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.
 Cont….
• Personalized Management: - It is the most characteristics
factor of all.
It implies that the owner actively participates in all aspects of
the management of the business, and in all major decision-
making process.
There is little delegation of authority and one person is
involved when anything material is involved.
• Technology: - Small business is generally labor intensive and
only few are technology intensive.
• Geographical Area of Operation: - The area of operation of
a small firm is often local. Generally, small business is a
business that is privately owned and operated, with a small
number of employees and relatively low volume of sales.
 As cited by Teshome Kobamo 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

2. Small businesses: Having the three features of microenterprise

and employing 6-49 workers

3. Medium scale enterprises –relatively higher share of the

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

4. 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

Birr
whose minimum paid up capital is not less than
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.
 Types of small business
There are three types of small businesses. These are:
1.Family Enterprises
Are locally owned and operated, often by one person called a sole
proprietor.
Proprietors may have started their businesses in an effort to
supplement or replace family income.
Many are service-based firms that rely on an owner’s skills.
Family owned businesses vary widely and can include retail
stores, contracting businesses, small manufacturing firms, and
restaurants among others.
In the absence of a successor, the life of a venture is limited to the
working life of its founder.
A florist, for example, may operate successfully until the founder
retires, but if no one exists to succeed the owner, the business is
sold or closed. Succession is a serious problem.
 2, Personal Service Firms (PSF)
Rely crucially on unique skills of their founders or
key employees.
In most instances, the business is the person, and
succession is unlikely unless a son or daughter
develops comparable skills.
Such diverse occupations as golf professionals,
interior designers, and freelance writers are
considered to be PSFs. Since the early 1980s, the
premier personal service firm has been the
computer service enterprise that provides: software
development, business consulting, office system
networking, and similar assistance to other firms.
 3, Franchises
Represent an extraordinary growth sector of the American
economy that is spreading overseas at an accelerated pace.
Franchises are created by contract.
An individual receives specific help and advantages in exchange
for a franchise fee and, usually, a percentage of sales.
The individual who buys a franchise is called franchisee, and those
who sell franchises, the patron corporations, are called
franchisors.
The franchisor develops a net work of income-producing
enterprises that share a common name, use common materials,
and sell similar products or services.
The franchisee may receive financial help, training, guaranteed
supplies, a protected market, and technical assistance with
matters such as site selection, purchasing, accounting, and
operations management. For example, McDonald.
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/determination/ 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/ security/
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
Thanks for your
participation!!