Cambridge O Level Business Studies · Syllabus 7115 · Understanding Business Activity
Capital Employed
What is Capital Employed?
The total value of long-term finance invested in a business, used as one measure of its size. A business with a large amount of capital employed has substantial long-term resources committed to it, which makes the measure useful for comparing capital-intensive businesses but misleading for service businesses that need few physical assets.
This definition is part of the Understanding Business Activity chapter in Cambridge O Level Business Studies.
Common mistakes with Capital Employed
- “The biggest business is the one that makes the most profit.” Correct Profit measures performance, not size. Size is measured by number of employees, value of output, sales revenue or capital employed.
Examiner tips on Capital Employed
- Use more than one measure. Each measure answers a slightly different question. When two measures disagree — one firm larger by employees, the other by capital employed — that disagreement is the answer: it tells you the two businesses are organised differently, one labour-intensive and one capital-intensive. Say so.
Questions students ask about Capital Employed
Why is profit not a measure of business size?
Because profit measures financial performance, not size. Size is measured by number of employees, value of output, sales revenue or capital employed, and each measure has a limitation — capital employed, for example, is useful for comparing capital-intensive businesses but misleading for service businesses that need few physical assets. A large business can make a loss in a bad year, and a small business can be highly profitable.