Business Size Unit 1 Module 1

Objectives Defining Business Size (Small vs. Large) Criteria for Measuring Business Size

Defining a Small Business A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships.

Definitions (Small Business Association of Jamaica (SBAJ) Definition of a Micro Business Micro Enterprises are regarded as one with an annual turnover of less than US$100,000. Definition of a Small Business Small Enterprises are regarded as one with an annual turnover of between US$100,000 and US$5,000,000 and a staff complement of 1-50 employees.

Continued Definition of a Medium Size Business Medium Size Enterprises are regarded as annual turnover of between US$5,000,000 and US$25,000,000 with a staff complement of between 50-500 employees.

Trinidad

Trinidad In Trinidad and Tobago the size of the business' asset base is a major determinant. Thus the value of a firm’s non-property assets such as: machinery, equipment and working capital (excluding land and building) must fall between $100 000 and $1.5 million to be considered small.

Other Definitions UK Based Definition Marsh and Soulsby (2002) in their text Business Law, posit that a Small Business is “ one with annual turnover not exceeding £2.8 million and total balance sheet assets not exceeding £1.4 million and or no more than 50 employees on average.”

Please Note The legal definition of "small" varies by country and by industry. Examples: Australia: Small Businesses are those with fewer than 15 employees under the Australian Fair Work Act 2009, European Union: Small Businesses are those with fewer than 50 employees U.S.: Small Businesses are those with fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.

Criteria for Measuring Business Size The size of a business is not measured according to the size of its building, but other factors such as: Sales turnover (or sales revenue) Number of employees (How many people are employed by the business?) Share capital (the number of shares times the price of each share) Market share the sales of the business of a particular product as a proportion of all sales of that type of product. A 5% market share would mean that 1 in 20 of all products sold are sold by that business. Value of Assets (How much are all the possessions of the company worth?) Number of outlets (e.g. shops)

Market Share The market share of the business is normally measured as a percentage. Obviously, the larger the percentage share of the market the larger the business. This measure is only useful for comparing businesses in the same industry; one business with 50% market share may be much larger or smaller than another business with the same market share if it is in a different sized market.

Level of Sales Turnover The level of sales turnover can be used to measure the size of the business. For example in the UK, The 1985 Companies Act says: “a firm with turnover less than £1.4 million is small. If turnover lies between £1.4 million and £5.75 million then the firm is medium size. If turnover is over £5.75 million it is large”. What are the limitations of using this criterion? A business may be going through a bad phase and may not have huge sales does it make the business small?

Labour Force (Number of Employees) The number of employees is an easy way of measuring the size of a business. It can be difficult to compare businesses in different markets using this measure, for example, a retail business may employ more people than a car manufacturer, but this does not mean the retailer is larger. This is because the car manufacturer uses a large amount of machinery, therefore it does not need as many workers.

The Value of the Business This measures the value of the business if it were to be sold. This value can vary enormously depending upon if there is another business wanting to buy it.

Value of Capital Employed (Capital Structure) The value of capital employed calculates the value of everything the business owns, in other words, how much it would cost to replace all of the businesses assets. This measure is therefore based on the amount of money invested in the business. Generally, the more money invested the larger the business. What are the limitations of using this criterion?

Market Capitalization This is the current share price multiplied by the number of shares. This criteria however, may also not be a true indicator of business size, since markets are very volatile and share prices change every day. Does it alter the size of the business every day?

Level of Profitability Generally, businesses which have a higher level of profitability than others may be considered larger businesses. Using this criterion however, can be misleading as a large company may have problems and make only a small amount of profit.

Points to Note There is no best way to measure the size of business. Also the comparison should be amongst businesses of the same industry in the same conditions. At least two to three ways should be used. If the number of employees is more then the size would be larger expectedly. However, the limitation is that a business using capital intensive methods would have fewer number of labour for e.g. if packaging is manual then lot of labour is required but if packaging is automated, then less number of employees are received.

Points to Note Capital employed may be higher in new businesses due to large investment. Sales - if turnover is high then business is large but if a business produces luxury goods, then profit margin is high and sales volume may be not high. Profit may not be made in a very large firm due to several reasons.

CAPE 2007, Question 2.