The Nature of Small Business

 

© 2007 John Wiley & Sons Australia, Ltd

 

Chapter

4

The nature of small sm all business

 

Chapter

‡ Defining

outline

small business

‡ Characteristic

features of a small features

business ‡

The economic significance of the small-business sector 

‡ Entrepren ntrepreneur eur

or small-business owner-manager?

 

Learning objectives

‡ Define

what constitutes a small business what

‡ Identify

the key characteristics that make small businesses different from other  types of business organisations

 

Learning objectives

‡ List

the advantages and disadvantages of  starting and operatin operating g a small business

‡ Outline

the importance of small sm all business in the economy

‡ Explain

the difference between small

business management and  entrepreneurship

 

Definition

‡

small business

Small business: a small-scale, independent firm, which is usually managed, funded and operated by its owners, and whose staff size, financial resources and assets are comparatively limited in scale.

‡ Most definition efinitions s

are a m miixture of both qualitative and quantitative measures.

 

Generic

definitions

Qualitative criteria for small business: ‡ Independently

owned and operated  (not part of a larger corporation)

‡

The owners contribute most, or all, of the operating capital (i.e. they bear the risk and they are entitled to the profits)

 

Generic

definitions

Qualitative criteria for small business: ‡

The owners owners make m ake most decisions and are not answerable to anyone else (owner-managers)

‡

The business has a small market m arket share

 

Generic

definitions

Quantitative variables that are used to categorise and sort businesses include: ‡

the number of staff 

‡

wages and salaries expenditure

‡

legal structure

‡ ‡

total annual turnover (sales revenue) value of firm assets

‡

share of ownership that is held by the owner/manager(s)

 

National

definitions of small business

‡

The most commonly-cited definition is that provided by the Australian Bureau of  Statistics (ABS)

‡

Accor ding to the ABS, there are four  principal categories of businesses:

 

Australian definitions

‡ Micro-enterprise icro-enterprises, s,

which employ less than 5 full-time staff (or equivalent number of  part-time positions). positions). T This his includes self-employed people who work on their  own.

‡

v

Small e between 5 valent) staff. and 19businesses, full-time (orwho equiha

 

Australian definitions

‡ Medium

businesses, consisting of firms employing 20±199 people.

‡ Large

firms consist of businesses with two hundred or more staff. Collectively, micro-enterprises, small  businesses and medium-sized medium-sized firms are referred to as SMEs (small and  medium-sized enterprises).

 

International

definitions of  small business

 

Characteristic

features of a features

small business ‡ Usually

only 1 or 2 owners

‡ Financing ‡

provided by the owner 

The business has limited market share

‡ Often

has a limited life span

‡

Sometimes run on a part-time basis

‡

There is a low level of net profit

 

Characteristic

features of a features

small business ‡ Limited ‡ F ‡

product or ser vice offering d

requently is a home-base business Geograph eographically ically lim limite ited to one or two locations

‡ Is

often a family-based business

‡ Is

only located in the private sector 

 

Differences

between small

and large businesses Compared

to large corporations, small firms

tend to: ‡ Have

more female owner/managers

‡ Have

managers with fewer qualifications

‡ Have

fewer unionised employees

‡ Operate ‡

for fewer hours each week

Be less likely to use formal management improvement and planning techniques

 

Differences

between small

and large businesses ‡

Be less likely to access government assistance

‡

Be less likely to export

‡ Use

less external financing

‡

Be less likely to want to grow bigger 

‡

Be more likely to fail

 

The

advantages of operating a small business

‡

Being your own boss

‡ C

d

an work align personal goals an interests with ‡ Potential ‡ Provide

financial rewar ds

support/jobs/opportunities to

family members

 

isadvantages s Disadvantage

of operating

a small business ‡ Uncertainty,

ambiguity and constant

change ‡

Stress

‡ Potential

for financial loss

‡ Increased ‡ Need

responsibilities

to be multi-skilled

 

Factors

leading to success and failure

‡ Five

comm on area common areas s of failure:

F

± inance ± Marketing ± Production ± Personnel ± Personal

 

Factors

leading to success and failure

‡

Business Exit: Any situation where a business ceases to exist, such as firm closure, liquidation, bankruptcy, sale or  transfer to another owner, or merger.

‡ Recent

research in Australia indicates

that approximately 7.5% of all businesses exit each year.

 

Factors

leading to success and failure

‡

The cumulative effect is that about two-thir ds of all businesses still exist after  5 years, half are still trading after  10 years, and about one-thir d remain after 15 years.

 

The

economic significance of the small-business sector 

Small firms are important to all national economies because they provide: ‡ Employment ‡

opportunities

The next generation of large firms

‡ Competition ‡ Innovation ‡

An outlet for entrepreneurial activity

 

The

economic significance

of the small business sector  ‡ Exports ‡ ‡

d

d

d

v

Specialise pro ucts an ser  ices Support to big business

‡ Decentralisat ecentralisation ion

regional areas)

(economic activity in

 

The

economic significance

of the small business sector  ‡ More

equitable distribution of economic resources, wealth and opportunities

‡ Flexibility

in the overall economy

 

National

and regional economic significance

‡

Small businesses are a major economic force in the Pacific Rim and around the world

‡ 45

million SMEs in APEC, representing 95% of all firms, and employing 60% of  the workforce

 

Entrepreneur ur or small-business Entreprene owner/manager? ‡ Entrepreneur:

±

discovers/generates, evaluates and  exploits new business opportunities

± starts or grows an enterprise based on these ideas ± adds value to society based on their  independent initiative.

 

Entrepreneurr or small-business Entrepreneu owner/manager? ‡ Not

all small business owners fit this category. Many small firms do not actively seek out new ideas or business opportunities.

‡

v

The terms frequently o erlap, but are not always synonymous.

 

Difference

between entrepreneurship

and small-business management

 

Summary

‡

There is no single definition of what constitutes a small business, and a variety of both qualitative and quantitative factors can be used to separate small firms from other businesses.

 

Summary

‡

Small firms share a number of typical characteristics that separate them from other types of business organisations. These include a smaller sm aller market share share,, a small ownership ownership base, a limited life span d

d

an limite net profit.

 

Summary

‡

The advantages of owning a small business include the freedom to pursue one¶s own goals, flexibility and personal achievement. The disadvantage antages s include an increased exposure to uncertainty and  d

risk, financial loss an personal stress.

 

Summary

‡

Small businesses are a major economic force throughout the Pacific Rim region.

‡

The concept of small business management differs from the concept of  entrepreneurship.