Measuring business size
From WikiTextbook
A business can grow slowly over time by investing money in new machines and buildings. A quicker way for a business to grow is to takeover or merge with another one. There are a number of reasons why a business would choose to grow, such as:
• A larger business may be able to make more profit.
• Higher pay for the managers if they are able to increase the size of the business.
• It can be easier for a larger business to spread risk as it may diversify into different markets.
• Economies of scale, these will be discussed in greater detail below.
Not all businesses would want to grow, for example, a sole trader may be happy working on his or her own.
Measuring the Size of a Business
The size of a business is not measured according to the size of its building, but other factors such as:
• The market share of the business
• The level of sales turnover
• The number of employees
• The value of the business
• The value of capital employed
The market share of the business is normally measured as a percentage. Obviously, the larger the percentage share of the market the larger the business. This measure is only useful for comparing businesses in the same industry; one business with 50% market share may be much larger or smaller than another business with the same market share if it is in a different sized market.
The level of sales turnover can be used to measure the size of the business. The 1985 Companies Act says: “a firm with turnover less than £1.4 million is small. If turnover lies between £1.4 million and £5.75 million then the firm is medium size. If turnover is over £5.75 million it is large”.
The number of employees is an easy way of measuring the size of a business. It can be difficult to compare businesses in different markets using this measure, for example, a retail business may employ more people than a car manufacturer, but this does not mean the retailer is larger. This is because the car manufacturer uses a large amount of machinery, therefore it does not need as many workers.
The value of the business measures the value of the business if it were to be sold. This value can vary enormously depending upon if there is another business wanting to buy it.
The value of capital employed calculates the value of everything the business owns, in other words, how much it would cost to replace all of the businesses assets.
