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What’s it: Business size is about how big the company’s operations are. It can be measured by several indicators, including assets, revenue, production, market capitalization, number of employees, and capital invested.
Business size matters. It can affect a company’s competitive capacity. For example, large companies have large resources to support competitiveness. In addition, they also benefit from higher economies of scale, which are not present in small companies. As a result, it makes them enjoy lower costs while increasing their output.
How to determine company size
Several indicators to determine company size, including:
Number of employees – how many people are recruited by the company. Big businesses employ more workforce than small businesses because they operate on a large scale.
Revenue – how much money is made from selling goods or providing services. An alternative is to use a sales volume measure.
Production – how much volume of output is produced. This indicator is irrelevant for service businesses because their output cannot be quantified as for manufacturing companies.
Amount of invested capital – how much capital is owned by the company. It is usually positively correlated with the resources at hand. For example, capital can refer to the sum of equity capital and debt capital. Alternatively, we can refer to physical capital such as property, plant, and equipment.
Market capitalization – how much is the total value of the shares issued by the company. It only applies to public companies, where the shares are traded by the public and listed on the stock exchange.
- Market capitalization = Company’s share price x Number of shares outstanding
Classifying business size
The four common categories of businesses based on their size are:
- Micro-sized business
- Small-sized business
- Medium-sized business
- Large-sized business
The classification may differ between institutions and between countries. Each institution has different categories and definitions. Some may use the number of employees as a basis for categorizing. While others may use turnover or revenue. In Indonesia, for example, the Central Statistics Agency categorizes businesses into:
- Micro-sized business: 1-4 workers
- Small-sized business: 5 – 19 workers
- Medium-sized business: 20 – 99 workers
- Large-sized business: 100 and more workers
Meanwhile, the OECD uses the following categories:
- Micro-sized business: less than 10 employees
- Small-sized business: 10-49 employees
- Medium business: 50-249 employees
- Large-sized business: more than 250 employees
Furthermore, the European Commission combines the number of employees and turnover to categorize businesses:
- Micro-sized businesses: less than 10 people and have an annual turnover of not more than €2 million.
- Small-sized business; less than 50 people and have an annual turnover of not more than €10 million.
- Medium-sized businesses: less than 250 people and have an annual turnover of not more than €50 million.
- Large-sized businesses: 250 people or more and have an annual turnover of over €50 million.
In the United States, the Small Business Administration (SBA) classifies businesses into three categories:
- Small-sized business: annual revenue of less than $38.5 million and no more than 1,500 employees.
- Medium-sized businesses: annual revenues between $38.5 million and $1 billion and 1,500 to 2,000 employees.
- Large-sized business: over $1 billion in revenue and over 2,000 employees.
Why is business size important?
Big businesses have large capital and resources to grow. As a result, they have better economies of scale, allowing them to be more efficient. Large resources also support a strong market position and greater bargaining power with customers and suppliers.
For the economy, the big business provides more output and jobs. Their influence on the economy is even greater if they operate the financial industry.
Take banks, for example. As they get bigger, they become more strategic for the economy. They play a major role in driving the economy through their role as loan providers. As a result, if one big bank fails, it can shake up the economy. For this reason, governments usually issue bailouts only to prevent major bank failures.
Furthermore, stakeholders often consider the business size when making economic decisions about a company. Here are some examples:
Customers often view large companies positively. They see large companies tend to have high quality to maintain their reputation and positive image. On the other hand, companies care about maintaining quality because they don’t want their reputation ruined. With greater economies of scale, they are also more likely to offer lower prices.
Investors consider the business size when allocating investment to a company’s stock or corporate debts. They may perceive large companies as safer because they have large resources, which allows them to have a competitive capacity and ability to make big money.
Workers are also more comfortable working in large companies because they offer better opportunities, including salary or professional career paths. In addition, they are also considered to offer more job security than small companies because they are more competitive.
Governments may charge different tax rates according to the company size. Or, when providing subsidies or grants, size may also be a consideration.
Creditors are concerned with the company size to determine the company’s capacity to borrow. Large businesses have a higher borrowing capacity, making it easier to seek funding from banks or the capital market.
Suppliers prefer large companies because they are more likely to get large orders. That way, they can achieve higher economies of scale.