CHAPTER TWO

SMALL BUSINESS MANAGEMENT

Contents
1. Concepts and definition of small business
2.Economic social & political aspects of small business
enterprise
1. Advantages of Going into Small Business
3. Small Business Failure factors.
2.3.1 Small business Problems in Ethiopia
4. Entrepreneurship and Business Enterprise Creation
5. Opportunities in contemporary business
Environment
6. Role of Creativity and Innovation in Idea
Generation
 Objectives this chapter is meant to familiarize you
with the basic concepts of small business
management.
Thus, after going through this lesson you should be able to:

• Understand general concepts of small business

• Write social and economic contribution of small business enterprise.
• Identify small business failure factors
• Integrate the knowledge necessary to establish a small
business venture.
• Scan the business terms of the entrepreneurial
environment in opportunities and
threats.
• Identifying important business ideas.
• Tap the sources for idea generation
 Introduction
• To define small business, people adopted
different standards for different purposes.

• Based on socio- economic conditions,

countries define small business
differently.
But all may use size and economic criteria
as a base to define small business. Size
criteria include number of employees and
the startup capital.
•
 SMALL BUSINESS MANAGEMENT

• There are two approaches to define

small business. They are:

1. Size criteria

2. Economic/control criteria
 SMALL BUSINESS MANAGEMENT

1. Size criteria • number of employees;

2. Economic/control criteria • volume, and value of sales
turnover,
• asset size, and volume of
deposits,
• total capital investment,
• volume/value of
production, and a
combination of the stated
factors.
 SMALL BUSINESS MANAGEMENT
1. Size criteria
 Small business can be define as:-
• A business which is financed and supplied by one individual or a
small group. Only in a rare case would the business have more
than 15 or 20 owners.
• Except for its marketing function, the firm’s or the
enterprise operations and market are geographically
localized.
• Compared to the biggest firms in the industry, the business is
small.
• The number of employees in the business is usually fewer
than
100.
  Using capital as size criteria, Ministry of Trade and Industry of
Ethiopia adopted official definition of Micro and Small
enterprises as follows:
i. Microenterprises :- Are business enterprises found in all
sectors of the Ethiopian economy with a paid-up capital
(fixed assets) of not more than Birr 20,000, but
excluding high-tech consultancy firms.
ii. Small Enterprises:- Are business enterprises with a paid-
up capital of more than Birr 20,000 but not more than
Birr 500,000, but excluding high-tech consultancy firms
and other high-tech establishments.
 SMALL BUSINESS MANAGEMENT

1. Size criteria • Market share

2. Economic/control criteria • Independence
• Personalized
managemen
t
• Technology
• Geographical area
of operation
 2. Economic/Control Criteria

• Size does not always reflect the true nature of an

enterprise. In addition to size, qualitative
characteristics may be used to differentiate small
business from other business.
 All the following characteristics must be satisfied if
the
business is to rank as a small business.
• Market share: Thecharacteristic of a small
firm’s share the market is notlarge
enough to enable it to
influence the prices of national quantities of
goods sold to any significant extent.
• Independence: The owner has a control of
•Personalized Management: It implies that the owner
actively participates in all aspects of the management of
the business, and in all major decision-making process.

•Technology: Small business is generally labor intensive.

Only few are technology intensive.

•Geographical area of operation: The area of operation

and market of a small firm is often local.
 Generally, small business is a business that is privately
owned and operated, with a small number of employees
and relatively low volume of sales.
 Small businesses are normally privately owned
companies, partnerships or cooperatives.
 2.2. Economic social & political o
contributions small business enterprise f
 Some of the contributions are
1. Equitable distribution of
wealth and decentralization
of economic power

2. More
Employment
creation capacity
3. Removing
Regional Imbalance

4. Ancillary Function

5. Export Promotion
12
 2.2. Economic social & political ns
contributio small business of
enterprise
1. Equitable distribution • Income generated in a
of wealth and large number of small
decentralization of enterprises is dispersed
economic power more widely and its
2. More benefit is derived by the
Employment large segments of the
creation capacity society.
3. Removing
• This is due to wide spread
Regional Imbalance
ownership and
4. Ancillary Function decentralized location of
small scale enterprises
5. Export
Promotion 13
 2.2. Economic social & political ns
contributio small business of
enterprise
1. Equitable distribution • small enterprises
of wealth and
decentralization of require less capital
economic power but generate
2. More more
Employment
creation capacity employment.
3. Removing • This is because
Regional Imbalance
small scale
4. Ancillary Function enterprises are
labor
5. Export
Promotion intensive 14
 2.2. Economic social & political ns
contributio small business of
enterprise
1. Equitable distribution • Continuous shifting of people
from rural to urban areas
of wealth and causes over-crowding in cities.
decentralization of
economic power • Large scale industries have the
2. More tendency to concentrate in big
Employment cities. As a result semi urban
and rural areas remain deprived
creation capacity of the benefits of
3. Removing industrialization, people migrate
Regional Imbalance in large numbers to big cities.

4. Ancillary Function • Therefore, Small scale business

enterprise can be located
in rural and semi urban areas
5. Export reduce this migration.
to
Promotion 15
 2.2. Economic social & political ns
contributio small business of
enterprise
1. Equitable distribution • Many small-scale
of wealth and
decentralization of enterprises supply
economic power parts and accessories
2. More to bigger enterprises.
Employment
creation capacity This ancillary function
3. Removing involves specialization
Regional Imbalance
in specific areas and
4. Ancillary Function results in greater
profitability.
5. Export
Promotion 16
 2.2. Economic social & political ns
contributio small business of
enterprise
1. Equitable distribution • Small-scale enterprises are
of wealth and opening up fresh paths
decentralization of in the export market in
economic power our world.
2. More • Realizing the
Employment importance of the small-
creation capacity scale sector in the
3. Removing
economy the Ethiopian
Regional Imbalance
government has adopted
4. Ancillary Function several measures to
speed up the growth of
5. Export small enterprises
Promotion 17
 Advantages of going into Small Business
 The desire/ need for individuals to own and operate their own small business
is increased. As stated earlier, this continual creation of new business is at
the heart of free enterprise system.
 Owning a small business has the following common advantages:-

1. Independence

2. Financial Opportunities

3. Community Service

4. Job Security

5. Family Employment

6. Learning from Challenge

7. Introducing Innovation
 Independence

A
d Financial Opportunities
 Most small
v Community Service business
owners enjoy
a being their
Job Security
own boss.
n  They like the
Family Employment freedom to do
t things their
Learning from Challenge own way.
aS
B
Introducing Innovation
g

e
 Independence

A
d Financial Opportunities  Another major
reason for going
v into business for
Community Service oneself is financial
opportunity.
a  Many small
Job Security business owners
make more money
n running their own
Family Employment company than they
t would be working
for someone else.
Learning from Challenge
aS
B
Introducing Innovation
g

e
 Independence

A
d Financial Opportunities
 If the person has
v Community Service reason to believe
the public will
a pay for such
Job Security output/ service,
he or she will
n start a small
Family Employment company to
t provide it for the
community.
Learning from Challenge
aS
B
Introducing Innovation
g

e
 Independence

A
d Financial Opportunities

 When one owns a

v Community Service business, job
security is
a ensured.
Job Security  The individual
can work as long
n as he or she
Family Employment wants; no
t mandatory
retirement exists.
Learning from Challenge
aS
B
Introducing Innovation
g

e
 Independence

A
d Financial Opportunities

v Community Service  Another

advantage is the
a opportunity to
Job Security provide family
members with
n employment. This
Family Employment has several
t benefits.
Learning from Challenge
aS
B
Introducing Innovation
g

e
 Independence

A
d Financial Opportunities
 Research reveals
that most
v Community Service successful small
business owners
a like to feel they
Job Security have a chance to
succeed and the
n
chance to fail.
Family Employment  They learn from
t the past failure or
success.
Learning from Challenge
aS
B
Introducing Innovation
g

e
 Independence

A
d Financial Opportunities  New products that
originate in the
research
v Community Service laboratories of big
business make a
valuable
a contribution to our
Job Security
standard of living.
n  Record shows that
many scientific
Family Employment
inventions
t originated with
independent
Learning from Challenge
inventors and small
aS organizations .
B
Introducing Innovation
g

e
 2.3 Small Business Failure factors
 Poor operations management
 Lack of experience
 Poor financial management
 Over-investing in fixed assets
 Poor credit practices
 Failure to plan
 Inappropriate location

26
 Poor operation and management

Lack of experience

Poor financial management

Small The manager

Busin Over-investing lacks the ability
e ss
Failur to operate a
e
Poor credit practice small business.
factor
s
Failure to plane

Inappropriate location
 Poor operation and management

Lack of experience

Poor financial management

Small Many owners start
Busin businesses in
Over-investing
e ss industries in which
Failur
they have no
e
Poor credit practice experience
factor
s

Failure to plane

Inappropriate location
 Poor operation and management

Lack of experience

Poor financial management

Small Many owners start
Busin with too little money
Over-investing and with little or no
e ss
Failur understanding of
e financial spreadsheet
factor Poor credit practice applications.
s

Failure to plane

Inappropriate location
 Poor operation and management

Lack of experience

Poor financial management

Small Owners who over-
Busin invest in fixed assets
Over-investing
e ss may find themselves
Failur with no access to funds
e for working capital.
factor Poor credit practice
s

Failure to plane

Inappropriate location
 Poor operation and management

Lack of experience

Poor financial management

Owners often sell on
Small credit to meet (or beat)
Busin the competition and
Over-investing
e ss find that they lack the
Failur additional working
e capital required or the
factor Poor credit practice
ability to collect
s receivables.
Failure to plane

Inappropriate location
 Poor operation and management

Lack of experience

Poor financial management

Small
Busin The lack of a strategic
Over-investing plan to guide the
e ss
Failur business in the long
e run.
factor Poor credit practice
s

Failure to plane

Inappropriate location
 Poor operation and management

Lack of experience

Owners who choose a

Poor financial management business location
Small without proper
Busin analysis, investigation,
Over-investing and planning often fail.
e ss
Failur
e Too often, owners seek
factor Poor credit practice “cheap” sites and
s locate themselves
straight into failure.
Failure to plane

Inappropriate location
 2.4. Entrepreneurship and
Business Enterprise
Creation
• 2.4.1. Opportunity scouting/
sensing

34
 Problems in the Ethiopian small business
 Small-scale businesses have not been able to contribute
significantly to the economic development, particularly because
of financial, production, and marketing problems.
 Lack of adequate finance and credit has always been a major
problem of the Ethiopian small business.
 Small-scale units do not have easy access to the capital because
they mostly organized on proprietary and partnership basis and
are of very small size.
 They do not have easy access to industrial sources of finance
partly because of their size and partly because of the fact that
their surpluses which can be utilized to repay loans are relatively
small.
 Because of their size and partly because of the limited profit,
they search for funds for investment purposes . Consequently,
they approach traditional money lenders who charge extra high
rate of interest hence small enterprise continue to be financially
weak
 Small business owner can avoid some of the
common pitfalls that lead to business failure by:

 Knowing the business in depth

 Developing a solid business plan
 Managing financial resources
 Understanding financial statements
Learning to manage people effectively
Etc……
End of chapter
two