CHAPTER TWO

SMALL BUSINESS MANAGEMENT

--- Small business is a business
which is independently owned
and operated, not dominated
in its field of operation and
meets certain standard of
number of employee and
capital.
--------A small business is a
business that is privately
owned and operated, with a
small number of employees
and relatively low volume of
sales.
1
== The two approaches to define small business
enterprises are:
------- Size criteria-quantitative approach
------- Economic/ control criteria-qualitative approach
Size criteria
Sales volume
Number of employees
Asset size
Volume of deposit
Insurance in force
Economic/ control criteria
o Market share : Small firms market share is that it is not
large enough to enable it to influence the market price and
quantity of the national goods sold at any significant extent
o Independence: The owner has control over the business by
himself.
o Management style: implies that the owner actively
participates in all aspects of the management of the business
and in all decision making processes. There is only every little
devolution or delegation of authority.
=== The most widely used criteria to define small business:
number of employees and
amount of capital.
 As cited by Endalkachew Mulugeta in Ethiopian
context:
• Small businesses are those business enterprises with a
paid-up capital of above 20,000 birr and not
exceeding 500,000 birr, and excluding high Tech
consultancy firms and other technology
establishments.

• Micro enterprises: are those businesses that have a

paid-up capital of less than 20,000 birr, and excluding
high tech consultancy firms and other technology
establishments.

• Large and medium enterprises, by default, are those

with more than 500,000 birr in paid-up capital.
 Definition by the Central Statistics Authority(CSA):
1. Micro enterprises: Independently owned & operated;
small share of the market; managed by owners;
Employing 5 or less employees

1. Small businesses: Having the three features of

microenterprise and employing 6-49 workers

2. Medium scale enterprises –relatively higher share of

the market & independently or jointly managed by the
owner and employee 50-99

3. Large enterprise –employee 100 and above

 Definition by the Ministry of Trade and Industry
Micro business organizations means trade enterprises
whose capital is not exceeding Birr 20,000.00.

Small business organizations means trade enterprises

whose minimum paid up capital is not less than Birr
20,000.00 and not exceeding from Birr
500,000.00.

Micro and small business work sectors excludes;

------ higher consultancy service organizations,
-------higher technological institutions
 Characteristics of Small Business

Actively managed by its owner

independent Management
No or few management layers
Style of management is highly personalized.
Relatively small in size
Largely dependent on the internal resources of
capital to finance its growth.
Limited resources
 limited share of a given market.
The small business does well;
---- in small, isolated, overlooked and imperfect
market.
---- in developing markets as it can easily
absorb the changes.
---- in a bad business condition due to
having quick and clever capability of
bringing changes in cost and labor.
The Importance of Small Business Enterprises

Greater value in building up a local

production structure and in promoting
economic growth.
creating employment opportunity, and
achieving a fair distribution of nation
resources, income, knowledge and power
A seedbed for development of local
entrepreneurship.
Promote rural industrialization
More appropriate technology is applied
Supplier of parts and accessories to
bigger industries
Play prominent role in promoting the
export market
Factors that Contribute to the Success of
Small Business
Hard work, drive and dedication
Market demand for products/ services
provided
Independent management
Common Causes for Small Business Failure

Managerial incompetence/ inexperience

Neglect
Weak control system
Under capitalization
Failure to clearly define and understand the
market, the customers, and the customers'
buying habits.
Poor financial control
Over investment in fixed asset
Failure to plan current as well as future operation
Improper Attitude (The entrepreneur may not respect
time, employees and may have lazy lifestyle and
dictatorial style of work)
Failure to adopt proper inventory control system
Inadequate marketing plan
Incorrect market identification
Poor distribution channel
Poor location
Weak marketing communication or promotion
Problems in Ethiopian Small Business
1. Lack of Capital: Many business owners raise this
as a major problem.
• The survey indicated that the main financial
resources for start-up and expansion of MSEs
came from;
Personal savings and
Family support.
• Entrepreneurs find it very difficult to access credit
from banks due to;
 Lack of collaterals
the small loans provisions, with a short repayment
period and high interest rates.
2. Land and Premises: many owners of MSEs, run
their businesses in rented premises and high rental
charges have hinder the success of many
businesses as some charges are higher than the
capacity to pay.

3. High Taxation: In Ethiopia, according to Article

68(1) and (2) of Income Tax Proclamation-No
286/2002, Standard Assessment method is used to
determine the Income Tax liability of Micro and
Small Business Enterprises under Category C
taxpayers.
 The study revealed that the tax assessment that
should be done arbitrarily is high and become the
cause for the failure of MSEs.
4. Poor Markets and Market Information
• The majority of MSEs target the low income
market areas because of law entry barriers.
• Enterprises in this market tend to compete for the
same customers.
 Small business venture VS Entrepreneurial venture
• A small business venture is:
– any business that is independently owned and
operated,
– not dominant in its field, and
– does not engage in any new marketing or innovative
practices.
• An entrepreneurial venture
– The principal goals of an entrepreneurial venture are
profitability and growth, and
– the business is characterized by innovative strategic
practices.
• A small business owner is
– an individual who establishes and manages a business
for the principal purpose of furthering personal goals.
– The business must be the primary source of income
and will consume the majority of one’s time and
resources.
– The owner perceives the business as an extension of
his/her personality, bound with family needs and
desires.
• An entrepreneur is
– an individual who establishes and manages a business
for the principal purpose of profit and growth.
– The entrepreneur is characterized principally by
innovative behavior and will employ strategic
management practices in the business.
 Setting Small Business
Business Ideas

• Many businesses fail, not due to a deficit of

commitment and hard work, but because the idea
wasn’t a good one to begin with.
---- A business idea is some one’s opinion regarding
what may or may not be a good business.
Three types of business ideas:

Old Idea: an individual copies an existing

business idea from someone.
Old Idea with Modification: the person accepts
an old idea from someone and then modify it
in some way to fit potential customers’
demand.
A New Idea: the invention of something new for
the first time.
Sources of Business Ideas
Customers
Existing companies
Distribution channels
Research and Development units
Government
Divine force
The Start up Process of a Small Enterprise
Starting a new business requires the following
steps:
STEP 1: Identification of New Venture Opportunities
STEP 2: Evaluation and Selection of New Venture Opportunities
STEP3: Technical, Marketing and Financial Feasibility of the
Identified Project
STEP 4: Assessment of Personal Requirements and Organizational
Capabilities
STEP 5: Analysis of Competition
STEP 6: Developing Action Plans
STEP 7: Implementation and Evaluation
 Roads to Small Business Ownership

Getting Into Business

Acquire a Start a new

Buy an existing Take over
franchised business from
business a family business
business scratch
 1. Buying an Existing Business

It tends to reduce the risks.

When buying a business:
◦ Enable us instantly acquire a known product or service
and a system for producing it.
◦ Established a reputation, customers and employees.
Focus will be on making improvements.
 2. Taking Over a Family Business
• Family Businesses
– Characterized by two or more members of the same
family who ,control, are directly involved in, and
own a majority of the business
• What is Different About Family Businesses?
– The complex interrelationships of family members
interacting with one another and interacting with the
business
 3. Starting a New Business
• Starting a new business from scratch allows the
owner to overcome the shortcomings of an
existing business and to put his or her personal
stamp on the enterprise.

• The entrepreneur also has the opportunity to

choose suppliers, bankers, lawyers, and
employees without worrying about existing
agreements or contractual agreements.
More uncertainty is involved in starting a new
business, than in taking over an existing one.
The entrepreneur
◦ starts out with less information about projected
revenues and cash flow,
◦ has to build a customer base from zero, and
◦ may be forced to accept unfavorable credit terms
from suppliers.
Because it is an unknown entity, a new
business may have difficulty in borrowing
money.
 Advantages of Starting from Scratch
1. Creating whatever you feel is appropriate.
2. Creating your own distinctive competitive
advantage.
3. Experiencing the challenge of beginning a
new enterprise.
4. Taking pride in realizing personal goals.
5. Having no carryover baggage of someone
else’s mistakes, location, employees, or
products.
 Disadvantages of Starting from Scratch
1. Facing a higher risk of failure.
2. Having more trouble in identifying market
needs that you are able to satisfy.
3. Having to inform people that your business
exists.
4. Dealing with all of the details that you didn’t
foresee.
 4. Franchising
• An alternative to buying an existing business or starting
one from scratch is to buy a franchising in somebody
else’s business.
• This approach enables the buyer to use a larger
company’s trade name and sell its products or services in
a specific territory.
• In exchange for this right,
• the franchisee (the small business owner who contracts to
sell the goods or services) pays the franchisor (the
supplier) an initial fee and often monthly royalties as
well.
• Franchise: Contractual license to operate an individually owned
business as part of a larger chain
• Franchisor: Parent firm that develops a product or business process
and sells the rights to franchisees
• Franchisee: Small business person who purchases the franchise in
order to sell the product or service of the franchisor
• The Franchise Agreement: The legal contract that binds
both parties involved in the franchise and that spells out
the rights and obligations of both parties.
• Franchise fee: A one-time payment to become a franchisee
• Royalty fee: Ongoing payments to the franchisor; usually a
percentage of sales.
• Advertising fees: Fees paid to the franchisor for advertising

Franchises are of three basic types:

1. A product franchise: gives you the right to sell trademarked
goods, which are purchased from the franchisor and resold.
Car dealers and gasoline stations fall into this category.
2. A manufacturing franchise:, such as a soft-drink bottling
plant, gives you the right to produce and distribute the
manufacturer’s products, using supplies purchased from the
franchisor.
3. A business-formant franchise: gives you the right to open a
business using a franchisor’s name and format for doing
business.
End of Chapter 2