CHAPTER TWO

FUNDAMENTALS OF SMALL BUSINESS

Outlines
o Meaning And Definition Of Small Business

o Characteristics Of Small Business

o Rationale With Small Business

o Role of Small Business In Economic Development

o Reasons Why Many Small Businesses Fail

o Government Policy and Support towards Small Business

• Discuss about meanings and nature
of small business
Independently owned and
managed business that does
not dominate its market
 MEANING AND DEFINITIONS OF SMALL BUSINESS

• There are two approaches to define small business. They are:

1. Size criteria
2. Economic/control criteria.
1. Size criteria
• Size refers to the scale of operation.
• Varied Criteria used to measure size are:
• number of employees,
• 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.
 Definitions suggested by Small Business Administration (SBA)
– Financing of the business is 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 operations 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.
 This size criteria based definition of SMEs varies from country to country

Australia Manufacturing <100 employees

Services <20 employees

Germany SME <500 employees

France SME 10 -499 employees
China SME Depends on product group.
Usually 100 employees:
investment ceiling US $8
million.

Indonesia SME <100 employees

Malaysia SME <175 full time workers
investment US $1 million
• Ethiopian Business Development Services Network
(EBDSN) defined Small businesses as:
– business enterprises with a paid-up capital of more than
Birr 20,000 ($2,500) but not more than Birr 500,000
($62,500) but excluding high-tech consultancy firms and
other high-tech establishments.

Notice: (1 US$ equals about 9 Birr, 1 Euro equals about

10 Birr in 10/2003).
 Economic/Control Criteria
Economic/Control Criteria
The economic/control definition covers:
• Market share -is not large enough
• Independence-the owner has control of the business himself.
• Personalized management-the owner actively participates in all
aspect of management of business and decision-making process.
Characteristics Of Small Business
• Revenue and Profitability: is lower than companies that operate
on a larger scale. Lower revenue does not necessarily translate into
lower profitability.
• Employees: smaller teams of employees than companies that
operate on larger scales.
• Market Area: serve a much smaller area than corporations or
larger private businesses.
• Locations: can be found only in a limited area
• Low Startup Costs: The initial startup costs for a small-scale business are usually pretty low,
depending on the specific business model and what products or services are being sold.
• Portability: A small-scale business is generally portable, making it easy to set up and tear down.
• Leadership: Business owners must be the leader of their organization. They often provide the
mission, values and goals for the small business.
• Accounting: use accounting to record, report and analyze information relating to financial
transactions; to conduct a performance measurement analysis for business decisions.
• Human Resources: understand the current job market and how to set wages for various job
positions.
• Capital: have much smaller capital than larger enterprises.
• Workplace Culture: have fewer employees. Employees are less specialized, i.e. do variety of
tasks, because there are fewer people to do everything.
• Community-Based: participation in local communities.
• Small Structure: simpler than that of a larger corporation.
• Limited Suppliers: Small businesses also don't often have the massive network of suppliers
common to large companies.
 Rational With Small Business

 Successful Small Business Owners...Rational or

Emotional?
 In order to be a successful business owner, should
you be more rational than emotional?
 Are there are times when it is better to be
emotional rather than rational, and vice versa?
• Developing personal relationships:
– small businesses are well placed to build personal
relationships with customers, employees, and suppliers.
• Responding flexibly to problems and challenges:
– in a small business there is little hierarchy or chain of
command.
• Inventiveness and innovation:
– small businesses are well positioned to introduce and develop
new ideas.
• Low overheads:
– due to the small scale of operation, small businesses have
lower overhead costs.
• Catering for limited or niche markets:
– By contrast, small firms are able to make a profit on much
lower sales figures.
 Role Of Small Business In Economic Development
• Equitable distribution of wealth and decentralization of
economic power: due to wide spread ownership and decentralized
location of small scale enterprises they bring about greater
equality of income distribution.
• More Employment creation capacity: they are less capital
intensive and more labor intensive.
• Removing Regional Imbalance : inducing/reminding people to
set up small firms in rural areas- employment creation/benefits of
industrialization.
• Ancillary Function : supply parts and accessories to bigger
enterprises. involves specialization in specific areas and results in
greater profitability.
• Export Promotion : Small-scale enterprises are opening up fresh
avenues in the export market in our world.
 Advantages Of Going In To Small Business

 Discussion points
• What potential advantages that small business
owners earns?
• Advantages from government
• Distinct advantage over the big companies
• Is efficiency is better in small or large organization?
• compare demand creation or market advantage of small
business against large co.s
 Adv’s

• Independence
– Most small business owners enjoy being their own boss; they like the
freedom to do things their own way.
• Financial Opportunities
– Owners make more money running their own company than working for
someone else.
• Community Service
– By realizing unavailable goods or service.
• Job Security
– When one owns a business, job security is ensured ; no mandatory
retirement exists.
• Family Employment
– The opportunity to provide family members with employment
• Learning from Challenge
– They learn from the past failure or success.
• Introducing Innovation
• Catering for small or niche markets
– sell into much smaller markets that are ignored by larger organization
 Reasons Why Many Small Businesses Fail

 DISCUSSION POINTS
1. Does “fail” mean that it goes out of business because it was
not financially viable?
2. Why Businesses Succeed and Fail?
3. Do serial entrepreneurs succeed more than first time
entrepreneurs? What is your experience/observation
4. Is entrepreneurial success a skill, or is it luck?
5. Does success breed success?
6. Where do most entrepreneurs get their ideas from?
The following are some of the major factors, which cause most small business
failures
• Poor operations management – The manager lacks the ability to operate a
small business.
• Lack of experience – Many owners start businesses in industries in which they
have no experience
• Poor financial management – Many owners start with too little money and
with little or no understanding of financial spreadsheet applications.
• Over-investing in fixed assets – Owners who over-invest in fixed assets may
find themselves with no access to funds for working capital.
• Poor credit practices – Owners often sell on credit to meet (or beat) the
competition and find that they lack the additional working capital required or
the ability to collect receivables.
• Failure to plan – The lack of a strategic plan to guide the business in the
long run
• Unplanned and uncontrolled growth – Growth is natural and healthy, but
unplanned growth can be fatal to a business.
• Inappropriate location
 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

– Poor management

– Neglect

– Weak control systems

– Insufficient capital
Reasons for Success
• Hard work, drive,
dedication
• Market demand
• Strong management
• Successful Small Business Management Are:
– (1) Owners have developed habits and traits that are Positive,
Committed, Patient and Persistent.
– (2) A living Strategic Business Plan is in place.
– (3) An Organizational Structure has been developed that
encourages people to be their best and helps them do so.
– (4) Operational Support Systems are used that track
performance and relieve senior management of daily detail
yet supply them with critical data to manage the business.
 Quotes/on personal characteristics of successful business
• Invariably they have a positive attitude towards their business and
life in general.
– "Twenty years from now you will be more disappointed by the
things you didn't do than by the ones you did do. So throw off
the bowlines. Sail away from the safe harbor. Catch the trade
winds in your sails. Explore. Dream. Discover." Mark Twain
• They are committed to their effort.
– "The only place you'll find success before work is in the
dictionary." May B. Smith
• They are patient.
– "Entrepreneurs are simply those who understand that there is
little difference between obstacle and opportunity and are able
to turn both to their advantage." Victor Kiam
• They are persistent.
– "Many of life's failures are people who did not realize how
close they were to success when they gave up." Thomas Edison
 Government Policy and Support Towards
Small Business

 Discussion points: Policy coordination and leadership

– Is entrepreneurship considered a feasible, viable and
attractive option?
– How is Access to financial services?
– What about provision of Training and mentoring
services?
– How is accessibility to Business support and
information?
– Does Regulatory and legal environment is convenient?
– What sources of finance are available locally?
The Challenges of Growing Small Businesses:
Insights from Women Entrepreneurs in Africa- by Pat Richardson, Rhona
Howarth and Gerry Finnegan

 Access to resources, in particular to finance

• Recommendations
– There is a need to strengthen the capacities of MFIs
– The Government should give special emphasis to the
allocation of land and premises to women entrepreneurs at
reasonable rates.
– Where market failure exists, SME development incubators
need to be established to help alleviate the shortage of
appropriate premises for women entrepreneurs, as well as the
provision of more and better BDS and information services
for women entrepreneurs.
 Market access and developing BDS
Issues:
– No access to export markets- increasing global competition.
– difficulty of accessing markets outside of their immediate communities.
Recommendations:
I. offering assistance in marketing to facilitate access to local, regional and
international markets
II. The ILO support through trade fairs, and continue promoting international
lessons and best practices.
III. BDS products and services should be promoted
- Quality assurance schemes - Productivity Improvement Programmes
- Production technology - Product development
- Packaging development - Business skills development
- Information about markets including export markets
- Support with information technology
Support for Growth-oriented Women Entrepreneurs in
Ethiopia- by Lois Stevenson and Annette St-Onge

 The specific needs of women entrepreneurs were identified as

being:
1) Improved access to financing;
2) Enhanced strategic entrepreneurial and management
competencies;
3) Stronger business networks;
4) Opportunities for trade development;
5) Exposure to higher potential business opportunities;
6) Technology enhancement; and
7) Sustained promotion of entrepreneurship.