What size of companies are the most profitable?


3

I often read about large companies that are in major trouble. According to the theories of economies of scale/scope large companies should, almost by definition, be profitable. t also seems like the only thing on the mind of business leaders is to grow the company. My question is therefore, are companies with many employees generally also more profitable, measured as profitability per employee. I am also wondering whether companies with higher income are generally more profitable (profit as a percentage of income). Maybe the perfect sized company has 10 employees?

Growth Profitability

asked Mar 14 '10 at 07:28
Blank
David
1,567 points
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • There should be some academic research on this topic. I am just not able to find it. – David 9 years ago
  • I'm not quite sure why you (or anyone for that matter) care profit per employee unless all employees have a equal amount of shares of the company (unlikely!) – The Dictator 9 years ago
  • Say for example that you run a reasonably successful company, and you find another company of the same size (in terms of income). The question is whether a merger would be a good idea, given that the businesses are compatible. Will size (measured in income) make you more profitable? I agree that measuring size in terms of employees does not make any sense. I should have asked my question differently. – David 9 years ago
  • @fx: It's a (very) broad measure of corporate effectiveness, that like many other metrics, aren't most valuable alone. You use them along with others. Let me ask you this: given two companies, both with similar revenues but one who's PPE is two times the other, which one would you invest in? What if the trend in PPE is downwards for that one, but up for the other one? It's useful because it's one of the few simple metrics that involve employee count. Many other traditional metrics don't. – Alphadogg 9 years ago
  • This question would fit better in the newly proposed (by me) Strategic Management Q&A. The form will be the same as on this Q&A with reputation etc. See http://area51.stackexchange.com/proposals/26177/strategic-managementDavid 9 years ago

6 Answers


5

One answer is this: without employees, you probably don't really have a company, you just have a job. That's not ALWAYS true, but it's often true.

After that, it all depends upon what you means by "profitable". For example:

  • Company A has 150 employees and earns $1M net profit per year.
  • Company B has 30 employees, and earns $1M net profit per year.

Which is more profitable?

Technically, they are both equally profitable because they earn the same net profit per year. However, the one with 30 employees is probably a lot less of a headache for the owner(s) to manage.

Sometimes when people use the word "profitable" they are referring to return on sales or return on capital. Those are altogether different questions.

answered Mar 14 '10 at 13:08
Blank
Tcolling
433 points
  • Thanks for pointing out that my question was unclear. I meant net profit per employee, so in your case Company B. I have updated my question. – David 9 years ago

4

With a very broad stroke, larger firms have more revenue per employee than small ones. Last time I looked, the smaller companies in the Software 500 was around $100K and the larger ones was more like $250-300K. To benchmark your industry, go to hoovers.com (or like) and sample a sizable number of companies then do your your own simple math averages.

However, that's total revenue numbers I did a while (around 2008) ago. As for profitability, given that smaller firms are continually re-investing profits, which really means pushing their expenses as far as they can, and often into the red, I'd actually guess it's also lower for smaller companies, not higher as many are relating here.

Furthermore, with company size comes the ability to do exponentially more, both from a business point of view, and also lobbying, legislation, strategic partnering, various "polys" like monopolies, oligopolies, etc.

There are anecdotal exceptions either way, of course.

UPDATE: Another common reason why larger software companies are more profitable is that in a small/startup company, you have 2 devs at $100K and (very) minimal supporting staff bringing in, say, $300K in profit. Whereas in a medium company, the pool of high IT expense, while bigger, begins to be diluted by the larger-but-cheaper staffing for selling and supporting the product in a bigger market share.

answered Dec 10 '10 at 01:39
Blank
Alphadogg
1,383 points
  • This is the best answer I have seen. I would like to point out that small companies can have excellent monopolies as well. They do this by staying below the radar of larger companies, just minding their own business. Similarly, I have seen examples of 2 small companies that had developed cost saving technologies in their respective markets and been competing in the market for 30+ years. They just enjoyed a higher margin, without pushing the competitors out of the market. Purposly, they did not apply for a patent, because it only lasts for 20 years and it gives the compatitors full information. – David 9 years ago

3

One measure of success is the income generated per imployee. The highest amounts here that I have heard of come from very small software companies. There are a number of smallsoftware firms that generate nearly $1,000,000 per employee per year.

answered Mar 14 '10 at 09:19
Blank
Gary E
12,510 points

2

I'm not sure about profits per se, but this study found that productivity peeks at relatively few employees. Here's a graph from the summary.

answered Mar 18 '12 at 13:04
Blank
User435124
81 points

2

It depends on the business.

A perfectly-sized fabless startup cannot be less than 20-30 engineers, because it requires a multi-disciplinary team to develop a chip: IC designers, verification engineers, SW people, at least one PCB designer that does the prototype board.

In SW business the picture is very different, early Microsoft is an example.

answered Mar 14 '10 at 09:13
Blank
Output Logic
341 points

1

I almost hate to put it this way.... but... as the saying goes... "size doesn't matter".

What matters is the value you're delivering for your clients. If you start with that - and you complement that with thoughtful financial management - you can create remarkable margins and value for you and your stockholders.

answered Mar 14 '10 at 11:05
Blank
Warren E. Hart
2,181 points
  • True, but doesn't answer the question. – Alphadogg 9 years ago

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Growth Profitability