THE NATURE OF SMALL BUSINESS

WHAT IS A SMALL BUSINESS?

■ Small business maybe defined by using any of the two approaches: market share or total assets
■ Under the market share approach small business may be defined as one which is independently
owned and operated in which is not dominant in its field of operation.
■ The term independently owned means ownership is by a private individual a partnership or
corporation.
■ The term not dominant indicates that a small business does not control a sizable share of its
market.
■ When the total sales of a business firm is less than 1% of the total demand for its products the firm
may be considered small business.
■ A small business may be defined under the total assets approach as one having total assets that
fall within a certain bracket.
■ Example the Magna Carta for Small Enterprise (R.A. 6977) indicates that the fear must have a
total assets valued at above P 1.5 million to P 15 million to be considered small business.
■ The government refers this approach because it simplifies formulation and implementation of
policy.
■ One of the disadvantages of the total assets approach is that the asset values are affected by
inflation. After so many years inflation alters the nominal value of business assets and what may
be previously considered small business may no longer be classified as such.
■ From the point of view of business management the market share approach in defining a small
business is more appropriate. This is so because the target market share is an objective more basic
than other objectives.
Types of Small Business

 Small business may be classified into five types:

1. Manufacturing
2. Service
3. Wholesaling
4. Retailing
5. General Construction Firms

1. MANUFACTURING

 A manufacturing business is one involved in the conversion of raw materials into products needed by
society.
 Examples:
Bakeries, tricycle sidecar assembly shops, bagoong manufacturers, restaurants and others.

2. SERVICE

 Service businesses are those that provide service in one way or another they can be further classified into
the following:
1. Business services – accounting firms, janitorial service firms, security service firms, and collection
agencies.
2. Personal services – tutoring services, massage parlors, voice lesson.
3. Repair services – auto repair shops, watch repair shops, plumbing services.
4. Entertainment & recreation – movie houses, Resorts, billiard pool centers.
5. Hotels and motels
6. Education services

3. WHOLESALING

 Refers to the activities of persons or establishments which sell to retailers and other merchants or to
industrial institutional and commercial users but who do not sell in large amounts to final consumers.
 Examples:
1. Soft drinks wholesalers in local areas.
2. Dealers of supplies and office equipment
3. Grains wholesalers
4. RETAILING

 Retailing covers all activities involved in the sale of goods or services to the final consumers. The bulk of
retailing activities are performed by small businesses.
 Examples:
1. Retail drug stores
2. Fast food shops
3. Appliance stores

5. GENERAL CONSTRUCTION FIRMS

 Are those engaged in the construction of buildings whether for private individuals or firms or for the
government.
 Many of them perform subcontracting jobs for the bigger contractor such as installing electrical facilities
and sewerage.
 As a whole, general construction firms employ hundreds of thousands of people and they operate mostly
in the countryside

Characteristics of Small Business

 Independent management – the owner is also the manager

 Small capital required – Small business requires only small capital and this can be supplied by a single or a
few individuals.
 Mostly local operation – small business usually operates in a certain locality although there are cases
when the market is not confined to a local area.

Economic Importance of Small Business

1. Providers of economic opportunities for entrepreneurs

 People who do not feel comfortable as employees have the option of engaging in small business
operation

2. Providers of products and services to consumers

 The production of many products and services is often times not feasible with big and medium
business operation. These limited opportunities are naturally fitted for small businesses

3. Suppliers of products and services to other businesses

 Some businesses require raw materials, semi-finished products, finished components or even
labor which they cannot economically produce. The small business performs this task for them.

4. Distributors of products and services of other businesses

 Some manufacturers do not have the ability to distribute their products and services. Many
small businesses assume this role for them.

5. Supporters of government

 Small businesses support a government with the taxes they pay as well as performing other
function.

6. Providers of employment

 A large proportion of the labor forces are employed by small businesses.

An individual has various options to improve is economic lot. They are the following:

1. Be an employee
2. Be a professional
3. Be a small business operator (SBO)
Advantages of Operating a Small Business

1. Opportunity to gain control over his own destiny

2. Opportunity to reach his full potential
3. Opportunity to rip unlimited profits
4. Opportunity to make a contribution to society and receive recognition for his efforts

Disadvantages of Operating a Small Business

1. Uncertainty of income
2. Risk of losing your entire capital investment
3. Lower quality of life until the business gets established
4. Complete responsibility
5. Having to serve undesirable customers
6. Paperwork and other chores
7. Long hours and demanding work condition

Small business plays an important role in the development of our economy. They provide economic
opportunities for entrepreneurs, products and services to consumers and industrial users, services to
other firms by way of distributing their products and services, payment of taxes to the government, and
employment.