IGCSE, A Level Business Student Forum

Q12 Analyse the reasons, why capital employed can’t be a good approach to measure business size. [6]

Possible Structure:
[KN]
[AN]
[AN+]

[KN]
[AN]
[AN+]

[KN] Exclusion of Intangibles.
[AN] Capital employed primarily focuses on tangible assets such as property, plant, and equipment. It tends to exclude intangible assets like intellectual property, brand value, and goodwill, which can be significant assets in many modern businesses.
[AN+] Consequently, it may underestimate the actual size and value of a business.

[KN] Omission of Working Capital.
[AN] Capital employed typically ignores working capital, which includes current assets like inventory, accounts receivable, and accounts payable. These are crucial for a business's day-to-day operations and growth
[AN+] Ignoring them can lead to an inaccurate measurement of the business's overall size and financial stability.

[KN] Intangible Assets
[AN] Many businesses today derive significant value from intangible assets such as intellectual property, brands, and customer relationships. Capital employed may not account for the value of these intangible assets
[AN+] hence which can be a substantial part of a company's worth and influence.

[KN] Working Capital
[AN] apital employed focuses on long-term assets and investments but does not account for the liquidity and working capital needed to fund day-to-day operations.
[AN+] A business with a large amount of working capital might have more immediate financial strength, despite having a smaller capital employed.

KN: Intangible Assets
AN: Many modern businesses rely heavily on intangible assets like intellectual property, customer data, or brand value
AN+: These assets may not be accurately represented in the capital employed figure, yet they can significantly impact a business's size and value.
KN: Profitability
AN: The primary objective of a business is often profitability. A business with a high capital employed may not necessarily be more profitable or efficient.
AN+: In contrast, a smaller business with a lower capital base might be highly profitable and nimble

[KN] idol capital
[AN] some of firms may have employed capital but due to low resources the capital would be idol and not being used
[AN+] this means that the measuring an business size from the amount of capital is not an good option

[KN] labour intensive business
[AN] some business would be solely working on labour
[AN+] so by only measuring capital good would lead to an incorrect answers

[KN]Different Capital Structures
[AN]Businesses may have different capital structures based on their industry, growth stage, and financing strategy.
[AN+]a capital-intensive manufacturing business may have a high capital employed, while a service-oriented business may require less capital.

[KN]Asset Intensity
[AN]Some businesses, such as those in the information technology or software development sector, may have low capital employed despite generating substantial revenue. This is because they may not require significant physical assets to operate.
[AN+]A business with a high return on capital employed may generate substantial profits relative to the capital invested, even if the capital employed figure is relatively low. This indicates a high level of efficiency in utilizing resources.

[KN] Intangible Assets
[AN] Many businesses calculate their value from intangible assets such as property, brands, and customer relationships
[AN+] these assets can tell the size of the business but it isn't a reliable source

[KN] Working Capital
[AN] capital employed focuses on assets and investments.
[AN+] A business with a large amount of working capital might have more immediate financial strength.

[KN] Varying Capital Requirements
[AN] Different industries and businesses have varying capital requirements.
[AN+] Comparing businesses solely based on capital employed doesn't account for these differences and can be misleading.

[KN] Operational efficiency
[AN] Capital employed doesn't directly reflect how efficiently a business utilizes its assets to generate revenue.
[AN+] A business with lower capital employed may be more efficient in its operations and have a greater economic impact.

[KN]Different Capital Structures
[AN]Businesses may have different capital structures based on their industry, growth stage, and financing strategy.
[AN+]a capital-intensive manufacturing business may have a high capital employed, while a service-oriented business may require less capital.

[KN]Asset Intensity
[AN]Some businesses, such as those in the information technology or software development sector, may have low capital employed despite generating substantial revenue. This is because they may not require significant physical assets to operate.
[AN+]A business with a high return on capital employed may generate substantial profits relative to the capital invested, even if the capital employed figure is relatively low. This indicates a high level of efficiency in utilizing resources.

[KN]capital productivity[AN]different capital employed have different prodictive capacity which can be worn out by the amount it has been used[AN+]a business with more productive capital will have more goods than those with worn out capital

[KN]idol capital [AN]some capital may not be used by the business and would be left for back up[AN+]in such cases the firms may not be successful in measuring it

(kn) used less
(an) some capital might be used less in some process or used only once
(an+)or the capital that was used to make a certain product is finished from a business
(kn)labour intensive
(an) the firms may be labour intensive compared to other firms
(an+) the capital might not even be used only once or twice a month

[kn] capital employed is a measurement not suitable to measure certain types of businesses especially those that are labor intensive
[an] it doesn't take into account the amount of intangible assets in a business for example copyright and customer loyalty . in such businesses the capital employed can be relatively low
[an+] however the business might itself be efficient therefore leading to a underestimation of the business size
[kn] working capital
[an] capital employed focuses on non current assets but does not consider the liquidity and working capital needed to fund day-to-day operations
[an+] A business with a large amount of working capital might have financial strength despite having a smaller capital employed

[KN] Depends on its use.
[AN] If the business uses more labor than the capital employed so the measurement will be ineffective.
[AN+] Thus this will lead inefficiencies and the business size may be understated.

[KN] It doesn't take into account the industry or business model.
[AN] Different businesses requires varying levels of capital investment and so measuring business size according to it may not provide an accurate assessment.
[AN+] Thus both success and size will be not upto the mark if found.

[KN]It ignores no. of sales/customers
[an]A business may have invested more but its customers may be less for eg. an eye optician invests more as compared to salon yet salon may have more sales
[an] therefore it may not be relevant to all types of businesses as different businesses have diiferent approaches as their main way to measure business size

[KN] Capital intensive businesses invest more than labour intensive
[AN] Machinery is expensive than labour costs hence even with high investment capital intensive businesses may be making less profits than labour intensive businesses

[KN]Some businesses may not require alot of capital
[AN]some very successful businesses do not use alot of capital in their production
[AN+]Thus this varies from business to business and is not an efficient method of measuring size of a business

[KN]Extra capital
[AN]some businesses may have spare capital with them which is not used
[AN+]Thus this shows that capital employed is not a good measure