Chapter 3: size of a business
Businesses vary in size, from a sole trader with only one employee to a multinational corporation with
thousand of them. Measuring the size of businesses is a rather inexact science, but effort is still made so
that comparisons can be made between them.
Measuring size of business:
-Low price inflation
-Low levels of unemployment
-Balance of payments
-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.
- If the business is larger it usually means the business is established reducing the risk of failure.
-Because investors benefit from business success the bigger the business the greater the money they
-May prefer to deal with large firms as they are more stable and less likely to cease production or
Problems for the way of measuring business size
1. First problem: There are several different ways of measuring the size of a business and they are
not an exact science.
2. Second problem: There is no international definition of how big or small a business is.
Different measures of size
1. Number of employees: This is the simplest way of measuring the size of a business. The higher
the number of employees the bigger the business. 2. Sales turnover: This is the total value of sales made by a business in a certain period of time. It is
usually used when comparing two businesses in the same industry. The higher the sales
turnover the bigger the business.
3. Capital employed: This is the total value of all long-term finance invested in the business. The
greater the company is, the greater the amount of capital employed in it.
4. Market capitalisation: This is the total value of a company´s issued shares. This measuring
method can only be used in businesses that have shares on the stock exchange (public limited
companies). It is calculated by this formula=
Market capitalisation=current share price * total number of shares used
5. Market share: Sales of the business as a proportion of total market sales. If a firm has a high
market share, it must be among the leaders in the industry. It is calculated with this formula.
(Total sales of business/ total sales of industry) * 100
Which form of measurement is best?
There is no best measure. The one used depends on what needs to be established about the firm being
compared. This could depend on whether we are interested in absolute size or comparative size within
one industry. If an absolute measure of size is required, then it is most certainly advisable to test a firm
on at least two of the above criteria and to make comparisons on the basis of these.
The significance of small and micro businesses
Even though there is no established universal definition for small business, it will be easy to
identify them within your own economy. They will employ few people and will have a low
turnover in comparison to other firms.
It is now common to make further distinction for very small businesses which are called micro-
Benefits of encouraging small businesses
Many jobs are created.
Variety in the market.
Specialist goods and services.