Small Business – A Profile

Small Business – one that is independently owned and operated for profit and is not dominant in its field.

Small Business Sector

Small Business Administration (SBA) developed ‘smallness’ guidelines for US businesses.

Of the 23,000,000 businesses in the US, only 17,000 employ more than 500 workers -- .75%

Part-time entrepreneurs account for 1/3 of all small businesses.

With 70% of new business failing within 5 years of starting, the small business sector is always changing.

Small businesses provide approximately 50% of the jobs in the US.

Industries Attracting Small Businesses

Usually industries requiring a low initial investment and some special skills or knowledge.

Small businesses might include: selling gasoline, flowers or coffee to go; publishing magazines, hauling freight, teaching languages or programming computers; building new homes or fixing old ones, fixing appliances, recycling materials or selling used cars; driving taxi cabs, flying airplanes, etc.

Generally fall into three categories: distribution, service and production industries

Distribution Industries

Includes retailing, wholesaling, transportation and communication

Concerned with moving goods from the producers to the customers

Wholesalers buy products in quantity from manufacturers and then resell them to retailers.

Retailers may include: clothing, jewelry stores, pet shops, bookstores, grocery (cold) stores, etc.

Service Industries

Provide services such as: medical and dental care; watch, shoe, TV repairs; haircutting and styling; restaurant meals; dry cleaning, etc.

Other services might include: financial services (accounting, insurance, real estate, investment counseling, etc).

Some service businesses can be run from home.

Production Industries

May include: construction, mining, and manufacturing industries.

Small number of these exist as these industries can require a large initial investment.

Many of these small businesses make parts or special assemblies for larger manufacturers or provide special skills to larger construction firms.

Entrepreneurs

People who risk time, effort, and money to start and operate a business.

See Figure .1, page 170.

Why People Start Businesses. . .

‘Entrepreneurial Spirit’ – the desire to create a new business

IndependenceDesire to determine one’s own destinyWillingness to find and accept a challengeInternet creates perfect environment for

entrepreneurs (including teens) because start-up costs are relatively small – computer, modem, phone line and Internet domain name.

Why People Start Businesses. . . (continued)

A person may decide he or she has ‘had enough’ of working and earning money from someone else.

Loss of a job for some reason – decides to start own business rather than work for someone else again.

May have an idea for a new product or a new way to use or sell an existing product.

Opportunity to go into business may arise suddenly sometimes as a result of a hobby.

As he or she gains the knowledge and experience required to start a business working for someone else, motivation to start a business develops.

Why Small Businesses Fail. . .

Starting a small business requires much more than energy and a good idea!

If a small business is to be successful, money, time, personnel and inventory all need to be managed effectively.

Many entrepreneurs lack management skills required to run a business.

Success and expanding too quickly sometimes lead to problems.

Almost 70% of small business fail within the first 5 years of operation.

Importance of Small Businesses to the Economy

Many small businesses started by finding new ways to do a job with less effort for less money. (Ford Motor Company, Polaroid,

Xerox, etc.)

1. Providing Technical Innovation Small businesses are responsible for 2 ½ times

as many innovations as large firms relative to the number of persons employed.

Examples: penicillin, insulin, power steering, personal computers, instant cameras, air conditioning, airplanes, helicopters, etc.)

Importance of Small Businesses to the Economy (continued)

2. Providing Employment Small businesses contribute significantly

to solving unemployment problems. Small businesses employ about 50% of

the private force and provide about 2/3 of new jobs added to the economy.

Small businesses provide 67% of workers with their first jobs and initial on-the-job training in basic skills.

Importance of Small Businesses to the Economy (continued)

3. Providing Competition Small businesses as a group competing

in one particular area can cause a larger business to become more efficient and more responsive to consumer needs.

Importance of Small Businesses to the Economy (continued)

4. Filling Needs of Society and Other Businesses

Large businesses must operate on a large scale and may be unwilling or unable to meet the special needs of smaller groups of consumers (companies who equip cars with devices to allow people with special needs to drive).

Small businesses provide a variety of goods to each other and to much larger firms (GM relies on about 32,000 companies for parts and supplies to make their cars and more than 11,000 independent dealers to sell its cars and trucks).

Debenhams, British Home Store and other intermediary businesses purchase their merchandise from many small businesses for resale in their stores around the world.

Advantages of Smallness. . .

1. Personal Relationships with Customers and Employees

Owners of small shops get to know many of their customers by name and deal with them on a personal level.

Small-business owners often become involved in the social, cultural and political life of the community (Bahrain Chamber of Commerce elections).

Owner/employee relationship tends to be closer as owner may be not only boss but counselor, which may help owner to keep effective workers who might otherwise jump to a larger business.

Personal service provided to customers may be a major weapon which larger firms may not be able to match.

Advantages of Smallness. . . (continued)

2. Ability to Adapt to Change

Owner of small business does not need anyone’s permission to adapt to change.

He or she may add or discontinue merchandise or services, change store hours or experiment with various price strategies in response to market changes very quickly.

Through personal relationships with customers, the owner of a small business quickly becomes aware of changes in people’s needs and interests, as well as in the activities of his or her competition.

Advantages of Smallness. . . (continued)

3. Simplified Recordkeeping

Usually requires only a simple set of financial records

Cheque book Cash receipts journal to record all sales Cash payments journal to record all

payments

Advantages of Smallness. . . (continued)

4. Independence

Owner does not have to punch in or out. Owner does not have to bid for vacation time. Owner does not have to take orders from

anyone. Owner does not have to ask permission to make

changes. Owner does not have to worry about being

promoted, laid off or fired. For many owners, these are the reasons they

decided to own their own businesses.

Advantages of Smallness. . . (continued)

5. Same Advantages as Sole Proprietors

Retention of profits Ease and low cost of going into business Ease of ending business Ability to keep information secret

Disadvantages of Smallness. . .

1. Risk of Failure

2/3 of small businesses close their doors within five to six years of opening.

Small businesses can be hit hard by a business recession because they do not have the financial resources to stay in business until the market recovers.

Disadvantages of Smallness. . . (continued)

2. Limited Potential

Small businesses are most likely not going to grow into large businesses due to owner’s limited technical or administrative skills.

Employees also have a limited potential for advancement.

Disadvantages of Smallness. . . (continued)

3. Limited Ability to Raise Capital

Personal loans from banks and other lending institutions provide only about ¼ of the capital for small businesses.

Half of new small businesses begin with capital provided by the owner, his family members or friends.

Banks are not willing to risk making large loans to small businesses owned and operated by one person.

Pros and Cons of Smallness. . .

Advantages:

Personal Relationships with Customers and Employees

Ability to Adapt to Change Simplified Recordkeeping Independence Retention of Profits Ease and Low Cost of Going

into Business Ease of Ending Business Ability to Keep Information

Secret

Disadvantages:

Risk of Failure Limited Potential Limited Ability to Raise Capital

Franchising

A Franchise is a license to operate an individually owned business as though it were part of a chain of outlets or stores.

Examples: Pepsi, Coca-Cola, Ford, BMW, McDonald’s, Taco Bell, Dairy Queen, Costa Coffee, Hard Rock Café, etc.

Franchising. . . (continued)

Franchising is the act of granting a franchise (license) to an individual or group.

A franchiser is the individual or organization granting a franchise (license).

A franchisee is a person or organization purchasing the franchise (license).

See Table 6.4, page 192.

Types of Franchising. . .

1. Manufacturer authorizes a number of retail stores to sell a certain brand-name item.Examples: passenger cars, trucks, farm equipment, shoes, paints, petroleum, etc.

approximately 90% of all gasoline is sold through franchised, independent retail service stations.

Almost all sales of new cars and trucks are handled by franchised dealers.

Types of Franchising. . . (continued)

2. A producer licenses distributors to sell a given product to retailers.

Examples: common in soft-drink industry – franchise independent bottlers who then sell to retailers

Coca-Cola Company Dr Pepper/Seven-Up Companies PepsiCo

Types of Franchising. . . (continued)

3. A franchiser supplies brand names, techniques, or other services instead of a complete product.Franchiser is concerned with quality control – development and marketing strategies.

Examples: Holiday Inns, McDonald’s, Burger King, Dairy Queen, Hertz Corporation, Avis, Kentucky Fried Chicken, Subway/TCBY, Radio Shack, Century 21 Real Estate, etc.

Is Franchising Successful? …

Franchising is designed to provide a tested formula for success, along with ongoing advice and training.

94% of franchisees report that they are very or somewhat successful.

However, too rapid expansion, inadequate capital or management skills can cause failure for both franchisers and franchisees.

Advantages of Franchising. . .For Franchiser:• Gains fast and well-controlled

distribution of its products without incurring the high cost of constructing and operating its own outlets.

• Has more capital available to expand production and to use for advertising.

• Can ensure, through the franchise agreement, that outlets are maintained and operated according to its own standards.

• Since franchisee is likely to be very highly motivated to succeed, higher royalties will be paid to the franchiser.

For Franchisee:• Opportunity to start a business with

limited capital and to make use of the business experience of others, as an outlet with an internationally recognized name has guaranteed customers as soon as it opens.

• If business problems arise, the franchiser gives the franchisee guidance and advice.

• Franchisee also receives materials to use in local advertising and can take part in international promotional campaigns sponsored by the franchiser.

• Franchisee can save money on advertising, supplies and various business necessities by purchasing them with other franchisees.

Disadvantages of Franchising. . .

Main disadvantage is that the franchiser retains a great deal of control.

Franchise agreement may dictate what the décor should be, the design of the employee uniforms, types of signs and all details of the business operations.

Franchisee pays for security, usually with a one-time franchise fee and continuing royalties and advertising fees, collected as a percentage of sales.

If a franchisee becomes very successful, the franchiser may choose to license another franchise in a nearby area.

Franchisees may put in ten- and twelve-hour days, six to seven days a week.

Franchisor must approve the sale of the franchise, by the franchisee, to another buyer.