The size of firms Businesses vary considerably in size. Companies such as Tata based in India, Anglo American plc based in South Africa and Microsoft based in America are considered large, whereas a roadside food-stall proprietor or a self-employed carpenter are running small businesses. Sometimes, however, it is necessary to provide a measure that is more objective and this may be important to different stakeholders. For instance: • banks and other financial institutions want to know if the business is likely to be able to repay a loan • shareholders and investors may base their investment decisions on the size of a business; large businesses are often thought of as secure investments although some investors may prefer to invest in a small business that is likely to grow • businesses need to know the size and strength of their competitors • governments need to know the effect of different businesses on employment and the economy • employees may feel that their jobs are safer and that there are more prospects for promotion in a large company. The size of a business is measured in terms of: • output of goods and services • sales value or revenue • number of employees • capital employed (the amount of capital or money invested into the business by its owners from their own resources or loans). Size of output
Sales value
Measuring business size
Number of employees
Figure 3.1 Measuring the size of a business
Problems with measuring size Most methods of measuring and comparing the size of businesses do, however, present some problems (see also Table 3.1, page 22). • Output might be used to compare the size of firms in the same industry, but care is necessary: two fast-food restaurants each serving 1000 meals a day might be considered the same size, but two firms each producing 1000 motor cars cannot be compared on the same basis if one produces luxury limousines while the other produces family saloons. • Similarly with sales value or revenue: a business that produces and sells a small number of very high-value products may have higher revenue than a larger business that produces and sells a larger number of lower-value products. • Care must also be taken when comparing the size of businesses on the basis of numbers of employees or capital employed. Some businesses are labourintensive (i.e. they employ a large number of people relative to machinery and equipment), while others are capital-intensive (having a high level of machinery and equipment with fewer employees). • Using profit as a measure is usually inaccurate as other factors influence the amount of profit a business makes. Profit depends on the skills of management and workers, the efficiency of production and administrative systems, as well as the ability of the business to keep its costs low. Top tip Try to avoid using profit as a way to measure the size of a business. It is inaccurate as the amount of profit depends on more than just the size of the firm.
How firms grow Most businesses begin small and grow over a long period of time. A business may grow internally or externally. Capital employed
Internal growth Internal growth can also be called ‘organic’ growth. This is because it is the business expanding by itself rather than as a result of taking over another company. Some businesses
3.1 Activity Investigate businesses in your own country. 1 Construct a table listing the five largest businesses using one of the measures listed below: • output of goods or services • capital employed • sales value or revenue • profit. • number of employees 2 Would the order change if the businesses were measured against different criteria? What are the problems of comparing the size of the businesses using these criteria?
Business growth and measurement of size 21