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Size of Business

It is common to compare businesses by their size.

• The government might wish to give assistance to ‘small’ firms, so will need a measure of size.
• Investors in a firm may wish to compare the size of the business with close competitors – particularly in order to compare the rate of growth.
• Customers may prefer to deal only with large firms, assuming, perhaps, that they are more stable and less likely to cease production than smaller ones.

There are two problems with these and other requirements for a way of measuring business 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.
• There is no internationally agreed definition of what a small, medium, or large business is, but the number of employees is often used to make this distinction.

DIFFERENT MEASURES OF SIZE

• The number of employees
  • A small business employs fewer workers than large businesses since they operate on a small scale.
  • However, the method is not suitable if one business uses capital intensive method of production; businesses which use more machinery and technology may have few employees, but they still might be big
  • For example, Microsoft has less employees but it is still one of the biggest businesses today.

Business category	Number of employees
Small/micro	10 or fewer
Medium	11-50
Large	More than 50

• Revenue
  • Revenue is often used as a measure of size – especially when comparing fi rms in the same industry.
  • It is less effective when comparing firms in different industries because some might be engaged in ‘high-value’ production, such as precious jewels, and another might be in ‘low-value’ production, such as cleaning services.
  • This measure is needed to calculate market share.
• Capital employed
  • Big businesses have large capital investments in form of properties and equipment owned. All these properties are bought capital employed.
  • Capital employed refers to the total value of all long-term finance invested in the business.
  • Comparisons between firms in different industries may give a misleading picture
  • However, this method is not appropriate when one firm uses a labour intensive method. A business which might not use a lot of investment in machinery and investment in properties may still be big.
• Market capitalisation
  • Market capitalisation can be used only for businesses that have shares quoted on the stock exchange (public limited companies).
  • It is calculated by this formula-
    • Market capitalisation = current share price × total number of shares issued
  • As share prices tend to change every day, this form of comparison is not a very stable one. For example, a temporary but sharp drop in the share price of a company could appear to make it much ‘smaller’ than this measure would normally suggest.
• Market share
  • Market share is a relative measure. If a firm has a high market share, it must be among the leaders in the industry and comparatively large.
  • However, when the size of the total market is small, a high market share will not indicate a very large firm.
  • This is calculated using the following formula-
    • total sales of business/total sales of industry x 100

WHAT IS A SMALL BUSINESS?

• A small business is a business that is independently owned and operated, with a small number of employees and relatively low volume of sales.
• Different countries have slightly different description for a small business.
  • For example, in United States a business has less than 100 employees is considered as a ‘small business’, whereas it is under 50 employees to qualify as a ‘small business’ in European Union. In Australia, a small business is defined as 1-19 employees.
• Small businesses are normally privately owned corporations, partnerships, or sole proprietorships.
• Apart from number of employees, other criteria for classifying a business as ‘small’ are:
  • Amount of capital employed
  • Annual Sales turnover
  • Value of assets

IMPORTANCE OF SMALL BUSINESS IN THE ECONOMY

• Create jobs- small businesses employ majority of the workforce in any country.
• They can grow to become big- Every business starts small. These small businesses today will become big firms tomorrow
• Small businesses are flexible and respond easily to changes in demand- they are owned by one or two individuals hence they are more flexible and adaptable in day-to-day operations
• Small firms often cater to local demands- local or regular customers can place their individual orders. Small firms provide niche products and services which a larger firm might overlook.
• In difficult economic times, such as a recession, small business can be an important source of providing employment.
• Improves efficiency in the economy- Small firms provide competition to larger firms through providing customised goods and services.
• Boost economic growth: they increase the production of goods and services in the economy. Thus, the Gross Domestic Product (GDP)of an economy will increase.

DISADVANTAGES OF SMALL FIRMS

• Lack of capital- they don’t have enough capital to stock enough goods
• Managed and run by employees who are less skilled- small businesses lack the resources to hire skilled and experienced personnel
• Risk of failure is high- customers are unwilling to buy from small firms and the skilled employees are reluctant to join small firms
• Difficult for them to raise finance- small business often struggle to get loans from financial institutions and this will stifle business growth

SMALL BUSINESSES FACE THE FOLLOWING PROBLEMS

• Under capitalisation
• Poor debt management
• Lack of managerial skills of the owner
• Cannot retain experienced staff
• Usually find it difficult to attract skilled staff
• Poor stock management

HOW CAN SMALL BUSINESS SURVIVE?

• Small firms have the advantage of being able to respond quickly to change – they do not have the bureaucratic procedures often a feature of large firms where decisions are made only after many meetings. This means they can be quick to exploit new market trends.
• The Internet also allows small firms direct access to consumers, by passing intermediaries. The web gives small firms the opportunity of international marketing.
• Small firms can survive by selecting a premium niche and offering an exclusive brand’ that exactly meets the customer requirements of their target segment. They will need to be totally customer orientated.
• Keep well documentation for accounts receivable financing when unexpected expenses arrive.

GOVERNMENT ASSISSTANCE FOR SMALL BUSINESSES

• Reduced rate of profits tax (corporation tax) – this will allow a small company the chance to retain more profits in the business for expansion.
• Loan guarantee scheme – this is a government-funded scheme that guarantees the repayment of a certain percentage of a bank loan should the business fail. This makes banks much more likely to lend to newly formed businesses. However, the rates of interest are often higher than market rates and the firm must pay an insurance premium to the government.
• Information, advice, and support will be provided through the Small Firms agency of the Department for Business, Innovation and Skills.
• In very economically deprived areas, such as cities with high unemployment, governments finance the establishment of small workshops, which are rented to small firms at reasonable rents. Other aid is designed to help small firms overcome the particular problems that they frequently experience.

FAMILY BUSINESSES

• Refers to businesses that are actively owned and managed by at-least two members of the same family. Decision making is influenced by multiple generations of a family related by blood.
• Strengths of family business:
  • Stability- family positions typically determines who leads the business and as a result, there is longevity in leadership. Family leaders stay usually stay in the positions for many years until a life event such as illness, retirement, or death results in change
  • Commitment- since the needs of the family are at stake, there is a greater sense of commitment and accountability. The family owners often show dedication in seeing the business grow, prosper and get passed on to future generations. This level of dedication is almost impossible to generate in non-family firms
  • Flexibility- family members are willing to take on tasks outside of their formal job on order to ensure the success of their company.
  • Long term outlook- non-family firms think about hitting goals this quarter, while family firms think years, and sometimes decades, ahead. This ‘patience’ and long term perspective allows for good strategy and decision making
  • Decreased costs- family members working at family businesses are willing to contribute their own finance to ensure the long term success of the organisation. This could mean contributing capital or taking a pay cut. This advantage comes in handy during economic down turns, where it is necessary to personally suffer in order for the firm to survive.
• Weakness of family businesses:
  • Family conflicts- deep seated, long lasting bitter fights and quarrels can affect every single person within the firm and can draw divisive lines. These conflicts are usually difficult to solve and result in a premature ending of the business.
  • Succession/continuity problems- many family businesses fail to be sustainable in the long term; can often be explained by the lack of skills and ability of later generations or the splitting of management responsibilities between several family members to give them
  • Unstructured governance- governance issues such as internal hierarchies and rules, as well as the ability to follow and adhere to corporate laws, tend to be taken less seriously at family businesses. There is little interest in setting clear and formal business practices and procedures and this situation can lead to inefficiencies
  • Lack of outside opinions and diversity on how to operate the business- family members are given jobs for which they lack the required skills, education, and experience. This has got far- reaching effects on the success of the business.

BUSINESS GROWTH- INTERNAL GROWTH

• Refers to an increase in the scale of operations, expanding production and increasing the sales and profit of a firm
• Reasons why a business want to grow:
  • To increase profits- the chances of business success rise when the business grows both internally and externally
  • To reduce risk- business growth where the business introduces new products that are totally different from the existing ones lowers the risk of failure
  • To dominate the market- a business which is a market leader has the power to set prices
  • To reduce costs- increasing the output leads to the enjoyment of economies of scale. Economies of scale refers to the cost saving advantages enjoyed by a business as a result of large scale operations.

• Internal Growth
  • Expanding the business from within by using its own internal resources. It involves expanding the business through increasing the number of employees, increasing production of existing products, opening new outlets, and increasing quantities of goods sold. It is also referred to as organic growth.
  • An example of internal growth is where a retail business opens more shops in towns and cities where it previously had none.
• Advantages of internal/organic growth:
  • It can be financed through internal funds e.g returned profits
  • Less risky than taking over other businesses
  • Allows business to grow at a more sensible rate
  • Builds on a business’ strengths
• Disadvantages of internal/organic growth:
  • Slow growth and the shareholders may prefer more rapid growth
  • Growth achieved may be dependent on the growth of the overall market
  • Harder to build market share if the business is already a market leader
  • The business can be affected by liquidity problems (cash problems)