Starting A Small Business

Extract from Course Notes

What is meant by ‘small business”? Small is a relative term and it begs the question: ‘compared to what?’

While there is no universally accepted definition of a small business, a number of measurements can be used to determine whether a business is small, medium or large.

The most common measurements are:

• number of employees
• turnover (the volume of sales either in money terms or quantity over a set period of time)
• asset value (the total worth of all assets owned by the business)

These measurements are all based on some statistical calculation and expressed as a number.

Because of this they are referred to as quantitative measurements

Other definitions are based on qualitative descriptions, that is, the way in which the business is organised, owned, managed and operated. It is based on personal observation and a description of the business.

A comprehensive definition of small business usually relies on a combination of both quantitative measurements and qualitative descriptions.

Studies have revealed that the average person uses the term ‘small business’ to refer to an owner-managed business that may employ a few people.

Small businesses are the main source of most inventions and innovations. An invention is the development of something new. Innovation occurs when something already established is improved upon. Many successful businesses are built on these two forces, especially on innovation. Research and development (R&D), however, can be rather costly. Small business faced with having to undertake R&D often finds difficulty is obtaining adequate finance. Traditional sources of finance, especially banks, perceive this type of finance request as high risk. One possible source of finance for R&D is venture capital. Venture capital is money that is invested in small and sometimes struggling businesses that have the potential to become very successful. The investors take an equity position in the business (own part of it) and provide supplementary finance. When venture capital is used in the initial feasibility stage, that is, when determining whether a potential idea can lead to a profitable product and business, it is referred to as seed capital.

Success of Small Business

All small business owners start off optimistically, believing that their business venture will lead to financial success and security. Many may have read some multitude of books available about being successful in small business. These books usually highlight five common ‘keys’ to small business success.

1. Entrepreneurial abilities. The people in small business are crucial to the success of the enterprise. Attitudes and personalities of owners will vary enormously. Some will have drive and enthusiasm, many will have set targets and some will take big risks. Some will thrive on the challenge of a potential failure, enjoying the process of solving problems. The majority will be highly motivated and optimistic.

2. Access to information. As a bare minimum the small business operator must have information regarding profitability, the quality of products and services and the performance of employees. Accurate and up to date information will allow the small business owner to make the best decisions.

3. Flexibility. The small size of the business allows the owner to adapt quickly to changes in the external environment. Because there are fewer levels of management, decisions can be made quickly. In addition, the close contact between owners and customers allows the establishment of personal relationships, helping owners to respond quickly to their customer’s changing tastes and preferences.

4. Focus on market niche. Small businesses can concentrate their efforts on a few key customers or a specific segment of the market. This provides the opportunity for the small business to become more specialised and able to deliver a high level of service.

5. Reputation. Because the small business is servicing a narrow market niche, it can develop enviable reputations for quality and service.

These five ‘keys’ above have been identified as major success factors.