Study on

Problems and Prospects of Small Firm in Bangladesh

Course: Financial Management

Course code: FIN-309

Submitted to:
Ali Haydar
Lecturer
Department of Accounting and Information System
Patuakhali Science & Technology University

Submitted by:
Md. Tanvir Ahamed Tuhin
ID: ES1903018
Registration: EMBA00495
Major: Finance
Session: Spring 2019 (3rd trimester)
Patuakhali Science & Technology University
Executive Summary
Small business is that part of business which is organized and managed by the owner or his or her
family. Small business is a crucial part of the total business scenario of any country. Especially it
plays a vital role in case of the economic development of a less developed or under developed
country. Areas that small business covers are- manufacturing, wholesaling, retailing, service and
so on. An interesting point to be considered is that the growth and development of medium and
large industries is mostly dependent on small business. Today, small business is providing strong
contribution the national economy. Features that have made small business separate from other
business forms are – large contribution of owner, source of finance, size and capital of the firm,
size of investment, less legal restrictions and so on. Like other countries small business is in a firm
position in our country. As the unemployment in our country is high, so small business may play
an essential role in reducing the rate of unemployment. Some government and non-government
organizations are assisting in the expansion of small business in our country. But unfortunately,
small business is facing some unexpected problems. These problems include – lack of required
knowledge and managerial skill of the owner, lack of adequate capital, inventory mismanagement,
negligence of the inhabitants towards small business, unable to compete with large firms, lack of
proper counseling and other forms of assistances and so on. As small business is having a crucial
impact on the economic developed of our country, so government as well as non-government
institutions must come forward with comprehensive program to remove all the inconveniences.
Because small business has gained a major portion of our country by contributing to personalized
flexibility, creativity, specialization and performance.
Small Business

A small business is a business that is independently owned and operated, with a small number of
employees and relatively low volume of sales. Small business is defined as those engaged in
manufacturing or processing or service activities whose total fixed investment is limited to BDT
30 million (US$ 0.75 million), while cottage industries are those engaged in manufacturing or
servicing and generally run by family members with a total investment limited to Tk. 0.5 million
(US$ 12,500) only. The legal definition of “small” often varies by country and industry, but is
generally under 100 employees in the United States and under 50 employees in the European
Union. In comparison, the definition of mid-sized business by the number of employees is
generally under 500 in the U.S. and 250 for the European Union. In Australia, a small business is
defined as 1-19 employees and a medium business as 20-200 employees. Small businesses are
normally privately owned corporations, partnerships, or sole proprietorships.
In addition to number of employees, other methods used to classify small companies include
annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed
definition. These criteria are followed by the European Union, for instance (headcount, turnover
and balance sheet totals). Small businesses are usually not dominant in their field of operation.
Small businesses are common in many countries, depending on the economic system in operation.
Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen),
hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-
scale manufacturing etc.
The smallest businesses, often located in private homes, are called micro businesses (term used by
international organizations such as the World Bank and the International Finance Corporation).
The term “mom and pop business” is a common colloquial expression for a single-family operated
business with few (or no) employees other than the owners.

Features of Small Business:

Small business has some special characteristics. These characteristics have made small businesses
different from other firms of businesses. The features of small businesses are as follows-

 In case of small businesses, owners pay the most vital role as he\she performs all the vital
responsibilities .s\he is the one who takes all the initiatives to start the business’s\he bears
all the risk. The business is operated & managed by his or her\by the owner
 It is easy to run the small business compared to large corporations. And there is little or no
delegation of authority. And the communication process is verbal.
 Another important feature is that, there is no separate entity. Business & owner is uniform
in this case.
 In case of small business, employers are hired internally. Most of the employees are from
the family & only few are hired.
  Another important concern is financing .Small business is basically financed by the owner.
Limited funds are borrowed. It has no access in share market.
 As, the employees are mostly from the owner’s family & the number of the employees are
few, so there remains a close relationship among owner & employees.
 There is little scope of innovation. And also few scope for specialist services.
 Small businesses are housed in small establishment. So infrastructural cost is low.
 Small businesses are run by the owner. So control is easy.
 In case of small business, it is easy to ensure security; compared to large corporations.
 Small business is run by limited capital. So, size of investment is comparatively low.
 Small business has limited market share. That is sales volume is small.
 Another important concern is, use of technology. Modern equipment are not used to a large
extent in case of small business.
 The alone mentioned features have made small business different.

Sources of funding
Small businesses use several sources available for start-up capital
 Self-financing by the owner through cash, equity loan on his or her home, and or other
assets.
 Loans from friends or relatives
 Grants from private foundations
 Personal Savings
 Private stock issue
 Forming partnerships
 Angel Investors
 Banks
 SME finance, including Collateral based lending and Venture capital, given sufficiently
sound business venture plans

Stages of Small Business Development:

Any precise quantitative estimate of the importance of small business in Bangladesh economy is
precluded by non-availability of comprehensive statistical information about these industries at the
national level. Latest BSCIC estimates suggest that there are currently 55,916 small industries and
511,612 cottage industries excluding handlooms under the section of small business. Including
handlooms, the number of cottage units shoots up to 600,000 units indicating numerical abundance
of small and cottage industries (SCIs) in Bangladesh. The most recent private sector survey
estimates the contribution of the micro, small, and medium enterprises (MSMEs) is 20-25% of
GDP. Regardless of the correct magnitude, SBs undoubtedly play a very important role in the
economy of Bangladesh in terms of output, employment, and private sector activities. Together,
the various categories of SBs are reported to contribute between 23% of total civilian employment.
However, serious controversies surround their relative contribution to Bangladesh’s industrial
output due to paucity of reliable information and different methods used to estimate the magnitude.
The most commonly quoted figure by different sources (ADB, World Bank, Planning Commission
and BIDS) relating to value added contributions of the SBs is seen to vary between 45-50% of the
total manufacturing value added. Some specialized financial institutions are working actively in
Bangladesh to provide SME facilities:
 Bangladesh Small & Cottage Industries Corporation (BSCIC)
o Bangladesh Industrial Technical Assistance Center (BITAC)
o Bangladesh Council for Scientific & Industrial Research (BCSIR)
o BASIC Bank
 NASCIB
 MIDAS
 CARITAS
 Commercial Banks (BRAC Bank, AB Bank, Dhaka Bank)

Bangladesh Small & Cottage Industries Corporation (BSCIC)

BSCIC is a promotional organization. It fosters the promotion and extension of Small and Cottage
Industries (SCI) in the private sector in Bangladesh. Its H.Q. is in Dhaka having 4 Regional offices
and 64 District offices. It is a Government statutory body.

Its Objectives are:

 To accelerate the growth of SCI and raise its productivity.
 To create employment opportunity, develop and provide marketing facilities and linkage
industries.
 To arrange HRD facilities.

BSCIC Provides
 Pre investment counseling
 In plant advisory services
 Post investment extension services
 Developed Industrial plots for investors

BSCIC Supplies
 Technical information
 Designs and prototypes
 Industrial profiles
 Market information
BSCIC Assists in:
 Financing of SCI through DFIs & NCBs
 Selection of right type of machinery
 Adopting and adapting appropriate technology
 Studying investment feasibility
 Establishing sub-contracting linkages.

BSCIC Organizes
 Technical and management skill development training
 Fairs and exhibitions
 Buyer-seller meet

Part – 2

Dividend:
A dividend is a payment made by a corporation to its shareholders, usually as a distribution of
profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit
in the business (called retained earnings) and pay a proportion of the profit as a dividend to
shareholders.

Dividend Policy:
The Dividend Policy is a financial decision that refers to the proportion of the firm's earnings to
be paid out to the shareholders. ... The amount of earnings to be retained back within the firm
depends upon the availability of investment opportunities.

Theories of Dividend Policy:

1. Dividend irrelevance theory: Dividend irrelevance theory indicates that a company's
declaration and payment of dividends should have little to no impact on the stock price. If
this theory holds true, it would mean that dividends do not add value to a company's stock
price. ... Buyers after this date are no longer entitled to the dividend.
2. Bird-in-Hand theory: The bird-in-hand theory states that investors prefer the certainty of
dividend payments to the possibility of substantially higher future capital gains.
3. Tax preference theory: The tax preference theory dividend policy or tax aversion theory
states that investors take into consideration taxes when they consider investing in a
security. The reason why taxes are important is because dividends have historically been
taxed at a higher rate than capital gains.
Clientele Effect
Clientele effect explains the movement in a company's stock price according to the demands and
goals of its investors. These investor demands come in reaction to a tax, dividend or other policy
change which affects the shares. ... As a result of this adjustment, stock prices may fluctuate`

Dividend Signaling
Dividend signaling is a theory that suggests that a company announcement of an increase in
dividend payouts is an indication of positive future prospects. The theory is directly tied to game
theory; managers with good investment potential are more likely to signal.

Residual Dividend
A residual dividend is a dividend policy that companies use when calculating the dividends to be
paid to shareholders. Companies that use a residual dividend policy fund capital expenditures with
available earnings before paying dividends to shareholders. This means the dollar amount of
dividends paid to investors each year will vary.

Advantages of Stock Repurchase:

1. Enhanced dividends and E.P.S.

Following a stock repurchase, the number of shares issued would decrease and therefore in normal
circumstances both D.P.S. and E.P.S. would increase in future. However, the increase in E.P.S is
a bookkeeping increase since total earnings remaining constant.

2. Enhanced Share Price:

Companies that undertake share repurchase, experience an increase in market price of the shares.
This is partly explained by increase in total earnings having less and/or market signal effect that
shares are under value.

3. Capital structure
A company’s managers may use a share buyback or requirements, as a means of correcting what
they perceive to be an unbalanced capital structure.
If shares are repurchased from cash reserves, equity would be reduced and gearing increased
(assuming debt exists in the capital structure).
Alternatively a company may raise debt to finance a repurchase. Replacing equity with debt can
reduce overall cost of capital due to tax advantage of debt.

4. Employee incentive schemes

Instead of cancelling all shares repurchase, a firm can retain some of the shares for employees
share option or profit sharing schemes.
 5. Reduced takeover threat

A share repurchase reduced number of share in operation and also number of ‘weak shareholders’
i.e. shareholders with no strong loyalty to company since repurchase would induce them to sell.
This helps to reduce threat of a hostile takeover as it makes it difficult for Predator Company to
gain control. (This is referred as a poison pill) i.e. Co.’s value is reduced because of high
repurchase price, huge cash outflow or borrowing huge long term debt to increase gearing

Disadvantages of stock repurchase

1. High price
A company may find it difficult to repurchase shares at their current value and price paid may be
too high to the detriment of remaining shareholders.

2. Market signaling
Despite director’s effort at trying to convince markets otherwise, a share repurchase may be
interpreted as a signal suggesting that the company lacks suitable investment opportunities. This
may be interpreted as a sign of management failure.

3. Loss of investment income

The interest that could have been earned from investment of surplus cash is lost.

Stock Dividend vs. stock split:

A stock dividend occurs when the company uses the amount of money that would be paid as a
cash dividend to purchase additional common shares for the shareholder. A stock split happens
when a company issues two or more new shares for every existing share an investor holds