SMALL BUSINESS

DEFINITIONS OF SMALL BUSINESS

• Small Business Act [SBA], 1934.

• “A business which is independently owned and operated &
not dominant in its field”

• Bolton Report: Report on the Commission of the

Enquiry on Small Business Firms, 1977
• “Small firms is one that has a relatively small share of its
market.”
• Stoner. Freeman & Gilbert. 1995.
• “Small Business refers to businesses locally owned and
managed. often with very few employee working at a single
location
Committee for Economic Development
A small business is one possesses at least two of the following
four characteristics:
• --------managers are the owners
• --------Capital supplier & the owner is an individual or a small
group
• --------workers & the owners are local, market may not be so
• --------relatively smaller compared with the biggest unit in the
industry [sales, employees etc.]
 TYPES OF SMALL BUSINESS

I. Manufacturing 2. Plastics
1. Metals a. Extrusion
a. Sheet metal b. Applicators
c. Formulators
b. Machine shop 3. Food
(1) General a. Processors
(2) Special equipment (1) Meat
(2) Vegetables
c. Foundry
(3) Specialty
d. Mini - steel mill items
II. Service III. Wholesaling
1. Service station.
1. Jobbers
2. Auto repair 2. Brokers
3. Appliance repair 3. Distributors
4. Manufacturing agents
4. House and commercial repair and reinvasion
5. Janitorial IV. Research and Development
6. Plumber
1. Materials
7. Electrician 2. Products
8. Floor covering 3. Software mentation systems
4. Specialized machinery
9. F.O.B. (Fixed base operation – aircraft) 5. Manufacturing system
10. ravel agencies
V. Consulting
1. Management
VI. Retailing
2. Management information system
3. Financial 1. Food
a. Grocery
4. Investment b. Fast prepared
c. Convenience
5. Marketing d. Restaurant
6. Risk management e. Lounges
f. Specialty shops
7. Land use and development
8. Engineering 2. Appliance
3. Hardware and building material
9. Economic 4. Specialty
10. Government 5. Clothing

11. Various additional highly

specialized areas
 STRUCTURAL FEATURES OF SMALL
BUSINESS

Small
Business

Tiny Specialized Cottage Village Ancillary

Sectors Sector Industries Sector Unity

Artisan Skilled
 STAGES OF SMALL BUSINESS DEVELOPMENT

Any business big, medium or small generally go through four key stages one after the
other. The names of the stages are often found to be different by different authors. The
race starts from the conception stage going through other two stages to reach the stage of
dissolution. According to one author the stages are:
1. The pre-business stages, in which an idea is thought about and is developed.

2. The business stage, in which idea is launched into a successful business endeavor.

3. The growth stage, in which the entrepreneurial spirit emerges and the business shoots
forward through expansion, new production, acquisition, or merger.

4. The termination stage, in which the owner’s manager’s business is sold, is liquidated, is
acquired by others, or is given to friends or relatives.
 COMPETITIVE STRENGTHS OF SMALL FIRMS

In spite of various types of problems, smalls firms can compete vigorously in many industrial
areas indeed, their smallness gives them a number of competitive strengths. When exploited
skillfully, these strengths enable them to ‘carry the attack' to larger firms. Three of these strong
points are discussed briefly below.
# Knowledge of customers and markets
The bureaucratic structure of the large corporation tends to isolate its management from customers
and markets. Sells people have regular contact with the market place, but their thinking is several
steps removed from the influential decision-marketing levels of the corporation.
# Flexibility in management
Big business is often pictured as being uniformly more efficient than small business. Some people
believe that small business exists because it is protected through government aid in one form or
another or because high business has not yet entered a particular field.
# Product and geographic specialization
It is impossible to become a specialist in such board areas as general business management. By
narrowing the range of business actively. However, one can develop an expertise in providing
needed goods and services.
 VARIOUS TYPES OF FINANCING

1. Short - term capital: This is borrowed capital that is to be repaid within 1

year.

2. Intermediate capital: This is borrowed capital that is to be repaid in 1to 5.

3. Long - term capital: This is capital whose repayment is arranged for more
than 5 years in the future.
 SOURCES OF FINANCE

A: Sources of Short - term Finance

Working capital consists of two components. fixed component and variable
component while the fixed or permanent component is to be financed through long
and medium term sources of finance. The variable portion of working capital is
financed though short term sources, that is sources that require repayment in a year
or less. Some of the important sources are trade credit, bank credit, public deposit,
customer’s advances, factoring, etc. Certain internal sources like deprecation reserve
and provision, etc. are also used for short - term financing purposes
• Bank Credit: Bank credit is the major source of finance for working capital Banks
after both secured as well as unsecured loans to business firms such as cash credit.
overdrafts. loans and advances and purchase and discounting of bills. They
provide credit against security. A loan may be sucure by tangible assets or by
personal security either by lien, pledge, hypothecation, mortgage or charge etc.
Bank loans are an important source of business financing such as seasonal build up
in accounts receivable and inventories. Banks do not provide 100% finance. They
insist that the customers bring a portion of finance from other sources.
• Public Deposits: Another source of short - term finance are unsecured public deposit. In many countries a
company can borrow only up to 25 percent of its share capital and free reserve. The maturity period varies
from 6 months to 5 years. Maximum interest rate payable is 15 percent. The minimum maturity period of
only 3 months is permitted for deposits amounting to 10 percent of share capital and free reserves.
The rules relating to public deposits have been made very strict in order to protect the interest of investors.

• Accounts Payable: They are created when the firm purchases raw materials, supplier’s goods for resale on
credit terms on open account. They are interest free and securities free. However, accounts payable is a
legally binding obligation of a firm. They also include bills payable.

• Accruals: They are short - term liabilities that arise when securities are received but payment has
not yet been made. Examples are wages and salaries payable, taxes payable, expenses payable, etc.

• Unsecured Non - Bank Short Term Sources: The following non-bank short-term sources are used
though they are not available to every business.
• Private Loans: A short-term unsecured loan may be obtained from a wealthy
shareholder, a major supplier, or other party interested in assisting the firm through a
short-term difficulty.
• Cash Advances from Customers: A customer may pay for all or a portion of future
purchases before receiving the goods. This form of unsecured financing provides funds
to purchase raw material and produce the final products.
• Commercial Paper: These consist of promissory notes with maturities of various
periods ranging from 3days to even year is usually issued in higher denomination and
can be used only by large well-known companies, which enjoy a fairly high credit
rating. It is purchased by other firms wanting to invest funds in marketable securities
temporarily. Individuals insurance companies and other institutional also purchase
commercial paper.
• Pledging and Factoring Receivable: These are two techniques of secured short-term
financing with accounts receivable as the collateral.
B: Sources of Long - Term Finance
• Equity Shares: The equity shares are the main source of finance and it is
contributed by the owners of the companies.
• Retained Earnings: Reserves and surplus build over the past are called retained
earnings. These earnings can be invested in business for modernization and
expansion.
• Deferred Credits: Many times the suppliers of machinery provide deferred credit
facility under which payment for the machinery may be made over a period of time.
• Preference Shares: Preference shares confer on preference shareholders two rights
to receive the preference dividend and get back their capital on priority basis.
Investors, who like to earn a limited but steady return on their capital. Prefer
preference share investment.
• Institutional Term Loans: Term loans are presently the most important source of
finance. Loans obtained from banks and financial institutions are generally secured
loans. They carry a fixed rates of interest and are repayable in installments.
• Debentures: Debentures are very commonly used creditorship securities.
Different types of debentures issued to mobilize the debt capital from the public.
They are generally secured and carry fixed percentage of interest. Registered
debentures, redeemable debentures, convertible debentures, mortgage or secured
debentures, ordinary debentures, etc. are a few types of debentures.
• Capital Subsidy and Development Loans: Central Government provides capital
subsidy to industries up in notified backward area.
CAUSES OF BUSINESS FAILURE
Sl No. Causes of Failure Explanations of the Causes

1 Incompetence [44%] Inability to run the business... physically,

morally, intellectually
2 Lack of Managerial Little or no experience of managing employees and other resources before going into
Experience [17%] business
3 Unbalanced Experience Not well rounded in marketing, finance, purchasing and production
[16%]
4 Inexperience in line [15%] Little, if any experience in the product or service before into business

5 Unknown 16%
6 Neglect 11 Too little attention to the business, due to had habits pour health, or marital difficulties

7 Fraud or Disaster III Fraud: misleading name, false financial statements, premeditated overbuy, or irregular
disposal of assets.
Disaster: fire, flood, burglary, employees’ fraud and or strike [some disasters could have
been provided against through insurance]