Chapter 3

Meaning of small business

 Meaning of Small Businesses
• The definition of small business differs from
country to country.
• There may even be different definitions used by
different agencies in one country.
• So, it is difficult to have a concrete definition of
small businesses since what is described is
“small” may be small compared to the industry
and economy we considering.
• In addition, the definition can vary according to
the frame of reference by different business
people such as:
 Con….
• Financers: in terms of level of fixed assets or
value added by the business
• Service personal: use the total number of
customers.
• Manufactures: use maximum level of energy
required for production.
• Labor officers: use the total number of
persons employed
 Con…
• These are some of the terms used to define
whether a business is big or small by different
stakeholders. There are two ways
(approaches) to define small businesses:
 The Quantitative Approach (size
criteria)
• Size refers of the scale of operation.
• It is used to measures the size of the business.
But the criterion used to measure the size of
business varies among different firms. The
following are the most widely used criteria to
measure the size of a business are:
• Number of employees
• Sales volume (total revenue)
• Asset size
• Insurance in force
 The Qualitative Approach
(Economic/Control Criteria)
• In addition to size criteria qualitative
characteristics should be used to differentiate
small business from other business. Some of the
most commonly use economic/control criteria’s
are:
• Market share: it shouldn’t be large enough to
influence the prices of national quantities of
goods and services to a significant extent.
• Independence: the owner has control of the
business himself
 Con…..
• Personalized Management: the owner actively
participates in all aspects of the management
of the business and in all major decision
making.
• Technology: whether the business is labor
intensive or capital intensive
• Geographical area of operation: is it the
operation of the business local or
international.
 Con….
• So taking into consideration of the different
approaches of defining small businesses, small
businesses administration of America defines
small business as one that is independently
owned and operate, not dominant in its field
of operation and meets certain standards of
size in terms of employees or annual receipts
(sales volume).
 Con….
• In defining small businesses countries adopted
different basis.
• For instance Ethiopia uses sales volume and paid up
capital at the start of the business.
• Australia and France use number of employees as
criteria and
• China/Malaysia use sales volume as there distinction
among businesses.
• Discussion Question
• What approaches/measurement we can define small
businesses in our home land?
 Nature and Characteristics of Small
Businesses
• Small- Scale industries have certain unique features,
which distinguish it from the large-scale sector. Some
of the characteristics (the aim is to provide a clearer
image of small business) of small-scale businesses are:
• Financing of the business is supplied by one individual
or small group. Only in a rare case would the business
have more than 15 or 20 owners.
• Personal character: in most small business the owners
themselves are managers and can operate
independently which is helpful to give customized
service to their clients.
 Con…..
• Local area of operation: except for its
marketing function, the firm’s operations are
geographically localized. Typically its operation
is limited to one city or community.
• Compared to the biggest firms in the industry,
the business is small.
• The number of employees in the business is
usually fewer than 100.
 Importance of small businesses to
National Economy
• The significance and importance of small
businesses can be indicated in their contribution
to the social, economic, political, and
technological conditions of the country and the
society in general. These are
• Economic Contribution
• The significance and importance of small
businesses can be indicated in their contribution
to the social, economic, political, and
technological conditions of the country and the
society in general. These are:
 Con…
• Generation and saving of Foreign exchange
(import-export)
• Enhancement of competition
• Balanced Regional Development: dispersion of
small businesses in all parts of the country helps
in removing regional imbalances by promoting
decentralized development of industries.
• Improves gross domestic production of the
country GDP
 Con….
• Social Contribution
• In general, there are different aspects of social
contribution, and those are:
• Creation of job opportunity (labor intensity)
• Agent of socio-cultural interaction
• Increase in per capita income: if there is an increase in
small scale businesses. The transaction also an increase
this implies that there is an increase in per capita
income of the society.
• Positive externalities: through creating the
infrastructural facility development.
 Con….
• Technological and political Contribution
• Introduction of innovation and invention: (since
most of the 21st century creation are the results
of small business innovation, for instance
photocopiers, jet engines, helicopters, etc) and
inventions.
• Better production methods in terms of processing
speed, quality of output, energy consumption.
• Improvement of business policies and procedures
 Con…
• Although small businesses play a very important
role in job creation, and they are more flexible
and adapt more easily to competition than larger
enterprises and they act as a driving force for
innovation.
• In other words they participate actively in
economic development and economic change;
they are also more susceptible to market failures
than their large scale competitors.
In more specific side, there are economic, social,
and political aspects of small business theories:
 Con…..
• Socialistic idea:
• The objectives are equitable distribution of wealth and
decentralization of economic power.
• According to this concept large scale industries results
in concentration of economic power in a few hands
and as a result inequalities of wealth distribution will
exist. Small enterprises are dispersed more widely and
its benefit is derived by a large population and resulted
to widespread ownership and decentralized location of
small scale units.
In this way small scale enterprises bring about greater
equality of income distribution
 Con…
• Less capital and more labor (the employment
Argument)
• The main problem is that we have vast man
power but inadequate capital, which has resulted
in increasing unemployment, this is unlike
situation in western countries where manpower
is limited but capital resources are enormous.
Planners have realized the necessity of
encouraging small industries because they
require less capital but generate more
employment.
 Con…
• Removing Regional Imbalance
• People shifts from rural areas to Urban which
causes overcrowding in cities due to lack of
social and medical services which require
heavy investment. This problem can be solved
by inducing people to set up small industries
in rural areas.
• Creating self-employment opportunities.
• Supply of critical raw materials
 Establishing Small Businesses
• Factors considered before starting a business are
the following
• Selection of business: before taking a decision on
the establishment of business. Selection of
business depends on the following factors such
as:
• Personal aptitude
• Personal ability (having the required knowledge)
• Amount of capital and profit (expected
achievement)
 Con…
• Detailed Investigation: the difficulties may come
in the way of establishing business in real from so
it needs to answer the when, what, and how
questions regarding the business.
• Selection form of business organization: the
selection of business form is depends on the
entrepreneur power and responsibility from
those identified by the law of the country such as
sole-proprietorship, partnership, corporation, etc.
 Con….
• Study of legal requirements: the selection of
business form is coinciding with the rules and
regulations of the state to issue the necessary
license for start up.
• Selection of place and staff: the selected
business must have suitable place to conduct
the business activities, in addition to the
skilled and unskilled human labor forces
needed for the business.
 Con….
• Management structure: a modern business
management and office is equipped with the
necessary equipment to enhance the
workability and efficiency of its staff and
secures the advantage over other business
opportunity through formation of business
policies and the direction of their
implementation.
 Factors Contributing for the Success
of Small Business
• In general, there are different variable which allows
small business to become successful, and this factors
are:
• Determination of objectives: an essential per-requisite
for the success of any business is the determination of
exactly what will be done by the business.
• Planning: lays down the course along which the
business will have to be able to achieve is objectives.
• Sound organization: the business must be staffed with
sufficient number of employees having different
talents and skills relevant to the business activities and
equipped with up-to date appliance.
 Con…
• Adequate capital: since capital is regarded as the life blood
of business, a business cannot be established. Organized
and operated without the required amount of capital for
the smooth operation of the business.
• Efficient management: a business enterprise cannot
succeed in the performance of its tasks and the fulfillment
of its objectives unless it is managed efficiently.
• Research: for achieving success there is need for
continuous improvement in the quality of its tasks and
services and also in methods and techniques of working,
this is possible when a business is always engaged in a
systematic search for new knowledge.
 Con…
• Business good will: an entrepreneur can
establish supremacy of his ability and
efficiency through his reputation for hones
dealing and good behavior.
• Satisfied customer: success of a business
depends to a large extent on the function of
affording the customers with their varying
needs and requirements. Their whims and
prejudice and of influencing their needs.
Reasons for Failure of Small Business
• Many small businesses fail due to various
reasons. Presumably, most of the reasons are
artificial i.e. the majority of the reasons are
created by faults and mistakes of human beings .
• While entrepreneurs can setup a small business
even with less, capital, enjoy quick returns and
have the vagaries (uncontrollable events) of the
market, they have to face many problems.
 Con….
• Some of the problems (main constraints) identified by
enterprise managers and the already established small
and micro enterprises managers and the already
established small and micro enterprises for the growth
of enterprises are:
• Lack of finance: the small entrepreneurs’ posses a
weak financial structure and find it extremely difficult
to obtain credit because of lack of collateral security.
This acts as a big handicap, especially in the latest
machinery and equipment or to acquire sophisticated
technology.
 Con…
• Poor availability of infrastructure: though
infrastructural bottlenecks are problems for big
businesses too, yet they can overcome these problems
to some extent because of their financial strength e.g.
generating their own power, or even influencing the
government in framing its olives sometimes. The small
entrapper on the other hand has to battle with them.
• Obsolete technology: most small business use old
technologies because they cannot afford better. As a
result the quality of their goods is inferior and the cost
of production is higher than in case of the economy
when they have had to compete with imported goods.
 Con….
• Marketing problems: the small entrepreneur cannot
supply standardized goods of high quality and as a
result cannot compete with products of large
companies or MNCs (Multi National companies ) they
usually do not have a brand name or loyalty, as there
are hardly any funds for advertising or sales promotion.
All these increase their marketing woes.
• Poor managerial and organizational skills: usually the
entrepreneur has to perform a multitude of diverse
functions invariable without having any exposure to
professional education or formal training. The large
sector on the best qualified and trained people
 Con….
• Apart from the above mentioned problems, the small
entrepreneur has work bargaining power to deal with
suppliers and financial institutions, have a high
incidence of sickness (due to a wrong choice of
product, poor managerial skills, lack of experience,
poor quality of products, etc) and has to face
bureaucratic red tapes and is unable to invest in
Research and Development (R&D).
• After the opening up of the economy the small sectors
has been finding it extremely difficult to compete with
the high quality goods available in the market.
 Avoiding consequences of small
businesses
• Know your business in depth: knowing your
industry well can be one of the ways of
minimizing the failures of small business. Also
knowing your business well by preparing
documented business mission, objective,
strategies and policies, is another methods.
• Have a good relation with stake holders: personal
contact with suppliers, customers, trade
association, and even competitors is one of the
ways to get knowledge.
 Con…..
• Prepare business plan: a well-written plan is a crucial
ingredient for the success of small business.
Answering. “What business I am in? “Leads to the
establishment of goals and objectives. In turn these
serve as aids in creating strategies policies and
procedures.
• Managing financial resources: the first step in
managing financial resources is to have adequate start
up capital. The most valuable financial resource to
small business is cash. You cannot main control over a
business unless you are not able to judge its financial
health.
 Con….
• Understanding financial statement: to understand
what is truly going on in the business you must
have at least basic understanding of accounting
and finance that would help to recognize the
financial position of your business from time to
time.
• Learn to manage people effectively (HRM): every
business depends on a foundation of well trained,
motivated employees. You would only do this if
your how to manage people more effectively.
 Con….
• Keep in tune with yourself: the success of your
business will depend on your constant
presence and attention and so it is critical. As
an entrepreneur you must always physically
and mentally fit through adjusting yourself
with time.
• Take up short professional courses in
management (entrepreneurship): to improve
your managerial skills
 Con….
• Be sensitive to your customers: your best
opportunity lies within your customers. If your
loose them, you will be hurt. So as an
entrepreneur, don’t ever give yourself a
chance to disappoint them.
• The other is be a wise in identifying the
present and future needs of your customers
through the analysis of the changes in their
interests