Chapter 05

Small Business
Course: Entrepreneurship Development and Small Business Mgt.

S. M. Misbauddin
What is Small Business? 

 The definition of a small business is an independently owned

and operated company that is limited in size and in revenue
depending on the industry.
– A local bakery that employs 10 people is an example of a small business.
– A manufacturing facility that employees less than 500 people is an
example of a small business

A private-owned and operated business with relatively

small turnover and staff numbers, typically seen as
constituting part of a specific commercial or
economic sector.
SME Classification by Bangladesh Bank:

Medium Enterprise:

In manufacturing, medium industry/enterprise would be those with

assets worth Tk 100 to 300 million and/or 100 to 250 workers.

In service industry and in business, medium enterprises will be those

which employ 50 to 100 and have assets (defined as above) worth
Tk 10 to 150 million.
SME Classification by Bangladesh Bank:

SMALL INDUSTRY/ENTERPRISE:

In manufacturing, small industry/enterprise would be those with

assets worth Tk 5 to 100 million (defined as above) and/or 25 to 99
workers.

In service industry and in business, small enterprises will be those

which employ 10 to 25 and have assets (defined as above) worth
Tk 500,000 to 10 million
SME Classification by Bangladesh Bank:

MICRO INDUSTRY/ENTERPRISE:

In manufacturing, micro industry/enterprise would be those with

assets worth Tk 500,000 to 5 million (defined as above) and/or 10
to 24 workers or less.

In service industry and in business, micro enterprises will be those

which employ 10 or less people and have assets (defined as
above) worth Tk 500,000 or less
Features of Small Business

Lower Revenue and Profitability :Small-scale business

revenue is generally lower than companies that operate on a larger scale.
Few Employees: Small-scale businesses employ smaller
teams of employees than companies that operate on larger scales.
The smallest businesses are run entirely by single individuals or
small teams. A larger small-scale business can often get away with
employing fewer than one hundred employees, depending on the
business type.
Small Market Area: Small-scale businesses serve a much
smaller area than corporations or larger private businesses.
The smallest-scale businesses serve single communities, such
as a convenience store in a rural township. 
Sole or Partnership Ownership and Taxes: The corporate form of
business organization is not well-suited to small-scale operations. Instead, small-
scale businesses prefer to organize as sole proprietorships, partnerships or limited
liability companies. These forms of organization provide the greatest degree of
managerial control for company owners, while minimizing the hassle and expense
of business registration.
Fewer Locations: A small-scale business, by definition, can be found only
in a limited area. These companies are not likely to have sales outlets in
multiple states or countries
Small Business Advantages

 Meeting customer needs

 Serve customers where the number of products and
services needed is small or the requirements are too
specialized for large businesses
 Get direct information from their customers
 Providing Unique Services
 Spend time determining needs and discussing
alternatives
 Unique needs, more individual attention, and willing to
pay more.
Common Small Business
Problems

 Not keeping adequate records

 Not having enough start-up money
 Lack of management experience
 Lack of experience with the type of business
 Not controlling operating expenses
 Poor location for the business
 Failure to manage credit offered to customers
Types of Small Business
Sole Proprietorship: A sole proprietorship refers to a
business that is not incorporated and has only one owner.
These are typically single-person businesses that have no
plans to bring in a second owner or additional employees.
General Partnerships General partnerships are
businesses owned by two or more people that invest
money, property, labor and skill for the success of the
company. Partnerships require each owner to take
responsibility for all the company’s debts, obligations and
liabilities.
 C Corporation C corporations are businesses that are
separate entities from an individual owner and are therefore
able to take special deductions not available in a sole
proprietorship or general partnership. A C corporation is a
business that must list net income and losses, and can also
sell stocks to shareholders and distribute profits. Corporate
debts are not assumed on an individual level, so C
corporation owners don’t have to risk their personal assets.
The main advantage of a C corporation is there are no
restrictions on the number of owners or the number and types
of stock offered.
 Definition of small business
Financing

Small business financing refers to the means by which an

aspiring or current business owner obtains money to start a
new small business, purchase an existing small business or bring
money into an existing small business to finance current or future
business activity.

Financing is the process of providing funds for business activities,

making purchases or investing. 
Factors Affecting Choice of Source of
Finance

 The source of finance chosen will depend on a

number of factors:
– Purpose – what the finance is to be used for
– Time Period – how long the finance will be needed for
– Amount – how much money the business needs
– Ownership and Size of the business
 Period Basis Sources
Long-term sources fulfil the financial requirements of a business for a
period more than 5 years. It includes various other sources such as
shares and debentures, long-term borrowings and loans from financial
institutions. Such financing is generally required for the procurement of
fixed assets such as plant, equipment, machinery etc.

Medium-term sources are the sources where the funds are required for a
period of more than one year but less than five years. The sources of the
medium term include borrowings from commercial banks, public
deposits, lease financing and loans from financial institutions.

Short-term sources: Funds which are required for a period not

exceeding one year are called short-term sources. Trade credit, loans
from commercial banks and commercial papers are the examples of the
sources that provide funds for short duration.
 Ownership Basis Sources
Owner’s funds mean funds which are procured by the owners of a
business, which may be a sole entrepreneur or partners or shareholders
of a business. It also includes profits which are reinvested in the
business. The owner’s capital remains invested in the business for a
longer duration and is not required to be refunded during the life period
of the business.

Borrowed funds refer to the funds raised with the help of loans or

borrowings. This is the most common type of source of funds and is
used the majority of the time. The sources for raising borrowed funds
include loans from commercial banks, loans from financial institutions,
issue of debentures, public deposits and trade credit.
These sources provide funds for a specific period, on certain terms and
conditions and have to repay the loan after the expiry of that period with
interest. A fixed rate of interest is paid by the borrowers on such loans. 
 Generation Basis Sources
Internal sources of funds are those that are generated inside the
business. A business, for example, can generate funds internally
by speeding collection of receivables, disposing of surplus
inventories and increasing its profit. The internal sources of funds
can fulfil only limited needs of the business.

External sources of funds are the sources that lie outside an

organization, such as suppliers, lenders, and investors. When a
large amount of money is needed to be raised, it is generally done
through the external sources. External funds may be costly as
compared to those raised through internal sources.
PEST Analysis
PEST Analysis

Advantages:
 Provides a simple and easy-to-use framework for your analysis.
 Involves cross-functional skills and expertise.
 Helps to reduce the impact and effects of potential threats to your organization.
 Aids and encourages the development of strategic thinking within your organization.
 Provides a mechanism that enables your organization to identify and exploit new
opportunities.
 Enables you to assess implications of entering new markets both nationally and
globally.
PEST Analysis

Disadvantages:
 Users can oversimplify the information that is used for making decisions.
 The process has to be conducted regularly to be effective and often organizations do not make this
investment.
 Users must not succumb to 'paralysis by analysis' where they gather too much information and forget
that the objective of this tool is the identification of issues so that action can be taken.
 Organizations often restrict who is involved due to time and cost considerations. This limits the
technique's effectiveness as a key perspective may be missing from the discussions.
 Users' access to quality external information is often restricted because of the cost and time needed to
collate it.
 Assumptions often form the basis for most of the data used, making any decision made based on
such data subjective.
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