CHAPTER TWO

SMALL BUSINESS
2.1: DEFINITION AND IMPORTANCE

• Providing an agreed up on and comprehensive

definition of small enterprises is difficult .

– Because of the fact that these enterprises are being

run with different areas of specialization.

For example, manufacturing, service, distribution

and other business are examples of these sub
division.
• Assigning one criterion to have clear
definition then become difficult task.

Therefore, a business enterprise is said to be

Small when it is compared to the larger ones and
Micro when it is compared to smaller ones,

The issues of sub dividing enterprises is comparative

rather than the absolute ones.
• From their own general characteristics small
businesses can be defined as follows.

These are:

Their financing is supplied by a single person or

a small group.
Their activity is geographically localized except
their marketing functions.
Are smaller compared to the larger firms.
Their number of employees is less than 100.
• There are two basic criterion that we shall use in sub
dividing small enterprises to distinguish them from the larger
ones.
These are: Size and Economic control criteria.
1. Using the size criteria, we will consider
Number of employees
Volume of sales
Asset size
Volume of deposits
Total capital investment
Volume of production and combination of these factors.

• Among the above criteria, number of employees is the most

commonly used criteria but having the best one is
dependent upon the purpose.
2. Economic Control Criteria

The size criteria specify the quantitative characteristics while the control adds the
qualitative ones. The following are manifestation of economic control criteria.

Market share: the market share of small enterprise is insignificant that it cannot
affect either the price or the quality of goods to be purchased in the country
market.

Independence: the owner has full autonomy over his business that no one can
interfere against his/her operations.

Personalized Management: All of the decisions are undertaken by the owner-

manager(centralized- management)

Technology: Labor intensive.

The standard of business Administration (SBA) has one
lined small enterprise by using number of employees and
sales volume ($).

Types of Business No of Employees or Sales

• Advertizing agencies-------------------------------------------$3.5 Million
• Copper ores mining---------------------------------------------500 Employees
• Employment agencies-------------------------------------------$ 3.5 Million
• Furniture stores---------------------------------------------------$3.5 million
• General contractor------------------------------------------------$ 17 million
• News paper publishing ------------------------------------------500 employees
• Single factory houses ---------------------------------------------$17 million

Despite of this sub division, the criteria has been up dated and the total
number of employees should not be more than 99. If their number of
employees becomes greater than 100, it categorized to large scale.
 Classification of Micro and Small Enterprises In Ethiopia

In Case of Manufacturing Enterprise (Manufacturi
ng, Construction and Mining):
 A Micro Enterprise: is one in which the investment
in plant and machinery (total asset) does not exceed
birr100, 000 (one hundred thousand); and
operates with 5 people including the owner.
 Small Enterprises: is one in which the investment in
plant and machinery (a paid up capital of total asset)
of birr100, 000 (one hundred thousand) and not more
than Birr 1.5 million; and operates with 6-30 persons.
In Case of Service Enterprise (Retailing, Transport, Hotel and T
ourism, ICT & Maintenance):
 A micro enterprise: is one with the values of
total asset is not exceeding Birr 50,000(fifty
thousands); and operates with 5 persons
including the owner of the enterprise.
 Small Enterprises: is one in which the total
asset value or a paid up capital of birr100, 000
(one hundred thousand) and not more than
Birr 1.5 million; and operates with 6-30 persons.
 IMPORTANCE OF SMALL BUSINESS
Small business has the following importance basically for countries with labor abundant and
capital scarce country like Ethiopia.
These are:
Innovative and productive: though they do not maintain their own research and development wings,
it is the small units which are highly innovative.
Individual tastes, fashions and personalized service: Small Businesses are quick in studying
changes in tastes and fashions of consumers and in adjusting the production process and production
accordingly.
Symbols of national identity: small enterprises and almost always locally owned and controlled and
they can strengthen rather than destroy the extended family and other social systems and cultural
traditions that are perceived as valuable in their own right as well as symbols of national identity.

Happier in work: people who work in small enterprises are happier in their work than those who
work in large ones.
Always winners of the game: SB and new entrepreneurs were at the forefront of particularly every
business boom of the last decade, whether it was computers, television sets, consumer electronics,
garments diamond exports or Advertising.
Dispersal over wide areas: it is only small-scale units which have a tendency to disperse over wider
areas.
 ECONOMIC, SOCIAL AND POLITICAL ASPECTS

 ECONOMIC ASPECTS
Employment argument (more labor less capital)
Decentralization argument (removing regional imbalance)
Ancillary function: supply of accessories
Export promotion:
 SOCIAL ASPECTS
Narrowing the gap between the richer and the poor population.
Strengthens inter personal and intra-personal relationships
between the owners and their customers.
 POLITICAL ASPECTS
The stability of a country’s politics is greatly dependent up on
the economic condition.
 SMALL BUSINESS FAILURE FACTORS
• Most of the small enterprises fail because they could not pay for the debt/
fear of failure to pay debits against the borrowed money. But some
specific reasons include.
• Inefficient Human Factor: owing to illiteracy, ignorance, lack of
technical know-how in the areas of production, finance, accounting and
marketing management.

• Lack of Credit facilities: since there are no facilities for cheap credit,
they fall into the control of the money Lender who charges very high
rates of interest, or else they borrow from the dealers of their goods, who
exploit them by compelling them to sell their products at very low prices.

• Absence of organized marketing: as marketing is not properly

organized, the helpless workers are completely at the mercy of middle
man.
• Problem of raw materials: the quality, quantity and regularity of the
supply of raw materials are not satisfactory.

• Lack of machinery and equipment: exclusive machines and equipment

suitable for small businesses are not available.

• Power shortage and frequent power cuts: recently, power shortage and
frequent power cuts have played havoc with the small businesses.

• Problem of fiancé: the problem of finance in small sector is mainly due to

two reasons.
– First: it is partly due to scarcity of capital in the country as a whole.
– Second, it is partly due to weak creditworthiness of small units in the country.

• Problem of under utilization of capacity.

 PROBLEMS IN ETHIOPIA SMALL BUSINESS

• Small-scale industries have not been able to contribute substantially as needed to

the economic development, particularly because of financial, production, and
marketing problems. These problems are still major handicaps to their
development.

• Lack of adequate finance and credit has always been a major problem of Ethiopian
small business. Small-scale units do not have easy access to the capital market
because they mostly organized on proprietary partnership basis and are of very
small size.

• Small-scale enterprises find it difficult to get raw materials of good quality and at
cheaper rates in the field of production. Very often they do not get raw material in
time.
• Many small business enterprises are suffering with the problem of marketing their
products.
• It is only by overcoming all these constraints that small entrepreneurs can hope to
make their enterprises successful;.
 SETTING SMALL ENTERPRISE

Basic Business Idea

 A new business idea is an idea/ concept that an
entrepreneur designed it to apply particularly in the
near future.
 A business idea is said to be good if
 It has the ability to generate quick return.
 It has the ability to allow quick change in the products.
 The presence of good business idea is dependent up
on the presence of good opportunities in the market.
• In order to set basic business ideas,
entrepreneurs have to pass through the
following steps.

Step 1: Searching the ideas

Step 2: Process the ideas
Step 3: Select the best idea
 Step 1: Searching the idea

In this step an entrepreneur has advanced search of the basic business idea from various sources.

These include:
• Observing market: Scanning the market enables to understand the demand and supply positions available in the
market from the very beginning, this in turn enables to identify basic market gaps that paves the way for new business
idea development.
• Prospective consumers: consulting consumers is vital in understanding their tastes and the draw backs of the existing
products in a market. These also can have its own role in business idea conception.
• Developments in other nations: the technological advancement and business activities that are available in developed
countries are sources of new business ideas in the developing ones. E.g. videos, Washing machines, etc…
• Study of project profiles: many governmental and nongovernmental organizations develop and publish profiles of
their projects periodically. Careful analysis of these project profiles is one of the sources from which new business
ideas emerged.
• Government organizations: several governmental organizations assist entrepreneurs in developing new business
ideas. These include:
• Development banks
• State industrial development corporations
• Technical consultancy organizations
• Investment centers
• Export promotion councles etc…
• Trade fairs and exhibitions: exhibitions/ fairs are the events/ places where the producers, dealers and consumers of a
particular product category meet together. Availing in various fairs results in development of new business ideas.
 Step 2: Idea processing
• It includes: Preliminary evaluation and testing of ideas
generated.
• Screening out will be done by using the following criteria.
– Technical feasibility; refers to the possibility of producing the product.
It includes availability of technology, machinery, raw materials, labor.
– Commercial viability; it is important to make cost benefit analysis by
calculating
– The likely demand, expected sales volume, selling price, cost of
production and breakeven points.
– Detailed analysis: in this stage, the entrepreneur will make deep testing
by using maximum amount of data. The testing process will determine
the perspectives of technical feasibility, commercial viability or
financial and managerial feasibility.
 Step 3: Select the best idea
• After scanning the though screening process, an
entrepreneur selects the beast business idea accordingly.
• A good business idea is better to have the following
characteristics in relation to the product.
 Restricted or banned products
 Ease and profitability at exporting
 Excess demand
 In accordance with the entrepreneurs know how and
experience.
 Products with ancillary relationship
 Profitability
 Legal, in accordance with the industrial policy of a country