IGCSEBusinessCIERevision Notes1. Understanding Business Activity1.3 Enterprise & Business GrowthMeasuring Business Size

Measuring Business Size (CIE IGCSE Business)

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Danielle Maguire

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Methods of Measuring Business Size

  • A simple way to classify businesses is to consider their size 

Diagram with the Criteria for Determining Business size

1-3-ways-to-measure-business-size-cie-igcse-business-rn

Business size can be measured in several ways, including the size of the workforce, the value of capital employed and the value of sales or output

Size of the workforce

  • A measure of how many workers are in the business
  • Small and medium-sized businesses (SMEs) employ less than 250 employees
  • Large businesses have 250 or more employees

Value of capital employed by the business

  • A measure of all the capital (money, equipment, buildings) that is currently invested in a business

Value of business sales

  • The total sales revenue achieved during a trading period
  • It is calculated using the formula Price x Quantity

Value of business output

  •  The financial worth of goods produced, even though they may not all be sold
  • It is calculated using the formula Total Costs x Quantity
     

A Comparison of the size of two Businesses

Company Size of the Workforce Capital Employed
Value of Output

Futuristic Microchips

  • 4 Designers
  • 5 Maintenance staff
  • 9 Total employees

  • High tech production line - $100,000

  • 500 Microchips at $100 = $500,000

Tasty Satsumas

 

  • 400 Farm workers
  • 18 Managers
  • 418 Total employees

 

  • Basic fruit-picking tools

  • $20,000

  • 500, 000 oranges at $1= $500,000

  • Futuristic Microchips is the largest organisation using the measures of number of employees and capital employed
  • Tasty Satsumas is the same size as Futuristic Microchips in terms of the value of output

Stakeholder interest in business size

  • Banks wish to know how likely any loans will be repaid
    • Larger businesses may be less of a lending risk
       
  • Employees wish to know how secure their jobs are
    • A growing business is likely to offer job security
       
  • Suppliers may prefer to sell products to larger businesses
    • Large business are likely to purchase in greater quantities
       
  • Investors compare business size to distinguish between investment opportunities
     
  • Competitors may set growth objectives or benchmark their progress against similar-sized rival businesses 
     
  • Governments apply different tax rates for small and large businesses
    • Larger firms may need careful monitoring to ensure they do not abuse their market power

Exam Tip

When comparing business size, it is best to compare like with like, such as weighing up an orange producer with other fruit producers

Limitations of the Methods of Measuring Business size

  • Each method of measuring business size has both benefits and limitations
     

The Limitations of each Method


Method
Limitations

Size of the workforce

  • The method of production can influence this metric significantly
    • Capital-intensive businesses produce high levels of output with few employees
    • Labour intensive businesses have many employees that may generate a small volume of output

  • The nature of workers' contracts can mean this measure is unreliable
    • Some businesses hire many part-time workers whilst some businesses prefer full-time workers
    • Short-term, zero hours or agency worker contracts may not be included in workforce measurement

Value of capital employed

  • Not accurate when comparing labour-intensive and capital intensive production methods
    • European manufacturing businesses tend to have high levels of capital such as robots or advanced machinery compared to those located in countries such as Vietnam and Indonesia
    • Property values differ significantly across the world, and even between regions
      • E.g. The value of property in Singapore is significantly greater than property in mainland China

Value of sales

  • Businesses sell very different products
    • Comparing a market stall selling sweets and a retailer of luxury handbags would be unrealistic as their prices and volumes sold are very different

  • Selling prices vary between markets
    • Businesses may sell products to customers in low-income markets at a lower price than in a higher-income market

 

Value of output

  • High value output can be produced by businesses with very few employees or with limited capital employed
    • E.g. A bespoke jewellery maker may produce only a few expensive items each year

  • The value of output does not measure how successful a business has been at selling goods produced. If they are left unsold they are a poor measure of business size

 

Exam Tip

Profit is not a measure of business size. If a multinational like Netflix makes a loss, it does not mean that a sole-trader hairdresser which earns a profit is a larger organisation. 

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    Danielle Maguire

    Author: Danielle Maguire

    Danielle is an experienced Business and Economics teacher who has taught GCSE, A-Level, BTEC and IB for 15 years. Danielle's career has taken her from across various parts of the UK including Liverpool and Yorkshire, along with teaching at a renowned international school in Dubai for 3 years. Danielle loves to engage students with real life examples and creative resources which allow students to put topics in a context they understand.