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small_businessWhat is a small business?

A small business is a business that is independently owned and operated, with a small number of employees and relatively low volume of sales.

Different countries have slightly different description for a small business.

For example, in United States a business have less than 100 employees is considered as a ‘small business’, whereas it is under 50 employees to qualify as a ‘small business’ in European Union.

In Australia, a small business is defined as 1-19 employees.

Small businesses are normally privately owned corporations, partnerships, or sole proprietorships.

Apart from number of employees other criteria for classifying a business as ‘small’ are:

  • Amount of capital employed
  • Annual Sales turnover
  • Value of assets
  • Profits

 

Importance of small business in the economy

As we all know that small firms are important for the economy.

  • Small businesses employees majority of the workforce in any country.
  • Every business starts small.
  • Small businesses are flexible and respond easily to changes in demand.
  • Small firms often cater to local demands.
  • In difficult economic times, such as a recession, small business can be an important source of providing employment.
  • Small firms provide competition to larger firms through providing customised goods and services.
  • Small firms provide niche products and services which a larger firm might overlook.

 

Small businesses face the following problems

  • Under capitalisation
  • Poor debt management
  • Lack of managerial skills of the owner
  • Cannot retain experienced staff
  • Usually find it difficult to attract skilled staff
  • Poor stock management

How can small business survive?

Small firms survive by being different (product differentiation). They can survive by

  • Segmenting the market by income. They can target niche market segments of high income customers, position their product as a ‘premium brand’ at a high ‘premium price’ eg Morgan sports cars
  • Small firms have the advantage of being able to respond quickly to change - they do not have the bureaucratic procedures often a feature of large firms where decisions are made only after endless meetings. This means they can be quick to exploit new market trends.
  • The Internet also allows small firms direct access to consumers, by passing intermediaries. The web gives small firms the opportunity of international marketing.
  • Small independent firms can join together to form a buying group to negotiate discounts on joint orders.
  • Small firms can survive by selecting a premium niche and offering an exclusive brand’ that exactly meets the customer requirements of their target segment. They will need to be totally customer orientated.
  • Keep well documentation for accounts receivable financing when unexpected expenses arrive. 

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