Unit 1: Size of business

Question 1

different methods of measuring the size of a business

Answer 1

1. Number of employees
2. amount of capital invested
3. the sales turnover
4. market capitalisation

Question 2

disadvantages of being a small business.

what is a small business ?

Answer 2

A small business is a business that is independently owned and operated, with a small number of employees and relatively low volume of sales.

Disadvantages of small firms
 Lack of capital: they don’t have enough capital to stock enough goods
 They sell inferior goods: they operate usually in the rural communities where they sell poor quality
goods and sometimes expired food items
 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

Question 3

the importance of small businesses and their role in the economy.

Answer 3

 Create jobs: Small businesses employes majority of the workforce in any country.
 They can grow to become big: Every business starts small. These small business today will become
bog 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.
 Give informal credit: they offer credit facilities to well-known customers
 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.

Question 4

How can small business survive?

Answer 4

• segmenting
• respond quickly to change
• internet give access to consumers
• join other small firms to form a buying group
• selecting a premium niche
• keep well documentation of accounts

Question 5

why and how a business might grow internally.
Ad
Dis

Answer 5

why?
Reasons why a business want to grow:
 To increase profits- the chances of business success rises 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.
 To fulfil the objectives of the management- it can be a planned move by the management to
spread the wings of its business into new markets.

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 open 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)

Question 6

Importance of Business Size

Answer 6

Government
-the government may want to give assistance to small firms
-The government may want to charge different tax rates to different firms
Investors
-they may want to compare with its close competitors
-they want to know how safe it is to invest in a given business
Customers Workers Banks
Importance
-customers may prefer to deal with large forms since they are the most reputable and are less likely to cease production in the near future
-workers also want to be employed in large firms since they are concerned about job security
They use business size to determine the maximum loan they can give to the business