0264 · 1.3.2The methods and problems of measuring business size

Measures of business size

0:00A software business can employ a small team and have millions of dollars invested in its operations. A furniture manufacturer might employ many more people but have less capital invested. Each business looks larger through a different measure. By the end of this video, you will understand how to measure business size and why comparisons need careful interpretation. Business size describes the scale of an organisation’s operations. A business can be large in one way and small in another.

0:25Each measure captures a different feature. Choosing a useful measure therefore starts with deciding which feature we want to compare. The common methods are the number of people employed, value of output or sales, volume of output or sales, and capital employed. Output is the quantity of goods or services produced over a period. The figures for output and sales can differ because some goods produced remain unsold as inventory.

0:49When comparing businesses, make sure the figures cover the same period and describe the same activity. The number of people employed measures size by counting a business’s employees. This is easy to understand because a larger workforce often supports more activity. For example, a hotel employing many cleaners, receptionists and kitchen staff has substantial staffing requirements. Comparing employee numbers can be useful when businesses carry out similar work in similar ways.

1:14Capital-intensive production uses a high proportion of machinery and equipment compared with labour. An automated car parts factory can produce large quantities with relatively few employees. Its workforce count captures the people involved, while much of its production depends on machinery. This explains why employee numbers alone can understate the scale of an automated business.

Sales, output and capital

1:35Revenue is the income a business receives from selling goods or services. Value of sales measures size by the revenue earned over a period. It allows us to express different products in the same unit, such as dollars. Value of output measures the monetary worth of production over a period, including goods that remain unsold. A bicycle shop selling expensive models can earn substantial revenue from relatively few sales. Another shop might sell many more basic bicycles at lower prices.

2:01Sales value reflects both the quantity sold and the prices charged. A price increase can therefore raise this measure even when the quantity sold stays unchanged. Volume of output measures the quantity produced over a period. Counting loaves baked or chairs manufactured shows the physical scale of production. For services, we might count hotel nights provided or haircuts completed. Volume of sales is the quantity of goods or services sold over a period, so it shows how many units customers actually buy.

2:28Comparing quantities works best when the products are similar. Loaves and bicycles differ greatly in their value and the resources needed to produce them. A bakery producing more individual items than a bicycle factory gives limited evidence about their relative scale. Even within one industry, differences in product size or complexity can weaken a comparison. Capital employed is the total long-term finance used in the business. This measure indicates the financial resources committed to its operations.

2:56A factory requiring expensive equipment may have substantial capital employed. Businesses with similar production methods can be compared through the amount of capital supporting their activities. Labour-intensive production uses a high proportion of labour compared with machinery and equipment. A salon depends heavily on its employees’ time and skills. Its equipment may require relatively little investment, even when it serves many customers. Capital employed alone can therefore understate the scale of a business whose activity depends mainly on people.

3:25The methods of measuring business size exclude profit. Profit is total revenue minus total costs. It measures financial performance over a period. The amount earned depends on efficiency, prices and costs. A small business with carefully controlled costs can earn more profit than a much larger operation with high expenses.

Comparing businesses fairly

3:42Consider Kestrel Digital and Oak Furniture using figures from the same date. Kestrel Digital has twenty employees and five million dollars of capital employed. Oak Furniture has one hundred and twenty people on its staff, and its capital employed is one million dollars. We will compare each measure separately because the figures describe different aspects of their operations. Start with the number of people employed. One hundred and twenty is greater than twenty, so Oak Furniture is larger by this measure.

4:08Next, compare capital employed. Five million dollars exceeds one million dollars, so Kestrel Digital is larger by the amount of capital invested in its operations. The ranking changes because the furniture maker has more employees, while the software business has more invested capital. Both conclusions follow correctly from the figures. An overall judgement needs more information about their activities and production methods. Using several measures reveals the different ways in which each business has a larger scale.

4:35Fair comparisons also require consistent information. Sales figures must cover the same length of time, because a longer period includes more transactions. Both businesses should also count their part-time and full-time employees in the same way. Comparing firms in the same industry helps because their products and resource requirements are more likely to be similar. In Paper One Short Answer and Data Response or Paper Two Case Study, you could interpret figures or explain a measure’s limitation.

4:59An exam-style question could ask you to explain one problem with using employee numbers to compare these businesses. Start with the limitation, then use the case evidence, and finish by explaining how the comparison is affected. Employee numbers ignore how much capital supports each person’s work. Kestrel Digital uses only twenty employees, but five million dollars of capital is invested in its operations. Oak Furniture, with one hundred and twenty employees, has just one million dollars of capital employed.

5:26Employee numbers therefore make Kestrel Digital look smaller, even though its capital employed is five times larger. Each method measures a different feature of a business. The number of people employed counts its workforce. Revenue is the income a business receives from selling goods or services. Value of sales adds up this revenue in dollars. Capital employed is the total long-term finance used in the business. Profit measures financial performance, so it is excluded from the methods of measuring business size.

5:55Output is the quantity of goods or services produced over a period, and volume of sales is the quantity sold. Different methods can rank the same businesses differently, as Kestrel Digital and Oak Furniture showed. Use more than one method, compare similar businesses, and always state the measure behind your conclusion about size.