What 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
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.