Small Business: Characteristics, Strengths, Reasons for Failure in Small Business

Small BusinessEntrepreneurship is exposed in the form of a small venture. Every big business today started as a small business. It is the first avenue by which an entrepreneur executes his /her innovative idea/ideas.

Historically, small business has played a key role in our civilization. It appeared more than 4000 years ago. Small businesses flourished in almost all ancient cultures of the world.

The Arabs, Babylonians, Egyptians. Jews, Phoenicians, and Romans excelled at it. The entrepreneurial zeal was the driving force behind all these small ventures.

Both the small business and entrepreneurship are the inseparable twin feathers of the same bird. Therefore, small business is vital for the development of entrepreneurship in every economy.

The definition of a small business varies from country to country and between times in the same country. There is no generally accepted concept of small business.

It defies easy definition too. The following discussion will deal with various concepts of small business adopted in various countries of the world.

Small business is an enterprise that is comparatively small in size, operating in a geographically localized area except its marketing, employed fewer than 100 employees. It is financed by one individual or a small group of individuals.

Characteristics of Small Business

Different countries have adopted different definitions of small business or industry.

Other than a legal framework or small business, there a general understands the smallness of business among the people operating in this type of business.

Experts have identified the following common characteristics of small business:

  1. The business, as a rule, is managed by the owner or owners of the firm. The management team of the business might consist of family members, relatives, and close friends.
  2. The responsibility for decision-making normally lies with one key executive, with very little or no delegation of authority. Small-business owner-managers maintain a high degree of concentration of authority. They do not delegate as they believe that if you want a thing done right, do it yourself.
  3. There appears to be a close management-employee relationship. Entrepreneurs take an active part in the management and operation of the firm. They develop a very intimate relationship with the employees by working along with them. Therefore, relationships are informal and friendly.
  4. Small business is an extension of the personality of the entrepreneur. It is the reflection of the dreams and desires of the entrepreneur(s).
  5. Generally, there are fewer functional specialists, such as a full­time accountant or a personnel manager, in the organization. The nature of work generally is not that complex. Moreover, if the work is complex, technically different, it is the owner who generally holds that capacity or who can strongly supervise the task with his/her strong command on the technology. Therefore, they can develop a skilled or semi-skilled person for their ventures. Other functional tasks are performed by the owner-mangers themselves with their learned knowledge or framing in a relevant field.
  6. The firm normally has no more than two tiers of management reporting, and the size of employment is made limited by the law of the specific country. In general, it does not exceed 1500 persons.
  7. In most cases, the owner-managers are verbal communicators. Least number of written communications is made within the small businesses. Instructions are generally made through oral media of communication.
  8. The firm often places little emphasis on long-term planning, although the owner-manager may be aware that a formal long-term plan is necessary. The owner-managers entrepreneurs are reluctant to make a plan as it requires a handful of intellectual exercise with past, present, and future data to profess the future. The demand for continuous adjustment with the current environmental conditions sometimes discourages entrepreneurs from making.
  9. Normally, the firm’s stock is not listed with a stock exchange.
  10. The management of the firm is independent. They are not subject to any other’s supervision. Entrepreneurs are the owner-managers of small businesses. They are the sole authority of the firm to decide about the organizational matters.
  11. The capital is supplied, and the ownership is held by an individual or a small group of individuals. Small businesses may take proprietorship, partnership, or private limited company. In any case, the number of owners is always limited, and they hold the total ownership, and they supply the required equity too.
  12. The area of operation is mainly local, with the workers and owners living in one home community. However, the markets need not be local.
  13. The relative size of the firm within its industry must be small, which is not dominant in the industry. A small business should not have a major share of the market.
  14. Doctors, dentists, and lawyers may fit all or some of these characteristics, but in most cases, they are considered professionals rather than small business operators.

Strengths of Small Business

The definition of a small business varies from country to country and between times in the same country. There is no generally accepted concept of small business. It defies easy definition too.

The following discussion will deal with various concepts of small business adopted in various countries of the world:

  1. Spurs of innovation

Small businesses are the major sources of innovation in our civilization. Substantive numbers of successful innovations are implemented by small businesses.

Sources of new materials, processes, ideas, services, and products that large business firms are reluctant to provide arc being provided by small businesses.

Thus, the small business acts as a spur of innovation lo millions of entrepreneurs throughout the world.

  1. Checks monopoly

Small businesses encourage competition by checking the development of monopolies by large businesses. It produces new products, methods, and services and so forth and checks large firms’ tendency to control the market.

It also provides differentiated products that give the market a wide spectrum of choices. Therefore, small businesses keep large firms on their toes.

  1. Creates employment

Small, young, high technology businesses create jobs at a much higher rate than do older, large businesses.

Statistics show that in USA industries dominated by small businesses added 1.1 million jobs, while industries dominated by big businesses lost 700,000 jobs.

It is also evident that 99.7 percent of the businesses of the USA have less than 500 employees, and thus, the small business is the single largest employer, too (Siropolis 1998:08).

  1. Produces people

Small business has more intimate knowledge of its communities: therefore, take more personal interest in them. It takes community projects. It produces people as well as goods and services.

It enables the community people to achieve a better-rounded balanced development than they could enjoy in large organizations. It provides them a greater variety of learning experiences in work activities.

People have greater freedom in making decisions and in perforating a greater variety of activities. It lends zest and interest to their work.

It also trains people to become better leaders and to use their talents and energies most effectively.

  1. Contributes to dross Domestic Products

Small business contributes to the national economy of every country of the world significantly. It generates 54 percent of the sales revenues and 40 percent of the gross national product.

Thus, making it a vital force in the American economy (SHA. 1995:3).

  1. Higher financial performance

The small business earns higher returns on owners’ equity (ROE) than large manufacture do. That is, for each dollar invested in the business, small business investors earn more than do big-business investors.

Because small business cart respond quicker and at less cost to quickening rate of change in products and services, processes, and markets.

It has also become more attractive to talented, individualistic men and women who successfully utilize the fund.

  1. Makes big business dependent

Small businesses provide business with many of the services, supplies, and raw materials they need. General Motors, for example, buy from more than 10,000 suppliers, most of whom are small.

It is because bug businesses cannot supply product and services as cheaply as do small businesses can effectively supply those goods and services cheaply whose sales volume is small, whose sales demands close personal contact with customers, and whose supply requires meeting each Customer’ s-untrue needs.

They also sell most of the products made by big manufacturers to consumers. Thus, bit; businesses are dependent on small businesses for their very survival in many respects.

  1. Develops risk-takers and fosters flexibility

Small entrepreneurs have relative freedom to enter and leave a business at will. They can start and grow, expand or contract, succeed, or fail as they feel comfortable with the situation.

This freedom is the essence of the free economy. It makes managers responsible for customers, employees, investors, and the community.

Moreover, they can switch their production readily you meet changing market conditions, can adapt themselves quickly to chatty mu demands within their fields and capacity, and even can chance field at low cost.

This environment of small businesses helps developing risk-takers in society and fosters flexibility in the practice of economic activities.

  1. Provides opportune grounds for women

Small businesses are the most opportune sources of self-employment tor women. About 2.8 million women are engaged in self-employment in small businesses in the USA (1998).

According to a study sponsored by the National Foundation for Women Business Owners in the USA, the number of women-owned businesses grew 78 percent between 1987 and 1996, and women now own 37 percent of all businesses (Gendron. 1996:11).

  1. The seedbed for the new venture

Small business is the seedbed for new ventures throughout the world. Many of the big-businesses today started small because of its many-fold start-up advantages in 1993, 700,000 new small businesses are started in the USA (SBA.1994).

  1. Career for new graduates

Small business is the right venture for the new graduates who welcome the challenge of innovative work, want to be decision-makers, want the freedom of owning a small business, or want to have a financial incentive which one could never obtain by working for others.

  1. Ease of entry

Small business does not require much formality to start.

Financial requirements are not high too. Entrepreneurs can choose almost any line of business they like. This freedom of opportunity guarantees them the right to launch their ventures.

Reasons for the Failure of Small Business

The bright side of the small business is not all small businesses. In contrast, the dark side reflects problems unique to small business- Its death rate is high.

Researchers have identified many reasons for the failure of small businesses in the developed and developing countries of the world.

The following are the description of those weaknesses or dements of small business:

  1. Inadequate management

The lack of managerial knowledge and skills is the vital cause of failure of the largest number of small businesses. It is more evident in the case of expanding a situation.

Anybody with any academic background and experience can go for starling his/her small venture.

No law can stop them from entering into their ventures. It is not recognized that managerial expertise is a priori condition for starting and operating a business.

This deters them from recognizing, hire, and tap the talents they need to survive and grow.

  1. Shortage of working capital

Working capital is the lifeblood of all business enterprises.

Small businesses, with a small capital base, faces a shortage of working capital to maintain a desirable level of operation. It also thwarts its expansion and its capacity to avail profitable opportunities.

Study shows that businesses that start with loo little investment by owners have a greater chance of failure than businesses with adequate investment by owners.

  1. Lack of balance

Small business does not maintain a proper balance among many interrelated affairs of the organization.

The significant reasons for such imbalance arc the lack of coordination between production and marketing, lack of proper record-keeping, lack of effective selling techniques, lack of coping with the increasing complexity of internal management, and lack of balance between having too few products so that sales are lost and diversifying too fast.

These lacks of balance make small businesses vulnerable to failure.

  1. Unabated entry

The chief reason for small business failure is the unabated entry. Any men and women can enter into small business without any hindrance.

They may have 20 years of experience in that line or none at all. They may do a textbook job of searching their markets or plunge in with no information at all. They may be millionaires or penniless.

Yet regardless of their qualifications, the small business is open to them.

But economists’ often point out; freedom of opportunity means not only the freedom to succeed but also the freedom to fail. Failure to sec this reality often causes untold stress, trauma, and tragedy.

  1. Lack of business experience

Small business run by people without prior industry experience is vulnerable to failure. People with any track record start small businesses and could not cope with operational problems and crises. Inexperience in a fine of operation makes decisions faulty and disastrous to the organizational continuity.

  1. Fraud or Disaster

Small business is vulnerable to many situations due to its inability to 10 sustain the damage. It may be caused by fraud, by fire, flood, burglary, criminal act, or by the death of owner-manager or a key person of the business. It affects its continuity in the market or sometimes causes the death of the firm.

  1. Insufficient inventory turnover

Small business faces inventory turnover problem that docs not only blocks the working capital but also risks the business for product obsolescence.

It also affects profit due to lack of sales and deters the smooth progress of the operation of the business,

  1. Improper markup

Small business does not set its price policy with sufficient market information rather goes on traditions cost-plus or competitive pricing.

It sometimes does not cover the expected rates of return necessary for maintaining the financial strengths of the firm. It is observed that small firms that fail, they fail because of insufficient return on their investment.

  1. Wrong location

Location is one of the fundamental reasons for the success and failure of small businesses. A common saying is that “the three most important factors in a small business success arc location, location, and locator.

Though exaggerated, it underscores the need for the right location for the small business.

Location is more vital in some industries than in others depending on whether customers must travel to the entrepreneur’s place of business or the entrepreneur must travel to customers, whether the business offers a unique product or service with little competition, or even on whether convenience is a key selling point.

However, it is well recognized that the wrong location seriously affects the success of small businesses.

  1. Poor credit-granting practice

Uncontrolled receivables or poor credit practices affect credit collection and due position.

It causes extra pressure on cash position and other working capital items; it also seriously handicaps the firm to maintain the daily operation.

Thus, many small businesses fail due to excessive blocking of a fund with the debtors due to poor credit granting practice.

  1. Non-business family background

I.ussier and Corman (1995 21) found that business owners whose parents did not own business have a greater chance of failure than the owners whose parents did own a business.

  1. Neglect

Little attention to the affairs of small businesses by the entrepreneur or owner-manager is a strong reason for the failure of small businesses.

Small businesses need absolute personal care, attention, and dose supervision, as it does not sustain any set back of any kind. Therefore, many small businesses fail due to neglect of their managing.

  1. Too much investment in fixed assets

Small businesses that have made an excessive investment in fixed assets face the problem of operating funds. It also requires high operating expenditures and, thus, needs high financial obligations too.

This heavy-head structure stalls the operative capacity and causes the failure of the small venture.

  1. Marketing inefficiency

The survival of the firm depends on generating sufficient sales from its market. Market creation, maintenance, and expansion arc the pivotal tasks of small businesses.

A study found that business owners without marketing skills have a greater chance of failure than others with marketing skills.

  1. Inefficient succession

Lack of succession or inefficient succession is a strong reason for early death or failure of small businesses. The majority of small businesses are sole-traders or partnership.

The sudden death of the entrepreneur or departure of partner/partners or incapability of entrepreneur calls for successors to take up the business.

  1. Leek of planning

Small businesses that do not prepare business plans have a greater chance of failure than businesses that do (Lussier and Corman, 19995:21).

There is general neglect in small businesses toward preparing a plan for that it loses its focus. Many small businesses fail because of unplanned action.

The success of small businesses depends on careful handling and overcoming the above-mentioned situations.

Every entrepreneur should rake necessary measures to prevent these reasons to protect his/her entrepreneurial venture from failure.

Scope of Small Business

The scope of small business is quite vast, covering a wide range of activities. Businesses that come within the distinct characteristics of small businesses are too many.

The industrial policy 2005 has mentioned a list of’ industrial activities that come within the scope of small businesses.

The National Taskforce on Development of Small and Medium Enterprises has also pointed out some area where small and medium enterprises cm successfully operates The following arc a list of the area of activities where small business will fit best:

  • Electronics or Electrical.
  • Software-development.
  • Light -engineering and metalworking.
  • Agro-processing/ agro-business/plantation agriculture/specialist farming/tissue-culture.
  • Leather-making and leather goods.
  • Knitwear/Ready-made Garments.
  • Plastics and other synthetics products.
  • Healthcare and diagnostics.
  • Educational services.
  • Pharmaceutical/cosmetics.
  • Fashion-rich personal effects.
  • Car and consumption goods.
  • Fast-food and frozen food.
  • Food processing and food assembling.
  • Paper printing and publishing.
  • Small fabrication.
  • Poultry farming.
  • Fisheries.
  • Lea gardening and processing.
  • Vegetable seed farming.
  • Floriculture.
  • Construction.
  • Cold storage.
  • Furniture.
  • Computer assembling.
  • Transportation, including automobiles.
  • Battery.
  • Glass and Ceramics.
  • Multilateral jute goods products.
  • Rubber.
  • Retailing, wholesaling.
  • Tourism, indenting.
  • Hotel, restaurant.
  • Cybercafe.
  • Mineral water.
  • Garments.
  • Stationery items.
  • Natural essential oils.
  • Organic chemicals and chemicals.
  • Boats and truck body buildings.
  • Auto parts components.
  • Miscellaneous transport equipment.
  • Sports goods.
  • Clocks and watches.
  • Servicing or repairing.
  • Financial like money exchange and many others.

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