There are many factors that are used in determining the size of a business. Some of the factors are only used to compare similar firms while others are used in comparing differentiated firms.
At one point we may want to determine the size of the business. This helps in knowing whether it’s growing or not. Also, you ascertain it in order to plan its various requirements. If you know the size of your firm,
then you’re able to determine its efficiency. Any enterprise is either; small, medium, or large size.
Every business is striving towards attaining the optimum size. Usually, any business starts as a small entity, and then during its operating period, it expands till it reaches the optimum size.
Eight Factors that Determine the Size of Business
1. Capital Investment Factor
The capital employed by shareholders in form of share capital, reserves, and surplus (net worth) determines the size of the business. It is mainly used to compare two firms or more that are producing similar or differentiated products.
2. Number of Employees
The number of employees employed by any business determines its size. This is done by comparing the wages paid to employees with other businesses. This factor is used where firms produce similar goods. If you use it in comparing firms that are producing differentiated products, then you end up with false results.
3. Power Used
The amount of power used determines the size of the business. Don’t rely on this factor as it is inaccurate because the amount of power used by any business may be more or less.
4. Raw Materials Used
The annual consumption of raw materials of any firm determines its size. It is used only on those firms that are producing similar products.
5. Volume of the Output
This factor is used on those firms that are producing homogeneous goods.
6. Capacity of Plant
It is used by firms that produce similar products.
7. Total Assets
The total assets of any business determine its size. The value of all assets (current and fixed) is taken as a means of measure. It is used in both similar and differentiated firms.
8. Value of Output
This is another factor that determines the size of any firm; however, this method is only effective in cases where firms produce a variety of products and where price levels remain constant.
Of all these factors, the volume of output is the most effective and reliable factor in measuring the size of any business unit.
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