Chapter 3: Size of Business
Learning Outcomes
Identify several the ways of measuring the size of businesses (measurements of business
size)
Analyse the significance of small businesses/firms on the economy of a country
Understand the ways how businesses can grow through internal growth
Size of business
Vary from sole traders multi-national corporations
Business size is relevant information to: managers, investors, government
Small firms offer many benefits for the dynamism of an economy
Measuring business size
Common to compare businesses by their size
o Government - wish to give assistance to ‘small’ firms, controls over the largest ones
o Investors - wish to compare the size of the business with close competitors – particularly
growth rate
o Customers - may prefer to deal only with large firms (more stable)
2 common problems in measuring business size:
o Several different ways of measuring and comparing business size - often give different
comparative results
o No internationally agreed definition (small, medium / large business)
Different measures of size
1. Number of employees
o Simplest measure
o Problem: businesses employ few people because highly automated (capitalised)
2. Sales turnover (revenue)
o Often used – especially comparing firms in same industry
o Less effective comparing firms in different industries – ‘high-value’ production
(precious jewel) ‘low-value’ production (cleaning services)
3. Capital employed
o Measures – total value of all long-term finance used in the business (a business
borrows for a long term, more than 1 year)
Capital employed = assets - current liabilities (left with non-current liabilities)
o Generally larger business enterprise – greater value of capital
o Comparisons of firms in different industries – misleading picture (i.e. hairdresser,
optician)
, 4. Market capitalisation
o Only for businesses – shares quoted on the Stock Exchange (PLC)
o Problem: share price changes every day (not stable)
Formula:
Market capitalisation=current share price ×total number of shares issued
5. Market share
Relative measure
Firm – high market share – among the leaders in the industry & comparatively large
Problem: Size of total market is small – high market share will not indicate a very large
firm
Formula:
total sales of business
× 100
total sales of industry
6. Other measures
o Depends very much on the industry
o Number of guest beds (hotels)
o Number of shops used (retailers)
o Total floor sales space (retail businesses)
THERE IS NO ‘BEST’ MEAUSRE
Importance of Small & Micro businesses
Many jobs – created: Many small businesses though may not employ many staff,
collectively they employ a very significant proportion of the workforce in most
countries.
Dynamic entrepreneurs - new ideas Helps to create variety in the market and
consumers benefit from greater choice
Create competition for larger businesses unexploited consumers
o larger firms will not exploit consumers with high prices & poor services
o i.e. AirAsia budget airline.
Learning Outcomes
Identify several the ways of measuring the size of businesses (measurements of business
size)
Analyse the significance of small businesses/firms on the economy of a country
Understand the ways how businesses can grow through internal growth
Size of business
Vary from sole traders multi-national corporations
Business size is relevant information to: managers, investors, government
Small firms offer many benefits for the dynamism of an economy
Measuring business size
Common to compare businesses by their size
o Government - wish to give assistance to ‘small’ firms, controls over the largest ones
o Investors - wish to compare the size of the business with close competitors – particularly
growth rate
o Customers - may prefer to deal only with large firms (more stable)
2 common problems in measuring business size:
o Several different ways of measuring and comparing business size - often give different
comparative results
o No internationally agreed definition (small, medium / large business)
Different measures of size
1. Number of employees
o Simplest measure
o Problem: businesses employ few people because highly automated (capitalised)
2. Sales turnover (revenue)
o Often used – especially comparing firms in same industry
o Less effective comparing firms in different industries – ‘high-value’ production
(precious jewel) ‘low-value’ production (cleaning services)
3. Capital employed
o Measures – total value of all long-term finance used in the business (a business
borrows for a long term, more than 1 year)
Capital employed = assets - current liabilities (left with non-current liabilities)
o Generally larger business enterprise – greater value of capital
o Comparisons of firms in different industries – misleading picture (i.e. hairdresser,
optician)
, 4. Market capitalisation
o Only for businesses – shares quoted on the Stock Exchange (PLC)
o Problem: share price changes every day (not stable)
Formula:
Market capitalisation=current share price ×total number of shares issued
5. Market share
Relative measure
Firm – high market share – among the leaders in the industry & comparatively large
Problem: Size of total market is small – high market share will not indicate a very large
firm
Formula:
total sales of business
× 100
total sales of industry
6. Other measures
o Depends very much on the industry
o Number of guest beds (hotels)
o Number of shops used (retailers)
o Total floor sales space (retail businesses)
THERE IS NO ‘BEST’ MEAUSRE
Importance of Small & Micro businesses
Many jobs – created: Many small businesses though may not employ many staff,
collectively they employ a very significant proportion of the workforce in most
countries.
Dynamic entrepreneurs - new ideas Helps to create variety in the market and
consumers benefit from greater choice
Create competition for larger businesses unexploited consumers
o larger firms will not exploit consumers with high prices & poor services
o i.e. AirAsia budget airline.
