Chapter 3 Size of a business

Question 1

What is used to measure the size of a business?

Answer 1

1 Number of employees
2 Sales turnover
3 Capital employed
4 Market capitalisation
5 Market share

Question 2

What does sales turnover measures?

Answer 2

Sales turnover measures the total value of sales made by a business in a given time period

Question 3

What does Capital employed measures?

Answer 3

Capital employed measures the total value of all long-term finance invested in the business

Question 4

What does Market capitalization measures?

Answer 4

Market capitalisation measures the total value of a company’s issued shares

Question 5

What does Market Share measures?

Answer 5

Market share measures sales of the business as a proportion of total market sales

Question 6

Which form of measurement is best?

Answer 6

• Number of employees is simple but can give problems
• Sales turnover and capital employed is more effective when comparing firms in the same industry but less effective when comparing firms in different industries
• Market capitalization can only be used for businesses that have shares ‘quoted’ on the stock exchange (plc’s)
• Market share is a relative measure

Question 7

What is the significance of small firms?

Answer 7

• A small firm typically has few employees and a low amount of turnover compared to other firms
• All great businesses were small at one time
• Many jobs are created by small firms
• Small firms are often run by dynamic entrepreneurs, with new ideas for consumer goods and services
• Small firms create competition for larger firms
• Small firms often supply specialist goods and services to consumers and important industries in a country

Question 8

Advantages of small firms?

Answer 8

• can be managed and controlled by the owner
• Often able to adapt quickly to meet changing customer needs
• Offer personal service to customers
• Closer relations with staff

Question 9

Disadvantages of small businesses?

Answer 9

• may have limited sources of finance

- may find that the owner/s has/have to carry a large burden of responsibility if unable to employ specialist managers

Question 10

Advantages of large businesses?

Answer 10

• can afford to employ specialist professional managers
• have access to different sources of finance
• are more likely to be able to afford research and development into new products and processes

Question 11

Disadvantages of large businesses

Answer 11

• may often suffer from a divorce of ownership and control that can lead to conflicting objectives
• may suffer for slow decision making and poor communication due to the structure of the large organisation

Question 12

Why do business owners and directors of companies seek growth for their businesses?

Answer 12

1 Increased profits
2 Increased market share
3 Increased economies of scale
4 Increased power and status of the owners and directors
5 Reduced risk of being a takeover target

Question 13

What is Internal growth?

Answer 13

Internal growth is expansion of a business by means of opening new branches, shops or factories (also known as organic growth)

Question 14

What is External growth?

Answer 14

External growth is business expansion achieved by means of merging with or taking over another business, from either the same or a different industry