What Is Business Size? [Definition, Classification, Measurement]
You may have heard the terms “small business” and “large business” before, but what exactly constitutes a small or large business?
And why does business size matter anyway?
In this article, we’ll answer those questions and more.
What is Business Size?
There are multiple definitions of business size.
- Number of employees
- Amount of invested capital
- Market capitalization
Number of employees
Business size often refers to the approximate number of employees a company has.
The Small Business Administration (SBA) defines a small business as one that employs fewer than 500 people. Meanwhile, a large business is defined as a company that employs 500 or more people.
Another way to measure business size is by looking at revenue. Businesses can be classified as small, medium, or large based on their annual revenue.
The European Commission defines small businesses as those that have a maximum annual turnover of €10 million and fewer than 50 employees.
Medium-sized businesses are those that have a maximum annual turnover of €50 million and fewer than 250 employees.
Another way to measure business size is by production. This method is typically used for manufacturing businesses.
Businesses can be classified as small, medium, or large based on the amount of goods or services they produce.
The United Nations Industrial Development Organization (UNIDO) classifies businesses as small, medium, or large based on the number of employees and/or the value of annual production.
A small enterprise is defined as one with fewer than 50 employees and/or an annual production value of less than $3 million.
A medium enterprise is one with 50-249 employees and/or an annual production value of $3-$10 million.
Lastly, a large enterprise is defined as one with 250 or more employees and/or an annual production value of more than $10 million.
Amount of invested capital
The European Commission defines small businesses as those that have less than €2 million in invested capital.
Medium-sized businesses are those that have €2-€15 million in invested capital.
Lastly, large businesses are defined as those with more than €15 million in invested capital.
Market capitalization is another way to measure business size. This method looks at the value of a company’s shares on the stock market.
The Securities and Exchange Commission (SEC) defines small-cap companies as those with a market capitalization of $250 million or less.
Mid-cap companies are defined as those with a market capitalization of $250-$2 billion.
Lastly, large-cap companies are those with a market capitalization of more than $2 billion.
How to measure the size of a Business: Employees – Revenue – Capital – Market Share
Why Does Business Size Matter?
Now that we’ve looked at some of the ways business size can be measured, you might be wondering why it matters in the first place.
Business size matters for a number of reasons.
First, business size affects your eligibility for government contracts.
In order to bid on many government contracts, your business must meet the relevant agency’s definition of a certain business size.
In addition, business size matters because it can affect your access to financing. Small businesses often have a harder time securing loans from traditional lenders such as banks because they are considered to be high-risk.
As a result, small businesses often have to turn to alternative sources of financing such as small business loans or lines of credit.
Finally, business size can affect your bottom line.
Small businesses in particular often have thinner profit margins than large businesses because they have less negotiating power with suppliers and customers simply because they have smaller orders. In other words, if a supplier loses an order from a small business it may not move the needle as much in comparison to losing an order from a larger business.
In addition, small businesses sometimes have higher overhead costs in relation to their revenue than large businesses because they may not have scale.
Many are familiar with the concept of the unprofitable startup that has to scale itself up to a certain size in order to be profitable.
But it all depends on the type of business. Many 1-person businesses have very high profit margins because they’re simply using their time to make money.
FAQs – Business Size
What is the smallest business size?
There is no definitive answer to this question as it depends on how you measure business size.
However, based on the most common measures of business size (revenue, employees, and production), a small business is typically defined as one with less than $10 million in annual revenue, fewer than 250 employees, and/or an annual production value of less than $10 million.
What is the largest business size?
Again, there is no definitive answer to this question.
A large business could be defined as one with more than $1 billion in annual revenue, more than 10,000 employees, and/or an annual production value of more than $1 billion.
Do customers prefer small or large businesses?
Customers often prefer large businesses because they know they are established and can generally provide better quality.
Do workers prefer small or large businesses?
Workers generally prefer larger companies because they can provide more opportunities.
However, some prefer working for small businesses, as they tend to be less formal and provide for a certain type of work environment that can’t be had at a larger company.
Some owners also like keeping their businesses small to lower overhead and the overall stress of running a business.
Do suppliers prefer small or large businesses?
Suppliers usually prefer larger businesses as they tend to have more consistent orders and can therefore provide more stability.
However, some suppliers prefer working with smaller businesses because they are often more flexible and can provide a better working relationship.
What is the most common business size?
The most common business size is small, defined as having less than $10 million in annual revenue, fewer than 250 employees, and/or an annual production value of less than $10 million.
What are some benefits of being a small business?
Some benefits of being a small business include lower overhead costs, more flexibility, and the ability to provide a more personal touch to customers.
What are some disadvantages of being a small business?
Some disadvantages of being a small business generally include less negotiating power with suppliers and customers, less scale, less funding to grow, and generally concentrated risks (whether it pertains to key-man risk or a lack of diversification in the business model).
What are some benefits of being a large business?
Some benefits of being a large business generally include economies of scale (thus, lower unit costs), more funding to grow, and greater negotiating power with suppliers and customers.
What are some disadvantages of being a large business?
Some disadvantages of being a large business can include bureaucracy, higher overhead costs in relation to revenue, and less customer intimacy.
Conclusion – Business Size
Whether you’re starting a new business or expanding an existing one, it’s important to keep business size in mind in order to make sure your company remains eligible for certain programs and has access to the financing it needs to grow.
Finally, remember that larger businesses aren’t always more profitable. In fact, small businesses often have higher profit margins than their larger counterparts.