Chapter 3 Section 2 Notes 2 ways to grow a business 1. Reinvestment 2. Mergers.

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Chapter 3 Section 2 Notes 2 ways to grow a business 1. Reinvestment 2. Mergers

Chapter 3 Section 2 Notes Growth through investment Business revenue (what to do?) Businesses can use their profits to invest in factories/stores, machinery or new technologies (increased sales) Before reinvesting a business must estimate its cash flow (income statement) Step 1: Businesses must record their total sales and then subtract all expenses (including taxes & depreciation) The total revenue after expenses is know as a business’ net income Step 2: Depreciation is added back to net income to get the cash flow (a better measure of business profit) Business owners must decide whether or not to reinvest (additional sales = more profit)

Chapter 3 Section 2 Notes Income Statement Sales$1000 Expenses Cost of goods$400 Wages$250 Interest$50 Depreciation$100 Earnings$200 Taxes$80 Net Income$120 Depreciation$100 Cash Flow$220

Chapter 3 Section 2 Notes Mergers take place for a variety of reasons Generates funds ($) quicker Businesses merge to become more efficient They no longer need 2 presidents, 2 personnel directors, etc. (more retail outlets, no additional cost) Some mergers are driven by the need to acquire new product lines (Microsoft moves into gaming consoles) Sometimes firms merge to catch up or eliminate their rivals (Royal Caribbean Cruises merged w/Celebrity Cruises) A company may use a merger to lose its corporate identity (ValuJet merged w/AirWays)

Chapter 3 Section 2 Notes Types of Mergers Horizontal merger Firms that produce the same kind of product join forces Example: Chase National merged with Bank of Manhattan Vertical merger Firms involved in different steps of manufacturing join together Example: An automaker merging with a tire company Conglomerates A firm that has at least four businesses, each making unrelated products, none of which is responsible for a majority of its sales Fortune Brands – office products (8%), golf products (15%), home products (46%), and wine (31%)

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