of external growth listed in the specification.
2. Rossiter Candles raised sales from £52,000 to £65,000. Calculate the percentage increase.
3. Rossiter borrows £20,000 and repays £22,400 in total. Calculate the interest as a percentage of the amount borrowed.
4. A new machine costs £40,000 and is expected to give a total profit of £36,000 over 3 years. Calculate the average rate of return.
5. A company makes £95,000 profit after tax and pays £35,000 in dividends. Calculate the retained profit.
6. Give one internal and one external source of finance.
7. A plc issues 50,000 shares at £4 each. How much does it raise?
8. Two firms hold 9% and 11% of a market and merge. State the combined market share.
9. A firm cuts staff from 40 to 34. Calculate the percentage reduction.
10. State two reasons why a business might change its aims.
11. Give one way in which a business might change its product range as its aims change.
12. Give one reason a plc may be more at risk of takeover than a sole trader.

Answers

1. Merger and takeover.
2. (65,000 - 52,000) / 52,000 × 100 = 25%.
3. (22,400 - 20,000) / 20,000 × 100 = 12%.
4. Average annual profit = 36,000 / 3 = £12,000; 12,000 / 40,000 × 100 = 30%.
5. 95,000 - 35,000 = £60,000.
6. Internal: retained profit or selling assets. External: loan capital or share capital (flotation also counts for a plc).
7. 50,000 × 4 = £200,000.
8. 9% + 11% = 20%.
9. (40 - 34) / 40 × 100 = 15%.
10. Any two of: market conditions, technology, performance, legislation, internal reasons.
11. Adding a new line to serve new customers, or dropping a weak, loss-making line to save cost.
12. Its shares are traded openly, so another business can buy enough of them to gain control; a sole trader has no shares to buy.

Where marks are usually lost

• Calling any rise in sales “organic” without checking that it came from the business’s own resources.
• Using the new figure as the divisor in a percentage change.
• Forgetting the units or the percentage sign in a Calculate answer, or leaving out workings when the command word asks for them.
• Writing “a loan is cheap” with no link to the interest and the repayments in the case.
• Treating retained profit as spare cash rather than profit that may already be invested.
• Giving a general list of reasons for changed aims instead of picking the ones that fit the case.
• On Explain questions, giving one point without the two expansion points the command word asks for.
• On Justify questions, describing both options but never recommending one.
• Confusing merger (agreement) with takeover (buying control).
• Answering as if every business can float shares. Flotation is for public limited companies.

Frequently asked questions

What is the difference between organic and inorganic growth in GCSE Business? Organic (internal) growth uses the business’s own resources, such as new products or new markets, so the owners keep control but growth is slow. Inorganic (external) growth happens through a merger or takeover, which is faster but costs more and brings integration problems.

How do you calculate the average rate of return for Edexcel GCSE Business? Divide the total profit by the number of years to get the average annual profit, then divide that by the cost of the investment and multiply by 100. For example, £36,000 profit over 3 years on a £40,000 machine gives 12,000 / 40,000 × 100 = 30%.

Which sources of finance can a growing business use? Internal sources are retained profit and selling assets; external sources are loan capital, share capital and, for a public limited company, stock market flotation. The best choice depends on the business’s past profit, its existing debt and how quickly it needs the cash.

Can any business raise money through a stock market flotation? No. Flotation means offering shares to the public on the stock market, so it is only open to a public limited company (plc). In Edexcel GCSE Business (1BS0) answers, treating a sole trader or private company as able to float shares is a common error.

Official syllabus

Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0), Specification, Issue 2, July 2022, published by Pearson Education Limited. Theme 2: Building a business, Topic 2.1 Growing the business, items 2.1.1 and 2.1.2.