CHAPTER 5

SMALL BUSINESS: A PROFILE

A small business is one which is independently owned and operated for profit and is not dominant in its field.

ATTRACTIVE SMALL-BUSINESS INDUSTRY CHARACTERISTICS

 Low initial capital investment

 Some special skill requirements
 High growth and profit potential

INDUSTRIES THAT ATTRACT SMALL BUSINESSES

Growing industries are attractive because of their profit potential. However, knowledgeable
entrepreneurs choose areas with which they are familiar, and these are most often the more
established industries. The various kinds of businesses generally fall into three broad categories of
industry:

1) Distribution industry
This category includes retailing, wholesaling, transportation, and communications – industries
concerned with the movement of goods from producers to consumers. Distribution industries
account for approximately 33% of all small businesses.

2) Service industry
This category accounts for more than 48% of all small businesses. About ¾ provide
nonfinancial services such as medical and dental care, haircutting, restaurant meals and dry
cleaning. About 8% offer financial services.

3) Production industries
Includes the construction, mining, and manufacturing industries. Only about 19% of all small
businesses are in this group, mainly because these industries require relatively large initial
investments.

1
THE PEOPLE IN SMALL BUSINESSES: THE ENTREPRENEURS

CHARACTERISTICS OF ENTREPRENEURS
 Entrepreneurial spirit is the desire to create a new business.

OTHER PERSONAL FACTORS

 Independent
 A desire to determine one’s own destiny
 A willingness to find and accept a challenge
 Family background
 Age

MOTIVATION
 He or she simply has “had enough” of working and earning a profit for someone else.
 Losing a job and decide to start the business he or she has always wanted rather than to seek another job.
 Have an idea for a product or new way to sell an existing product.
 The opportunity to go into business may arise suddenly, perhaps as a result of a hobby.

WHY SOME ENTREPRENEURS AND SMALL BUSINESSES FAIL

Capital management and planning are the key ingredients in the survival of a small business, as well as the
most common reasons for failure. Businesses van experience a number of money-related problems.
Entrepreneurs need the money to open the business and to operate it in its possibly lengthy start-up phase.

Many entrepreneurs lack management skills required to run a business.

THE PROS AND CONS OF SMALLNESS

PROS CONS
Personal relationships with customers and employees Risk of failure
Ability to adapt to change Limited potential
Simplified record keeping Limited ability to raise capital
Independence
Advantages of sole proprietorships
 Keeping all profits
 Ease and low cost of going into business
 Keeping business information secret

2
DEVELOPING A BUSINESS PLAN
A business plan is a carefully constructed guide for the person starting a business. It has three basic purposes:

1. Communication – Concise document that potential investors can examine to see if they would like to invest
or assist in financing a new venture.
2. Management – It helps to track, monitor, and evaluate the progress.
3. Planning – It guides a businessperson through the various phases of business.

Components of a business plan

FRANCHISING
A franchise is a license to operate an individually owned business as if it were part of a chain of outlets or
stores. Franchising is the actual granting of a franchise. A franchisor is an individual or organisation granting a
franchise. A franchisee is a person or organisation purchasing a franchise.

TYPES OF FRANCHISING

Franchising arrangements fall into three general categories.

1. A manufacturer authorizes a number of retail stores to sell a certain brand-name item. This type of
franchising arrangement is prevalent in sales of passenger cars and trucks, shoes and paint.
2. A producer licenses distributors to sell a given product to retailers. This arrangement is common in the
soft drink industry.
3. A franchisor supplies brand names, techniques, or other services instead of a complete product.

3
THE GROWTH OF FRANCHISING
ADVANTAGES OF FRANCHISING

TO THE FRANCHISOR
TO THE FRANCHISEE
• Fast and well controlled – Opportunity to start a proven business
distribution of its products with
• No need to construct and limited capital
operate its own outlets – Guaranteed customers
• More working capital – Franchisor available for advice and
available for expanded production and guidance
advertising – Materials for local promotional
• Franchising agreements campaigns
and participation in
maintain product and quality
national campaigns
standards – Cost savings when purchasing in
• Motivated work force of cooperation with other franchisees
franchisees

DISADVANTAGES OF FRANCHISING
TO THE FRANCHISOR TO THE FRANCHISEE
– Failure of the franchisee • Franchisor retains a large amount of
to operate franchise control over the franchisee’s activities
properly • Franchisor opening competing
– Disputes with and lawsuits franchises within the franchisee’s
by franchisees over the market
terms of the franchise