What Decides the Optimum Size of a Business?
“Technical factors operate in favor of an increasing size. In order to realize full advantage of technology, improvements in the scale of operations should be large. ”
The size of a business unit is primarily dependent on the technique of production employed in any business. Technical factors operate in favor of an increasing size. In order to realize full advantage of technology, improvements in the scale of operations should be large.
If you want to reduce the production costs, you must opt for the full functional capacity of a business unit. The increase in the production spreads the overhead expenses over large units resulting in lower cost per unit.
The optimum use of technical factors can be achieved through two processes namely by division of labor and by integration of processes. The small firms cannot afford to invest huge sums in sophisticated machines.
Managerial economies are possible in case of a large firm. The success of a firm depends upon the organizing capability of the top management. With the introduction of large-scale production, complexities of management have increased. The services of the experts are required to deal with different functions of management.
The appointment of functional experts involves more cost. The expansion of production is necessary to distribute the managerial cost among large units. The size of business unit is directly influenced by the availability of finance.
Finance is required firstly for establishing a unit and then for expanding it. The financial needs are in the form of fixed and working capital. Fixed capital is required for the accusation of fixed assets and working capital is needed for routine working of the business.
Small concerns such as sole traders have limited financial resources. These concerns largely depend upon the capital contribution of the owner. Commercial banks and other financial institutions are hesitant to extend them loans for lack of security and profitability.
Certain marketing economies are available if the scale of purchase and sale is higher. When buying is done on a large scale, one can expect savings in a lot of aspects of the business.
In such a case, the purchasers of large quantity also enjoy favorable terms and conditions with the company. The prices become low and cash discounts are readily available. Moreover a large firm can afford to use the services of marketing experts. All these above-mentioned factors determine the optimum size of any business.
Author - DeeKay
Tags - Finance, Economy
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