CHAPTER 2
THE NATURE OF SMALL BUSINESS
Business size is one factor that does not prevent one from engaging in entrepre-neurship. Since only a small
number of people have capital large enough to start a large enterprise, the bigger number of people with
minimal resources are forced to operate on a small-scale basis, if they decide on becoming entrepreneurs.
Since most new ventures will be small businesses, it is expected that majority of the efforts of those involved in
the propagation of entrepreneurship will focus on small business management.
The premise is that if small businesses are managed properly, their chances of becoming large enterprises are
increased. Since it is well-known that large enterprises bring certain benefits to the economy, small business
management is an activity worth pursuing. But if many small businesses will not develop into large businesses,
their contribution is still very significant.
What is a Small Business
Small business may be defined by using any of the two approaches:
market share approach
- small business may be defined as one which is independently owned and operated and which is not
domipant in its field of opera-tion.
- The term "independently owned" means ownership is by a private individual, a partnership, or a
corporation.
- The term "not dominant" indicates that a small business does not control a sizable share of its
market.
- When the total sales of a business firm is less than one percent of the total demand for its products,
the firm may be considered small business.
total assets approach
- A small business may be defined under the total assets approach as one having total assets that fall
within a certain bracket. For example, the Magna Carta for Small Enterprises (R.A. 6977) indicates
that the firm must have total assets valued at above P1.5 million to P15 million to be considered
small business. The government prefers this approach because it simplifies formulation and
implementation of policy.
- With the assets value bracket assigned to small business, it is inevitable that all enterprises having
total assets valued at 1.5 million and below will be classified as "microenterprises."
- Disadvantages of the total assets approach is that asset values are affected by inflation. After so
many years, inflation alters the nominal value of business assets and what may be previously
considered small business may no longer be classified as such.
From the point of view of business management, the market share approach in defining small business is more
appropriate. This is so because the target market share is an objective more basic than other objectives.
Kinds of Business
According to Size
Public Enterprises Private Enterprises
Example: Land Bank of Example: Globe
the Philippines telecom
Micro Cottage Small Medium Large
Business Business Business Business Business
5 Types of Small Business
1. Manufacturing
- A manufacturing business is one involved in the conversion of raw materials into products needed
by society.
- Examples of small business engaged in manufacturing are: bakeries, tricycle sidecar assembly shops,
bagoong manufacturers, restaurants, and others.
2. Service
- Service businesses are those that provide service in one way or another. They may be further
classified into the following:
1. Business services - provide service to other business. Examples are account-ing firms,
janitorial service firms, security service firms, collection agencies, and the like;
2. Personal services - provide service to the person. Examples are tutoring ser-vices, massage
parlors, voice lesson, among others;
3. Repair services - provide repair services to owners of various machinery and appliances.
Examples are auto repair shops, watch repair shops, plumbing services, and others;
4. Entertainment and recreation - includes movie houses, resorts, billiard pool centers, and the
like;
5. Hotels and motels; and
6. Education services include Montessori schools for children, high school, correspondence
schools, among others.
3. Wholesaling
4. retailing
5. general construction firms
Service
Wholesaling
Wholesaling refers to the activities of persons or establishments which sell to retailers and other merchants,
and/or to industrial, institutional, and commercial users, but who do not sell in large amounts to final
consumers. Examples are soft drinks wholesalers in local areas, dealers of supplies and office equipment, grains
wholesalers, and the like. A big number of these wholesale businesses are owned by small business operators.
Retailing
Retailing covers all activities involved in the sale of goods and/or services to the final consumers. The bulk of
retailing activities are performed by small businesses. Examples are retail drugstores, fast food shops, appliance
stores, and others.
General Construction Firms
General construction firms are those engaged in the construction of buildings whether for private individuals or
firms, or for the government. Many of them perform subcontracting jobs for the bigger contractors such as
installing electrical facilities and sewerage.
As a whole, general construction firms employ hundreds of thousands of people and they operate mostly in the
countryside.
Characteristics of Small Business
Small businesses have their own distinctive characteristics. They are the following:
1. Independent management - The owner is also the manager.
2. Small capital requirement - Small business requires only small capital and this can be supplied by a single or a
few individuals.
3. Mostly local operation - Small business usually operates in a certain locality although there are cases when
the market is not confined to a local area.
Economic Importance of Small Business
Small businesses play an important role in the development of our economy. They assume the following
functions (Figure 4):
1. Providers of economic opportunities for entrepreneurs - People who do not feel comfortable as employees
have the option of engaging in small business operation.
2. Providers of products and services to consumers - The production of many prod-ucts and services is
oftentimes not feasible with big and medium business operation. These limited opportunities are naturally fitted
for small busi-nesses.
3. Suppliers of products and services to other businesses - Some businesses require raw materials, semi-
finished parts, finished components, or even labor, which they cannot economically produce. The small
businesses per-form this task for them.
4. Distributors of products and services of other businesses - Some manufacturers do not have the ability to
distribute their products and services. Many small businesses assume this role for them.
5. Supporters of government - Small businesses support the government with the taxes they pay, as well as
performing other functions.
6. Providers of employment - A large proportion of the labor force are employed by small businesses.
Advantages of Operating a Small Business
An individual has various options to improve his economic lot. They are the following:
1. be an employee;
2. be a professional; or
3. be a small business operator (SBO).
An employee enjoys a fixed working schedule like 8:00 A.M. to 5:00 P.M. The pay he receives, however, is
limited and dependent to a large extent on industry norms and the financial capability of the company. In some
firms, the employee's pay depends on the whims of the owner.
A professional may generate higher income through the effective practice of his profession. A physician, for
example, may set his clinic in a certain area and proceed to treat patients for a fee. His income, however, is
limited by the number of patients he attends to every day as he cannot delegate his skill to others. In addition,
although he is useful to the community, his desire to provide employment to more people is severely limited by
the nature of his work. At most, he can employ four persons as assistants.
The first two options, however, can only be considered depending on certain conditions. Finding a job is not an
easy task. The rate of rejection for job applicants, especially in the Philippines, is just too high. In reality, there
are too many people who cannot exercise this option.
Entering a certain profession is also not an easy task. First, one must undergo long years of study, and second,
one must pass a rigorous entrance requirement like passing the board examination. There are also too many
people who cannot exercise this option.
The last option is small business operation. Although entrance requirements are not as difficult as the first two
options, it does not mean this option is easier to put into practice. A small business operator keeps long working
hours and absorbs whatever damages that happen as a result of his faulty decision-making. However, he is
afforded the following benefits:
1. opportunity to gain control over his own destiny,
2. opportunity to reach his full potential,
3. opportunity to reap unlimited profits, and
4. opportunity to make a contribution to society and receive recognition for his efforts.
Opportunity to Gain Control Over His Own Destiny
The prospective small business owner can choose from several business opportunities that he would like to take
advantage of. If, after a few years, he thinks that the business is not worth operating anymore, then he can
dissolve it and open a new one. This option is not made available to plain employees and professionals.
Opportunity to Reach Full Potential
The employee will do his work based on prescribed targets which may only require less than his full potential.
This is not so with the small business operator. His freedom to act is limited only by his potential and he can
revise or amend his targets within short notice.
Opportunity to Reap Unlimited Profits
If the small business succeeds, all profits, big or small, accrue to the owner. If he is not satisfied, he may exert
more efforts to increase his profits. This opportunity is not afforded to the plain employee.
Opportunity to Make a Contribution to Society and Receive Recognition for His Efforts
Entrepreneurs who make innovative products available to the public are recog nized properly by society. Some
of them, like Henry Ford, became billionaires. Others, like Walter Disney, merited listings in books of eminent
personalities.
In the Philippines, a list of the most admired entrepreneurs was published on August 2007 by Entrepreneurs
Magazine (See partial list in Exhibit 1).
Disadvantages of Operating a Small Business
Although certain advantages accrue to the small business operator, there are certain disadvantages that must
be considered. These are the following:
1 uncertainty of income;
2. risk of losing your entire capital investment;
3. lower quality of life until the business gets established;
4. complete responsibility;
5. having to serve undesirable customers;
paperwork and other chores; and
7. long hours and demanding work condition.
Operating a small business does not provide the assurance of an income, unlike getting employment which
offers fixed monthly salaries.
Complete independence in making decisions exposes the small business opera tor to the consequences of errors
of judgment which in some cases could wipe out his investment. The high rate of small business failures proves
the point.
As the small business operator assembles the needed resources, starts actual production, and makes moves to
attract customers, income and profit are held in abeyance, i.e., if they will ever be realized at all. Until then, the
owner experiences a lower quality of life.
The owner-operator will take full responsibility for whatever happens to the business. If the firm is sued for
selling unsafe products, for instance, then he suffers and carries whatever burden or penalty is imposed by
authorities. He cannot pass the blame to anybody else.
Even if the small business operator has freedom in his actions, he is not com-pletely free. He cannot choose his
customers. Even if he dislikes a particular customer, he cannot just send him away or even ignore him. He is
bound to give his customers satisfactory service even if they are rude.
/A big company can hire several persons to attend to specific tasks related to paperwork like bookkeeping or
other unpleasant tasks. The small business operator is forced to do these tasks himself.
It is a well-known fact that a small business must maintain long hours of work to keep the business going. If it
cannot acquire sales volume within a short time frame every day, it must stretch its business hours to
accommodate more customers. The limited volume of production and sales limits the number of activities that
can be economically served by hired personnel. The residual functions, even if they must be done under harsh
working conditions, must be borne by the small business operator. See comparison of employment and small
business operation (Table 4).
