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1.3 Enterprise, business growth and size

Measuring business size

There are many different businesses – some are considered large and others are
considered small. How do observers decide whether they are large or small? There are
three key factors to consider, which were identified and recognised by the European
Union (EU):

1. Number of employees – The number of people who work for a

business.
2. Value of output (sales revenue) – The number of goods that a
business sells multiplied by the selling price.
3. Capital employed – The money that has been invested into a
business to buy equipment and machinery. It shows the value of
the assets that the business owns.
4. Market share – The percent of total sales that a particular
company has in their overall industry.

Table 1. EU measures of business size.

Source: European Commission
(https://web.archive.org/web/20150208090338/http://ec.europa.eu/enterprise/policies/sme
/facts-figures-analysis/sme-definition/index_en.htm).

Small Medium Large

Number of employees <50 50-249 >250

Sales revenue <€10m €10m-€50m >€50m

Capital employed <€10m €10m-€43m >€43m

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The EU does not state typical market share percentages for small, medium or large
businesses. This is probably because it depends on the industry that is being
measured and the number of competitors within it. For example, in an industry with
many competitors, 10% market share could be considered very large if competitors
typically have a much smaller share of the market. In other industries, with few
competitors, an organisation with 10% market share could be considered very small.

Study skills
Remember that profit is not a valid measure of business size. Small businesses with
few employees can still make a very large profit, especially service businesses such
as accountants or web design companies. Some businesses that use a large amount
of capital employed (such as a power station) may be considered large, but they can
make a very small profit.

Table 2 shows the ways in which the measures of business size can be used.

Table 2. Using the measures of business size.

How can this be used to Limitations of using this

measure business size? method

Number Generally, a business A business that employs

of with more employees is few people can still be
employee considered to be larger considered large because it
s than those with fewer is capital intensive (it
employees. employs more machines
than people).

Value of Generally, businesses Small businesses can

output that generate more generate large amounts of
(sales revenue are considered revenue but still be
revenue) larger. considered small because
they sell their products at a
high price.

Capital Generally, a business A business that does not

employed that invests more money invest in equipment or
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 in capital equipment is
larger than those that do
not.
machinery can still become
large. Many service
businesses (such as lawyers
or designers) do not use
large quantities of assets
because they are labour
intensive (they employ
more people than
machines).

Market Generally, a business A business can have the

share with a higher market characteristics of a large
share than its firm, such as having more
competitors can be than 250 employees, but
considered large. still have a small market
share depending on the size
of the industry.

There is one other limitation, which is common to all measures of size. When
comparing the different methods, the businesses studied need to be in the same industry
. If they are in different industries, they will have different levels of revenue and
different uses of capital equipment. For example, a hairdresser would require less
capital equipment to operate than a steel manufacturer.

Study skills
When deciding whether a business is small or large, you need to compare more than
one factor. Generally, businesses are considered large if they fall into at least two of
the categories identified in the EU specifications (in Table 1).

Activity
Consider the following businesses. They are all manufacturers of computer screens.
Which is the largest business in the market? Explain your answer.

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 Busine
Business A Business B ss C

Number of 250 125 40

employees

Sales revenue $865 000 $702 000 $1 009

000

Capital $40 000 $410 000 $600

employed 000

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