Business unit / factors that affect the size of business
Meaning of Business Unit
A ‘Business Unit’ is a plant, firm or industry which produces, procures or exchanges goods, regularly, with a view to earn profits.
The above mentioned terms are discussed below. ‘Plant’ refers to a place where goods and services are produced. Popularly speaking, it is referred to as a factory, mill or establishment. Thus, a spinning mill manufacturing yarn or a sugar factory manufacturing sugar are “plant”.
The term ‘Firm’ in used in a broader sense than a plant. It refers to a business unit or a business undertaking, which manages the plant. It owns. the plants and manages their production and sales.
The term ‘Industry‘ conveys a wider meaning and includes many firms. It stands for the collection of firms, which are engaged in the same line of production. For example, textile industry refers to the collection of those firms, which are owning the plants engage in the textile production.
Factors which affect the size of a Business Unit The factors which affect the size of the business are discussed below:
1. The nature and extent of the demand of the product: If the product is of a perishable nature and cannot be carried to distant markets, like ice, if the saleable goods like those of a village shopkeeper, or a weaver, have a limited local demand, if the products are subject to constant changes of fashion and are to suit individual tastes, like dress-making or dress-selling. If the nature of the product is artistic and demands workmanship without the use of machinery, like jewellery, lace, hand-made cigars, embroidery, etc., if the customers of the business units are widely scattered like, laundry or cinema-houses, the tendency will be for small units to prevail to meet the needs of these scattered wants. On the other hand, standarised products and large size and complex character of the products demand the establishment of business units on a large scale.
2. Finance: It is another important factor determining the size of business unit. For this reason, the business started on company basis will be of a fairly big size in comparison with sole proprietorship or partnership business. Moreover, the industries which require installation of heavy and costly machines and large investment of capital in land and buildings at the initial stage, are to be started on a large scale to make the investment paying. But, on the other hand, business requiring small capital but more labour and a few tools and machines are started on a small-scale.
3. Law of return: When a product is subject to the law of diminishing returns, the greater production means higher cost, and as such, the industries of such type of products cannot expand to a large size. But, if the product is subject of the law of increasing returns, production on a larger scale means lower cost, and as such, the industries of such type of products grow larger and larger in size, if the demand for the products is also elastic.
4. Efficiency and ability of the entrepreneur : A business unit may have the possibility to grow larger and larger in size, but its expansion, apart from other factors, may be checked due to inability of the entrepreneur to manage the concern with due efficiency.
5. Risk: A business of a risky nature should preferably be started on a large scale, as a small unit of such business is seldom able to shoulder such responsibility. So greater the risk, larger is the size of the plant.
6. Market: It is again an important factor determining the size of the .business unit. If the market for the product is limited within the country, it will generally have a small plant. If its market is worldwide, it will generally have a big plant.
7. Cost of Transport: When the cost of transport of raw materials from distant areas and of finished goods to consuming areas is higher, it is better to start the industries on a small scale depending on local supply of raw materials and on the local markets for finished products.
8. Government Regulations: Government regulations also affect the size of the plant. Moreover, to avoid progressive corporation tax, it is better to start any plant on a small scale.
9. Production System: If a business unit is using specialization, doing distribution of work, complexity of industry is also there and using multi raw materials, the size of business unit will be big. On the contrary, if above things are not there, the size of business firm will be small.
