Small businesses have significance both at micro and macro levels. At the micro level, they can provide independence to individuals and a livelihood that is not dependent on an employer. At the macro level, they generate the largest percentage of employment in the country and contribute in a major way to the country's national income.
Small Business Characteristics
Small businesses usually employ a small number of persons and have relatively low sales volumes. Typically, they are organized as sole proprietorships, partnerships and privately owned corporations. Legal definition of what is a small business varies from country to country.
These businesses do not typically dominate their fields and are vulnerable to the policies and practices of large businesses in the same industry.
Businesses that can benefit from a personal touch such as hairdressers, lawyers, accountants and photographers are ideal as a small operation. Convenience stores, delicatessen, restaurants and guest houses for tourists are also usually organized as small businesses. And then of course there are the numerous small scale manufacturers and sub contractors.
Many businesses are micro-businesses (usually defined as enterprises with less than ten employees) that operate from the homes of their owners.
Management Problems for Small Business
Inadequate funding, known as under-capitalization, is one of the most common problems for small business, often leading to bankruptcy even when profitability potential is present. A rule-of-thumb states that if a business expects sales receipts of, say $100,000 and expenses of $70,000 for the first year, it should have access to at least $170,000 in funds, i.e. the total of first year receipts and expenses.
Many entrepreneurs price their products and services too low, and this is known as under-pricing. Under pricing yields low margins, known as contribution, over direct costs of delivering the product or service. If this contribution is too low, the business can find itself unable to meet "fixed" expenses such as rent and the staff payroll. As a result, the business will continue to incur losses even at full capacity utilization.
Marketing is another problem area for many small businesses. The business might be providing an excellent product or service, but is unable to achieve sales volumes needed for profitability. Achieving sales volumes requires sustained effort, as well as the ability to build trust and confidence among new customers. Small businesspersons might lack the staff and skills to do these.
Lack of business know-how is another major problem. Technical experts usually need additional business skills to succeed in business, for example.
Tackling Small Business Management Problems
Developing a vision and mission statement as discussed in a separate article can help the small businessperson clarify critical issues related to the success of the business. A vision statement identifies the value that the business provides, while the mission statement gives an indication of how that value will be provided.
Once the broad idea is in place as a result of the above exercise, the small businessperson should develop a clear plan for marketing and funding. A rough estimate should be made based on these plans regarding the likely volume of sales revenue and expenses to check whether the business can operate profitably.
Small business marketing typically starts with networking, i.e. establishing and using personal contacts with players in the industry. Word-of-mouth publicity and customer referrals are other excellent ways that the business should consciously try to use for building up respectable sales volumes at this stage.
Internet marketing using websites and e-mails is another excellent and affordable option for small businesses. Campaigns such as Google AdWords, Yahoo Search Marketing and Bing Search Advertising can be used to grow sales volumes. Using these requires specific expertise, however, and it is better to seek help from consultants with demonstrable results.
Funding can become easier if the small businessperson is aware of all the different sources, and takes the trouble to understand how each can be tapped effectively. Standard sources of funding are:
- Personal savings and equity loans that can be raised against one's assets
- Loans from friends and relatives
- Grants from private foundations, if one can be found without undue trouble
- Creating partnerships or a private stock issue
- Angel investors (rich individuals seeking avenues for profitable investments)
- Small business financing programs (usually guarantees issued by government small business support agencies)
- Banks and venture capital companies that would finance sound business ventures
Another major problem for small business management is productivity. This can be helped by using business software tailored for different tasks. Small business software for accounting, inventory management, property / asset management, payroll, invoicing and order management are available in plenty in the market. So are industry specific business management software for retail, restaurant and other businesses. Personal productivity software for tracking projects and individual tasks can also help significantly in using available time to full potential. In addition to enhancing productivity through automation, small business software can also help businesses adopt "best practices."
The availability of cloud computing services these days can reduce the investment needed on information technology as the business itself need not invest in the full infrastructure and tools.
Above all, the small businessperson should be aware of the special strengths of being small. These include closer relationships possible with customers and clients, ease of making changes to suit changing technology and business scenarios, and the possibility of achieving viable volumes in a niche market using the power of Internet marketing.
Small business provides independence and potentially high rewards. However, small business management poses some special problems. A conscious effort is needed to tackle these by using effective strategies. The small businessperson should also be prepared to work long hours, at least in the beginning, and be aware that the person now has a new boss, the customer, who might be less accommodating than a boss in an employment situation.
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