1.3 Size of business Flashcards
Measures of size of business
1 Number of employees
2 Sales turnover: total value of sales made by a business in a given period
3 Capital employed: Total value of all long-term finance invested in the business
4 Market capitalization: Total value of a company’s issued shares = current share price * total no. of shares issued
5 Market share: Sales of the business as a proportion of total market share
Ads of small businesses
- Can be controlled by owners
- Adapt quickly to meet changing customers’ needs
- Personal service to customers
- Easy to get to know the workers
- If family-owned -> informal -> employees are motivated
Diads of small businesses
- Limited source of finance
- Owners carry large burden
- May not be diversified -> vulnerable to external change
- If family =owned -> restrict innovation AND family rivalries -> conflict over who’s in control over expansion
Ads of large businesses
- Can employ specialist professional managers
- Cost reductions due to econ of scales
- Able to set low prices -> other firms inevitably have to follow
- Access to different sources of finance
- Diversified markets and products -> shared risks
- Afford R&D into new products + processes
Disads of large
- Difficult to manage
- Potential cost increases with large scale production
- Slow decision making and poor communication
- Divorce b/w ownership and control -> conflicting objectives
Significance of small firms
- Employments
- Often run by dynamic entrepreneurs -> new ideas for consumer goods and services -> create variety in market
- Competition small firms can create for larger businesses -> large may be less likely to exploit consumers w/ high prices and poor service
- Supply specialist goods and services to important industries e.g: Supply audio equipment, training services to large cooperation
- More small firms -> greater chances that the economy will benefit from large-scale organisations in the future (bc they grow)
- May enjoy lower average costs
Probs of small firms
- Lack of specialist management expertise
- Probs in raising short-long term finance bc they have little security to offer banks in exchange for loans
- Marketing risks from limited product range - problems when consumer tastes change
- Difficulty in finding suitably and reasonably priced premises
Why grow?
Increase:
- Profit
- Market share
- Economies of scale
- Power and status of the owners and directors
Reduce:
- Risk of being a takeover target
Internal grow (organic)
- Expansion of a business by means of opening new branches, shops and facilities
- Can be financed by retained profits, putting pressure on current expenditure
Disads of organic grow
Growth achieved may be dependent on the growth of the overall market
Harder to build market share if business is already a leader
Slow growth – shareholders may prefer more rapid growth
Franchises (if used) can be hard to manage effectively
Ads of organic grow
Less risky than taking over other businesses
Can be financed through internal funds (e.g. retained profits)
Builds on a business’ strengths (e.g. brands, customers)
Allows the business to grow at a more sensible rate
How to grow organically?
- Designing and developing new product ranges
- Implementing marketing plans to launch existing products directly into new markets (e.g. exporting)
- Opening new business locations – either in the domestic market or overseas
- Investing in research and development to support new product development
- Investing in additional production capacity or new technology to allow increased output and sales volumes
- Training employees to help the best acquire new skills and address new technology
Retained profit
Retained profit is the profit left after all deductions including tax and dividends to shareholders have been made and is kept/reinvested in the business.
