CHAPTER TWO

SMALL BUSINESS

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 Definition
 A business that is privately owned by
one individual or a small group of
individuals.
 It has sales and assets that are not large
enough to influence its environment.

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Definition
 There are two approaches to define
small business.
 By measure of size
 Using an economic/ control definition

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3
Definition…Cont’d
Size criteria  Number of employees
 Volume /value of sales
 Asset size
 Insurance coverage
 Volume of deposits
 Total capital investment
 Total investment in plant
and machinery
 Volume /value of production
 A combination of the above

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Definition---cont’d
Economic / Control  Market share
Criteria  Independence
 Personalized
management
 Technology
 Geographical area of
operation

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Bases of defining SMEs in various
countries
Country Category of industry Criterion
Ethiopia Micro enterprise Investment paid up capital not
exceeding USD2300(Br 40,000)
Small enterprise (SE) Investment paid up capital
USD2301-5747 (Br 40,000
-98,000)

Australia Manufacturing: <100 employee

Services : <20 employees
Germany SME < 500 employees
France SME 10-499 employees

Japan Manufacturing <200 Employees

Canada Manufacturing <200 employees
USA Very small: <20 employees
Small: 20-99 employees
Medium: 100-499 employees
Thailand Labour intensive <200 employees
Capital intensive <100 employees

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Advantages of Going into Small
Business
 Being your own boss
 Financial success
 Job security
 Flexible work schedule
 Family employment
 Challenge
 Community service

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Disadvantages of Going in to
Small Business
 Sales fluctuations
 Competition
 Increased responsibilities
 Financial loses
 Employee relations
 Laws and regulations
 Risk of failure

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 The Role of Small Business in
Society

Historically, major innovations are as likely to

come from small businesses as from large
firms.
Much of what is created in the high-technology
sectors comes from start-up companies.

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The Role of Small Business in
Society…cont’d
 Job Creation
 Small business creates 80% of new jobs
in the U.S.
 Industry sectors dominated by small
business have added the most jobs.
 Small business accounts for 38%
of all jobs in high-technology
sectors and for 96% of all
U.S. exporters.

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The Role of Small Business in
Society…cont’d
 Importance to Large Business
 Most products made by large manufacturers are
sold to customers by small businesses (retail
function).
 Small businesses as suppliers provide
large firms with essential services,
supplies, and raw materials.
 Large businesses outsource many
routine business operations such
as packaging, delivery, and
distribution to small businesses.

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New Business Start-ups
 Starting a New Business
 Buying an Existing Business
 An existing business has a proven ability to draw
customers and make a profit.
 Networks (e.g., customers and suppliers) are already
established.
 Negative: New owners inherit any existing problems.
 Starting from Scratch
 Avoids problems associated with previous owners.
 Allows freedom to choose suppliers, equipment,
location, and workers.
 Negative: More business risk and uncertainty.

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New Business Start-ups…cont’d
Trends in New Business Start-Ups
 The emergence of E-commerce
 Internet-based business
 Crossovers to small business by former
large-business employees
 Increased entrepreneurial opportunities
for women
 Better survival rates for small businesses

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Special Contribution of Small
Business
 Providing new jobs
 Introducing innovation
 Stimulating Competition
 Supporting Big Business: supply
function, distribution function.
 Producing Goods and Services
Efficiently

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Economic, Social, and Political aspects
of the Small Business Enterprise

 Socialistic Idea ( the Equality Argument)

 Less capital and more labor intensity (the
Employment Argument)
 Removing regional imbalance ( the
decentralization argument)
 Creating self-employment opportunities,
export promotion, and ancillary functions.

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Small Business failure factors

 Inadequate cash reserves

 Failure to clearly define and understand your
market; i.e., your customers, and your customers'
buying habits
 Failure to price your product or service correctly
 Failure to adequately anticipate cash flow
 Failure to anticipate or react to competition,
technology, or other changes in the marketplace.
 Overdependence on a single customer
 Believing you can do everything yourself.
 Putting up with inadequate management
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Small Business failure factors…
cont’d
 Lack of experience
 Lack of expertise
 Lack of strategy and strategic leadership
 Poor financial control
 Growing too fast
 Lack of commitment
 Ethical failure

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Reasons for Failure…cont’d
 Managerial incompetence/ inexperience
of the entrepreneur.
 Neglect - not devoting sufficient time
and effort to the business.
 Weak control systems that do not warn
of impending problems.
 Insufficient capital to sustain the
business until it begins to turn a profit.

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Reasons for Success

 Hard work, drive, and dedication by the

entrepreneur.
 Careful analysis of market conditions
provides insights about business
conditions.
 Managerial competence through training
and experience contributes to success.
 Luck sometimes plays a role.

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Family businesses

 Owned and financially controlled by

family members.
 Largest percentage of businesses
worldwide.
 Can provide an ideal business situation.
 Problems unique to family businesses:
 Family business dispute
 Succession problem

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