The following are some of the factors which put a limit on the growth of a business:
1. Shortage of Labour or Capital:
If increased supplies of trained labour are not available, the growth of a business will be automatically checked.
In the same way, if fresh capital cannot be raised, expansion stops. But these are not insurmountable obstacles.
If the business prospects are very bright, and if the entrepreneur is a man of established reputation, he will be able to cross these hurdles.
2. Nature of the Market:
If demand is limited or fluctuating, it will be imprudent to increase the size of the business. The nature of demand is the most important limiting factor. It almost settles the matter. If individual tastes have to be satisfied, large-scale production is ruled out.
3. Managerial Capacity:
Another serious limitation comes from the capacity of the manager. A point is reached in the expansion of a business beyond which it is not possible for the manager to control it efficiently. There is a limit to what a man can successfully manage. Beyond that point, supervision will become lax, materials will be wasted and machinery mishandled. Cost will overtake profits, and, in the end, the profits may vanish. The limit is reached when the marginal revenue is equal to the marginal cost.
4. Nature of the Industry:
In some industries, large-scale production is out of the question. They require close personal supervision, e.g., jewellery-making and tailoring. Or, there are industries where there is not much scope for the use of machinery and division of labour, e.g., agriculture, fruit and vegetable gardening, etc. Bulky articles like bricks can only be made on a small scale, for it will not pay to carry them over long distances.
5. Operation of the Law of Diminishing Returns:
It happens sometimes that the expansion of an industry leads to increasing costs, and the returns are less than proportionate. It will not be wise in such cases to expand the business. These are some of the factors which prevent the growth of a business beyond a certain limit.