Chapter 4- Business size, growth and external growth

Question 1

What factors need to be taken in account when making a judgement about the size of the business?

Answer 1

• Number of employees
• Number of factories, shops or offices
• Turnover and profit levels
• Stock market value
• Capital employed

Question 2

Number of employees (business’s size)

Answer 2

• Would be expected a large business would employ a large number of employees

But it might not be appropriate to judge the size of a business on the number of employees because:
- Many factories are highly automated and capital intensive so they produce a lot of output but don’t employ a large number of people

Question 3

In the UK, a business with fewer than how many employees is regarded as small?

Answer 3

Fewer than 50 employees

Question 4

In the UK, a business with how many employees is regarded as large?

Answer 4

More than 250 employees

Question 5

Number of factories, shops or offices (business’s size)

Answer 5

• Business would be perceived as ‘large’ if they had a higher number of factories, shops or offices.
• But it also depends if they have any in other countries and if so how many.

Question 6

Turnover and profit levels (business’s size)

Answer 6

• A high turnover is usually associated with a large business
  -But a business may only own one shop and still have a high turnover because of the high value of the (relatively few) products sold.
• A higher profit level is associated with a larger firm
• But a large firm could be having trading difficulties so therefore making a lower than usual turnover and profit so may not be accurate as a measure of size

Question 7

What is the definition of turnover?

Answer 7

Value of a business’s sales

Question 8

Stock market value (business’s size)

Answer 8

• The higher the figure, the larger the company is likely to be
• There is a drawback with this method which is if the share price falls it reduces the value of the company
• This means that on this measurement of size the business has suddenly become smaller even though a change in share price has no immediate impact on the number of factories, machines or employees.
• This method of estimating a business’s size can be misleading as share prices change daily

Question 9

How is the value of a public company calculated?

Answer 9

By multiplying the current share price by the number of shares issued.

Question 10

What is the definition of capital employed?

Answer 10

It is the total value of a business’s assets e.g. factories, offices

Question 11

Capital employed (business’s size)

Answer 11

• if the figure is high it’s reasonable to assume that the business is large
• But as with stock market value, prices and therefore values of factories and office blocks can rise or fall without any changes in the actual number owned
• Geographical location of assets also affects their value e.g. a factory unit in London will be more valuable than a business of exactly the same type in exactly the same unit in wales.

Question 12

What is the EU definitions of business size?

Answer 12

The EU has a standardised way of measuring size based on the number of employees, turnover or balance sheet value

Question 13

What is the EU’s definition of a micro sized business? (Employees)

Answer 13

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Question 14

What is the EU’s definition of a micro sized business? (Turnover €m)

Question 15

What is the EU’s definition of a small sized business? (Turnover €m)

Question 16

What is the EU’s definition of a medium-sized business? (Turnover €m)

Question 17

What is the EU’s definition of a micro sized business? (Balance sheet total €m)

Question 18

What is the EU’s definition of a small sized business? (Balance sheet total €m)

Question 19

What is the EU’s definition of a medium-sized business (balance sheet total €m)

Question 20

What are the factors affecting the size of a business?

Answer 20

• Market size
• Nature of the product
• Personal preference
• Ability to access resources for expansion

Question 21

Market size

Answer 21

• Where the market is small it is often dominated by relatively small business’s
• This is because larger firms don’t think they can gain economies of scale and/ or the level of sales to gain the desired level of profit
  -Consideration also needs to be given as to whether the market is expanding, static or contracting

Question 22

Nature of the product

Answer 22

• If a product is large and technologically complicated the firm will usually be larger because of the resources necessary to make and upgrade it
• Where the product is highly standardised it’s usually made by a larger business since it can gain economies of scale from manufacturing it
• A less standard product made from marketed with a personal touch will often be supplied by a smaller business

Question 23

Personal preference

Answer 23

• Entrepreneur might not want to expand nationally or even regionally and may prefer to be a big fish in a small pond
• Opening a new factory or office could mean a loss of control which the entrepreneur may not want
• May also be the consideration of whether the time and trouble that will need to be devoted to any expansion is worth it in terms of risks and personal sacrifices that may have to be made in terms of family life

Question 24

Ability to access resources for expansion

Answer 24

• Are funds available?
• ‘Credit crunch’ prevented many firms from expanding

Question 25

What are the reasons a business might want to grow?

Answer 25

• Entrepreneur wants a greater challenge
• Owners want a higher return on their investment
• Opportunity to gain unit cost reductions through economies of scale
• A bigger, stronger business is better placed to fight any economic/ competitive threats successfully

Question 26

What are the advantages for employees in a large business?

Answer 26

• Greater job security
• Large firm will have a specialist human resource management department which will ensure compliance with legislation

Question 27

What are the disadvantages for employees in a large business?

Answer 27

• Feeling remote from those who make the decisions that affect them
• Issue of poor morale and motivation that may affect productivity

Question 28

What are the advantages for suppliers in a large business?

Answer 28

• Regular orders
• Large orders
• Security

Question 29

What are the disadvantages for suppliers in a large business?

Answer 29

• May be offered a take it or leave it approach to conditions of supply and payment
• Overdependence on a large customer can cause problems if the large firm decides to change supplier