CHAPTER FOUR
SMALL BUSINESS:
VITAL COMPONENT OF
THE ECONOMY
Definitions of Micro and Small enterprise/Small Business
The terms Micro-enterprise and small-enterprise refer in
the first place to the size of the business.
For a long time, the concept of ‘informality’ has also
used to characterize micro and small enterprise,
informality here refers to the informal nature of the
employment process (no contract of employment and low
wages) and to the fact that most of such business are not
registered.
BUT
At present in most countries, a combination of the
number of workers and invested capital are used as a
yardstick.
• Such enterprises usually include small service businesses, bakeries,
metal working business, small furniture maker’s repair and maintenance
business, copying business, small scale food production business, etc…
• The lower limit in the microenterprise category is the one-person
business.
• The upper limit is often fairly arbitrarily, drawn at business with a
maximum of 10 employees and/or maximum capital of about US Dollar
50,000.
• Generally, there are two approaches to define a small business
enterprise. These are:
Size criteria and
Economic/control criteria
A. Size Criteria
Though the criteria used to measure the size of business may vary,
the following criteria are commonly used to measure the size of
businesses
• Sales volume
• Number of employees
• Insurance in force
• Volume of deposits
B. Economic/Control Criteria
• Market share - the market share of a small firm is not large
enough to enable to influence the prices of national goods sold to
any significant extent.
• Independence - The owner of a small business is independent in
that he/she has full control over the business.
• Personalized management - It is the owner who actively
participates in all aspects of the firms’ management and in all
major decision making processes. Thus, there is little or no
devolution of delegation of authority.
• In Ethiopian context, definition given by ministry of Trade
and Industry micro enterprises in Ethiopia are defined as
those firms with less than ten workforces and with a paid
up capital of not exceeding birr twenty thousand.
• While the small enterprises are defined as those ventures
with less than ten workforces and with paid up capital of
not exceeding birr fifty thousand.
• And this definition has been revised in 2010/11 again…
Economic, Social, and Political Aspects of
Small Business Enterprise
• Developing countries are devoting attention to the
development of MSEs in a variety of ways.
• Why it is important to give due attention to
the development of MSEs?
Cont’d
The following are the major vital roles MSEs
can play in the socio-economic development of
a nation:
o They have greatest value in building up a local
production structure and in promoting
economic growth
o Create employment opportunity and
achieving a fair distribution of national income,
knowledge and power
Cont’d
o Can be a seedbed for the development of
local entrepreneurship
oPromote rural industrialization
o Serve as suppliers of parts and accessories
to bigger industries
oPromoting the export market
What are the benefits one gains in
participating in the MSEs sector?
The benefits of owning small business
• Opportunity to gain control over own destiny
• Opportunity to reach your full potential
• Opportunity to rap unlimited profits
• Opportunity to contribute to society and be recognized for
your efforts
Why are Small Businesses Important to the Economy?
Providing job opportunities
Introducing innovations
Stimulating economic competition
Aiding big businesses: (supply and distribution function)
Producing goods and services efficiently
The Potential Drawbacks of Small Business Ownership
• Uncertainty of income
• Risk of losing your entire invested capital
• Long hours and hard work
• Lower quality of life until the business gets established
• Complete responsibility
Small Business Failure factors
This includes External factors & Personal Short Comings
A. External factors of failure
Economic condition /business cycles
Fluctuating interest rates
Interrupted supplies
Labor market trends
Inflation
B. Personal factors of failure
Inexperience
Arrogance
Mismanagement
-Over investment in fixed asset
-Poor inventory control
- Poor financial control
- Lack of planning
Problems of Small Business in Ethiopia
A. Financial
Lack of adequate finance and credit
They do not have access to industrial sources of finance because
of there size
high rate of interest to borrow
B. Production
Find it difficult to get raw materials of good quality and at
cheaper rates
Do not get raw materials in time
Because of their financial position they are not able to buy new
equipment consequently their productivity is low
C. Marketing problems
Setting Small Business
Basic Business Idea
A business idea has two defining characteristics;
i. it meets an unmet need
A product/service that satisfy a customer’s unmet need
It mean a brand-new product or service or it may mean finding a way
to provide a product or service at a lower price than currently
available
ii. it drives transaction.
The customers must be willing to exchange their money for our
product or service.
A key point keep in mind is that people do not buy products or
services, they buy the benefits they get from the product or service.
• Person is logical to think of a goal for the unit in long run rather
than to look for the immediate tomorrow
• This long-term thinking is called basic business idea
• In a dynamic business scheme, one has to carefully watch is one
of the basic ideas degenerating as regards
A. Its ability to generate quick returns
B. Its ability to permit quick changes in the products
Sources of Business Ideas
Some of the more frequently used sources are:
Market characteristics / observing the market
Government organization
Development in other nation
Social and economic trends
Emerging new technology
Trade fairs and exhibitions
Method of Generating Business Ideas
1. Survey
2. Focus Groups
3. Brainstorming
4. Problem inventory analysis
Legal Forms of Business Ownership/Organization
A. Sole proprietorship (ownership by one individual)
B. Partnership (ownership by two or more people)
C. Corporation (ownership by the shareholders)
D. Cooperatives
Characteristics of an ideal form of organization
Ease of Formation
Ease of raising capital
Limited Liability
Direct relationship between ownership control and management
Flexibility of operation
Continuity or stability
Retention of business secrets
Freedom from state regulation
Low tax burden
The End!