Size of business

Measurements of business size

• Explain different methods of measuring the size of a business

(Profit is not an acceptable measure of business size)

• Discuss which measurement method might be most useful in

different industries.

Significance of small Businesses

• Identify and explain advantages and disadvantages of being a small

business

• Identify and explain strengths and weaknesses of family businesses

• Explain the importance of small businesses and their role in the

economy

• Discuss the role of small businesses as part of the industry structure

in some industries

Internal growth

• Explain why and how a business might grow internally

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SIZE OF BUSINESS

Measurements of business size

There are different methods of measuring the size of a business (profit

is not an acceptable measure of business size)

 number of employees
 revenue
 capital employed
 market capitalization
 market share

Methods to measure the size of a business

Methods of measuring business size,

E.g. number of people employed, value of output, capital employed

NB: (Profit is not a method of measuring business size)

 Capital employed: is the value of all long-term finance invested in

the business, to buy things such as factories, office building,
machinery etc. (also known as assets) - Capital employed is a total
value of capital used in the business. The larger the business the
greater the value of capital needed for long-term investment.
However, there is a possibility that a firm having the same number of
workers have different value of capital employed/invested. For
example, a company with many workers may use labour-intensive
methods of production. These gives low output levels and use little
capital equipment. comparisons in different industries may be
misleading e.g. a hairdresser and an optician
 Number of employees: How many employees there are working for
a particular company. These is the easiest method of measuring the
size of businesses. The more employees the larger the business is.
However, it is not suitable to compare labour-intensive industry with
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 capital-intensive industry which mainly use automated operations
with high output levels.

 Value of sales/sales turnover: two businesses can be compared on

the basis of value of dollar ($) sales they generate in a specific time
period. It is suitable if businesses are in the same industry. Less
effective if in different industries e.g. high value production
such as previous jewels compared to low value production
such as cleaning services

However, it is not suitable for businesses in different industry. For

example, sale of an automobile business cannot be compared with a
beverage production firm because the value of sales of one unit in
the automobile industry is much higher compared to beverage unit.
In this measure we need to calculate the market share. market share
is the number of customers/sales captured by one firm in an industry
from the total number of customers/sales in the entire/total
industry.

 Market Capitalisation - is the total value of a company’s issued

shares
– Businesses with higher market capitalisation are generally
larger. However, it can only be used with businesses that have
shares on the stock exchange – public limited companies. Also
due to the fluctuations of share prices, it can be very unstable to
compare.

Market capitalisation = current share price × total number of shares issued

 Market Share – is the sales of the business as a proportion of total

market sales
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 - If a business has a high market share, then it must be among
the leaders in the industry or comparatively large. However, if
the total size of the market is small, a high market share will
not indicate a very large firm.

MARKET SHARE = total sales of the business × 100

Total sales of the industry

Business Employees Sales Turnover Capital

Category Employed
Micro 10 or fewer Up to 2 Million Up to 2 Million
Small 11 – 50 2 Million – 10 2 Million – 10
Million Million
Medium 51 – 250 10 Million – 50 10 Million – 34
Million Million
Large 251 or more Over 50 Million Over 34 Million

The methods and problems of measuring business size

There are several different measurements of business size and they all have
limitations:

Measurements Limitations/drawbacks
The number of Some firms use production methods which employ very few
people employed people, but which produce high output levels. This is true for
in the business automated factories which use the latest computer-controlled
equipment. These are called capital-intensive firms they use a
great deal of capital (high cost) equipment to produce their
output. Therefore, a company with high output levels could
employ fewer people than a business which produced less output.

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 Another problem is: should two part-time workers, who work half
of a working week each, be counted as one employee – or two?
The value of A high level of output does not mean business is large when
output of the using the other methods of measurement. A firm employing few
business people might produce several very expensive computers each
year. This might give higher output figures than a firm selling
cheaper products but employing more workers. The value of
output in any time period might not be the same as the value of
sales if some goods are not sold.
The value of sales Different businesses sell different products (expensive and cheap).
It could be misleading to use this measure when comparing the
size of businesses that sell very different products (for example, a
market stall selling sweet and a retailer of luxury handbags or
perfumes)
The total value of This has a similar problem to that of the "number of employees"
capital employed measure.
(money invested
into the business) Some companies may employ many workers may use labour –
intensive methods of production. These give low output levels
and use little capital equipment. They use cheap labour giving low
output with low-cost equipment.

Note: There is no perfect way of comparing the size of businesses. It is quite

common to use more than one method and to compare the results obtained -
because many methods are not as straightforward as it seems, this is because the
methods can produce different results so more than one method should be used
in measuring the size of the business.

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 Activity 3.4: Compare business size

You are employed by company A, which makes motorcycle. You have been asked
to write a brief report to the Managing Director comparing the size of your
company with three others in the same industry.

Use the following information below in your report. State the benefits and
drawbacks of each of the ways of comparing business size.

Workers Capital Value of output

employed employed ($m)
($m)

Company A 20,000 50 100

Company B 5,000 150 300

Company C 3,000 60 160

Company D 15,000 180 150

Possible answer:

Company A is the biggest in terms of employment but is this a misleading

measure in this case? It is not the biggest in terms of output since it has lower
output than all others.

Company B has high capital employed. Is this why its output is so much higher
than A?

Company D has more capital than B but produces lower value of output
compared to B.

Clearly companies have different ways of producing output in this industry –

either using many workers or high capital employed. Perhaps the value of output
is therefore the best measure as companies are in the same industry.

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Business Size

Reasons for measuring businesses size

Why are businesses measured in size?

 So, investors can compare businesses and know which to invest in
 So, governments can know where to put different tax rates
 So, competitors can gain a competitive advantage
 So, workers of the business can gain more confidence in financial
situation
 So, banks know how much loan they should lend to the business

Why is there needed to measure the size of different businesses?

Businesses vary in size, and there are ways to measure them.

Who would find it useful to compare the size of businesses?

Here are some stakeholders who are interested in measuring the size of
businesses and the reasons why:

 Investors – before deciding which business to put their saving into.

Potential investors would want to see if their investment is safe or not.
They use return on capital employed (ROCE) – a financial ratio to measure
the profitability of their investment. The higher the ROCE the more
profitable and viable their investment in a firm – meaning the investment is
favorable compared to cost.
 Governments – often there are different tax rates for small and large
businesses. The government would like to collect tax revenue. It needs to
compare the size of businesses to make fiscal policy for trade and industry.
In the policy the government may want to assist new or smaller businesses
by approving micro-financing and providing larger businesses with easy of
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 doing business. To achieve these – is through the ratio of tax collection in
small- and large-scale businesses. That is why government needs to make
different policies for small and large businesses in order to have more tax
revenue in the future
 Competitors – to compare their size and importance with other firms.
Investors in the firm may wish to compare the size of business with close
competitors/rivals to compare the rate of growth.
 Workers – to have some idea of how many people they might be working
with and pay. Workers are looking for security of their jobs hence they
need to compare the size of different businesses so that they can know
whether they are safer in their job or not.
 Banks – to see how important a loan to the business is compared to its
overall size. Banks are concerned/interested in the recovery of their loan.
Before approving different amounts of loans, they need to compare the size
of different businesses to know whether it is reasonable to approve an
amount of loan or not.

WHY DO OWNERS OFTEN WANT THEIR BUSINESSES TO GROW/EXPAND?

Here are some likely benefits:

 the possibility of higher profits for the owners

 more status and prestige for the owners and managers – higher salaries
are often paid to managers who control bigger businesses
 lower average costs per unit as output increases (Economies of scale)
 larger share of its market – the proportion of total market sales it makes is
greater. This gives a business more influence when dealing with suppliers,
distributors, and consumers. They are often attracted to ‘big names’ in the
industry and the large business can negotiate better deals i.e. higher
discounts

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Business Expansion/growth

Advantages

 Economies of scale - average cost per unit falls as output increases

Disadvantages

 Diseconomies of scale – is when average cost per unit increases as output

increases

HOW CAN BUSINESSES GROW?

There are different ways in which businesses can grow/expand.

Businesses can expand/grow in two main ways:

1. External Growth - is when the business takes over or merges with another
business. It is often called integration as one firm is integrated into another one.

Advantage

 Usually faster rate of expansion because the business already exists

Disadvantage

 Usually more expensive than internal growth

2. Internal Growth (organic growth)

– It is when the business expands its existing operations. It comes from within
the business. For example, a restaurant owner could open other restaurants in
other towns or a supermarket opening new branches.

– this growth is often paid for by profits from existing business.

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Reasons for internal expansion

 This type of growth is usually cheaper than external growth

 It is Easier to manage than external growth

However, this type of growth is usually at a quite slower rate than external
growth

Examples of internal growth include:

i. Opening more shops/branches/factories/new outlets

Advantages

 If it is based on market research, then there will be an increase in sales

Disadvantage

 costs are likely to increase when other outlets are opened such as paying
more staff wages, recruitment costs, cost of keeping staff and training
costs, rent etc.

ii. using internet/digital platform – E-Commerce

Advantages

 24/7 operations are possible

 Cheaper than offline shops because no rent or purchase of premises is
involved

Disadvantages

 Technical issues therefore you may need a web designer to set up your
web page
 Hacking and loss of data
 Information overload

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iii. Getting another firm to carry out certain tasks/functions for you – through
outsourcing

Advantages

 less costs because there are no training costs or labor costs involved
 improved quality because they are better at it than you

Disadvantages

 loss of control – you have no control for example, what if they do not
deliver the components on time? This could ruin your reputation because
you take all the blame.

Benefits of Business Growth

 Increased profits
 Increased market share
 Increase in economies of scale
 Increased power and status
 Reduced risk of being a takeover target

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