Chapter 3: Size of Business (AS LEVEL BUSINESS STUDIES)

Definitions to Remember:

• Revenue - total value of sales made by a business in a given time period
• Capital Employed - the total value of all long-term finance invested in the business
• Market Capitalisation - the total value of a company's issued shares
• Market Share - sales of the business as a proportion of total market sales
• Internal Growth - expansion of a business by means of opening new branches, shops, or factories (also known as organic growth).

Notes:

Different Measures of Size

There are several different ways of measuring and comparing business size and they often give different comparative results. A firm might appear large by one measure but quite small by another.

• Number of employees
• Advantage: easy to understand, obvious to everyone
• Disadvantage: some businesses may use machines and employ a small number of staff members
• Revenue
• Advantage: easy to use as a measure of size, especially when comparing firms in the same industry
• Disadvantage: less effective when comparing firms in different industries (some businesses might be engaged in 'high-value' production while others in 'low-value' production)
• Capital Employed
• Advantage: easy to identify (the larger the enterprise, the greater the value of capital needed for long-term investments)
• Disadvantage: two firms employing the same number of staff may have very different capital equipment needs.
• Market Capitalisation 
• Advantage: can be easily calculated ( market capitalisation = current share price x total number of shares issued ).
• Disadvantage: can be used only for businesses that have shares quoted on the stock exchange (public limited companies)
• Market Share
• Advantage: easy to calculate (total sales of business / total sales of industry x 100).
• Disadvantage: when the size of the market is small, a high market share will not indicate a large firm.

Why is the development of small businesses encouraged?

Many jobs are created by small firms

Collectively, the small-business sector employs a significant proportion of the working population in most countries.

Small businesses are often run by dynamic entrepreneurs

These innovative entrepreneurs tend to give out new ideas for consumer goods and services which creates a variety in the market. This helps benefit the consumers since they will now have a wide choice of product to choose from.

Small firms can create competition for larger businesses

If there was no competition between the small businesses and the large businesses, then this may lead to the large firms exploiting the consumers with high prices and poor service.

Small firms often supply specialist goods and services to important industries in a country

Large businesses depend on small specialist suppliers. By being able to adapt quickly to the changing needs of large firms, small businesses actually increase the competitiveness of the larger organisations.

The economy will benefit from large-scale organisations

The large firms of the future are the small firms of today. So, with more small businesses encouraged to become established and expand, the economy of the country will benefit from the business in the future.

Lower average costs can be passed on

The average costs could be lower since the wages rate being paid off to the staff could be less than the salaries paid in large organisations.

Government Assistance Towards Small Businesses

Reduced rate of profits tax (or corporation tax)
With the government reducing the rate of the tax, the small business has the chance to retain more profits in the business for expansion

Loan guarantee scheme
A government-funded scheme that guarantees the repayment of a certain percentage of a bank loan when the business fail.

Information, advice and support provided
The government may fund professional advice to entrepreneurs on marketing, business management and business planning.

Raising both short and long term finance
Small businesses has little security to offer to banks for loans so this will make obtaining finance much more difficult

Advantages of Small Businesses:

• can be managed and controlled by the owner(s)
• often able to adapt quickly to meet changing customer needs
• offer personal service to customers
• finds it easier to know each worker
• if family owned, the business culture is often informal, employees well-motivated and family members perform multiple roles

Disadvantages of Small Businesses:

• may have limited access to source of finance
• the owner has to carry a large burden pf responsibility (if unable to afford to employ specialist managers).
• few opportunities for economies of scale

Advantages of Large Businesses:

• can afford to employ specialist professional managers
• benefit from the cost reductions associated with large scale production (buying raw materials in bulk from suppliers may give out discounts compared to buying in retail).
• may be able to set low prices that other firms have to follow
• have access to several different sources of finance
• may be diversified in several markets and products so that risks are spread
• are more likely to be able to afford reasearch and development into new products and processes

Disadvantages of Large Businesses:

• may be difficult to manage, especially if geographically spread
• may have potential cost increases associated with large-scale production
• may suffer from slow decision-making and poor communication due to the structure of the large organisation
• may often suffer from a divorce between ownership and control that can lead to conflicting objectives

Reasons why business grow:

Increased Profits

Expanding the business and achieving higher sales is one way of becoming more profitable

Increased Market Share

This will give a business a higher market profile and greater bargaining power with both suppliers (suppliers giving discounts when buying in bulk) and retailers.

Increased Economies of Scale

Some of the examples of economies of scale are: easier source of finance, bulk buying discounts, advertising advantages

Increased Power and Status of the Owners and Directors

With the raise of power and status, there are higher opportunities of gaining publicity and influencing government policies.

Reduced Risk of Being a Takeover Target

A larger business may become too large to become a target for a potential takeover.