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According to Rickman and Roddick, small business is a business that “is privately owned and operated; it’s normally characterized by small number of employees and low volume of sales” (4). A small business could take the form of a sole proprietorship, partnership or corporation.
Small businesses are common and have heavy presence all over the world. Examples include grocery, hairdressers, law firm, accountants, restaurants, guesthouses, small-scale manufacturers, online shops etc.
Why small businesses are popular
Small businesses are becoming increasingly attractive to many for several reasons. First, small businesses require low starting capital investments and can be conveniently run from the neighborhood or from home.
Their ease of start is perfect to the unemployed and those who wish to stay close to their families. Second, it’s easy to market to products especially with the recent increase of internet users. Third, it is easy to keep proper records and prepare financial statements.
Even persons with no accounting knowledge can master quickly the basics of accounting for preparation of basic financial statements like the P&L accounts, by the help of an accounting consultant. Fourth, small businesses are highly flexible and can easily adjust to market forces.
Their ease of adaptation to market changes is as a result of little restrictions and regulations. Fifth, small business owners enjoy strong ties with their clients helping the proprietor to tailor customer services thus satisfying the customers. By serving satisfied customers the proprietor maintains a chain of loyal clients hence a steady flow of income.
Sixth, perhaps the major drive to start small business is the desire to be independent. Many employed persons ditch their jobs for small business because they want to be their “own bosses.” Lastly, it is easy to manage assets and liabilities in a small business.
Assets are few items owned plus the checking and savings accounts. Liabilities are the monies owed by the business. Usually the debtors and creditors are few in number hence easy to manage. Also the numbers of transactions are few thus records can be up dated regularly.
Challenges faced by small businesses
Taxation setbacks; value-added-tax (VAT) contributes greatly to malfunctioning of the small businesses. Changes in VAT, particularly an increase, directly affects the consumers through increased prices and would lead to decrease in sales. In addition to VAT, local authorities impose other taxes such as trading license, security fee, ground rates etc. High taxes greatly affect small businesses as they not only increase business costs but also increased illegal trading.
When the prices are high, good smugglers find a thriving business as they offer low prices making it hard for people running genuine business. The obvious result here would be genuine traders running into losses and probably closing down their business entities due to unfair competition.
Difficulties in accessing bank loans: poor compiling of business records, lack of security, lack of managerial skills, lack of professionalism, few market outlets are but a few of the factors that discourage banks from extending loans to small business proprietors. Any business establishment depends on capital pumped therein and lack of this limits the establishment and competitive running of many small businesses. This is a major setback since big losses would be disastrous and even lead to business closure.
Pressure from established big businesses: at the time of inception, small businesses lack the capacity to challenge the already established businesses. Equally small businesses are vulnerable to big businesses as they seem to hold their fate in their hands.
Actions such as giving abnormal discounts on selected goods for a long period of time will have great impacts on the small businesses whereas little effects on the big businesses. Big businesses enjoy great public trust compared to small businesses consequently low publicity, which is the key to successful marketing.
Therefore, the big businesses mostly have the competitive edge and the playing ground becomes uneven which is disastrous for small businesses for they do not measure up to the prevailing market competition presented by uneven playing grounds.
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Family obligations: in most cases, family members run most of small businesses and there exists no boundary between the business entity and the family. Therefore, family expenses are borne by the business making it hard to determine actual profits or losses.
Lack of market research: client satisfaction requires that proper field studies be done to determine the needs of clients to provide services they require. The costs for carrying out a market survey can be prohibitive to small business owners.
Failure to deliver on customer expectations has far-reaching effects, which would dwindle down its survival chances. In addition, since no studies have been carried out, cases of dead stock are common in small businesses hence large capital ends being tied up in stocks for along time.
Political setbacks: in developing countries, political inefficiencies pose great challenges to survival of small businesses. Usually a corrupt system would favor certain businesses which would not pay taxes, providing no level play ground.
Managing the challenges
In addressing capital setbacks, proprietors should be realistic, draw accurate budgets, and then seek cheap fund sources. It is rule of thumb that in addition to start up capital there should be money at least equal to the projected income for a year plus the operating expenses. To raise cheap funds entrepreneurs who have collateral can seek cheap loans from financial institutions.
Friends and family can be a good and more lenient source for business funds. In addition, arrangements with suppliers for credit purchases can provide more working capital. Lastly, once a business has established steady customer base, advance payments from customers can be negotiated for.
Tax setbacks; business proprietors should employ the tax agency to carryout tax assessments. In addition, understand the investment code and the taxation laws and pay taxes promptly to avoid penalties.
Low sales; one should establish a rapport with customers to enhance customer service delivery, employ professionals and motivate them; for good results, and carry out market research to understand the customer’s needs. Every business has peak seasons; proper planning will help in optimization.
Managerial setbacks: efficient management should be prioritized to ensure effectiveness. Keep proper employee records for objective monitoring and evaluation. Facilitate refresher management courses to enhance management skills. In addition, establishing proper networks with similar businesses or professional level would be beneficial.
Family setbacks: Family obligations should be handled separately with business activities. Also finding alternative sources to cater for the family’s basic needs is paramount. Lastly, business owners should set aside time to be with family or attend family and social events. This would create a business-family balance, which is healthy for the thriving of the business for it reduces conflict of interest between arising between family and business affairs.
In addition, one should prepare a business plan and set clear targets. Also preparing the revenue forecasts and clear budgets comes in handy in managing challenges in these establishments. Losses due to power black outs can be reduced through purchase of standby generators or UPS.
Marketing in small business is done through several way; these include word of mouth, customer referrals, social networks, television, radio, billboards, print media, email and internet among others. Given that the advertisement budget for small businesses is relatively low, marketing activities must operate within the set limits.
As such there are numerous marketing options available at any level of a small business. Word of mouth for instance would require very little expenses. Customers can be converted to marketing agents if they are encouraged to talk about the business services and do referrals. This can very effective since word of customer is easily trusted.
Another cheap marketing alternative would be use of internet. Placing product/service adverts online is relatively cheap and can reach many customers in a relatively short time. Moreover, establishing own website can greatly reduce advertisement costs. Established websites for products can be easily marketed through blogs where customers can find links to the business’ website. In addition, social networks such as facebook and twitter can be good in marketing products and services for small businesses.
Competitive pricing and persuasion: competitive pricing would be done by pricing the product or service slightly below the market price to increase sale volume. In addition, customers can be persuaded to buy products through by allowing negotiations as well as printing more information about a product making it more attractive customers.
Free media publicity: media is hunting for stories to feed their clients; therefore, as an entrepreneur one can court the media for interviews and cover one’s business, which provides free publicity. The local social events too can provide relatively cheaper publicity stands; therefore, one can volunteer to print the entrance tickets with information about your business.
Franchise is a good form of small business. It is good for those entrepreneurs who do not want to go through the hurdles of developing a new business; franchise is already well established. Franchise requires little or no experience to begin. Operating a franchise gives a head start to the business and the franchise provides support all the way.
Support benefits of franchise would include personnel training, site selection and advertising. Upon establishment, a franchise, the businessperson starts realizing profits much early because it has wide customer recognition.
On the other hand, operating a franchise means playing by the rules. The strict restrictions deprive the franchisee the freedom characterized with other forms of small businesses.
The rules include, product specifications, reporting procedures, dress code and general management guidelines. Also, the franchisee is required to repatriate a certain percentage of the gross sales. Lastly, in most cases the products come from the franchisor leaving no room for the proprietor to get best prices.
Small businesses remain very attractive to most people because of their low initial investment requirements ease of entry, convenience of operation and freedom for the owners. However, the challenges faced by small businesses have not been appropriately addressed thereby leading to massive business failures.
Reasons for business failure include lack of business plan, heavy taxation, lack of capital, saturated product markets, developing poor strategies etc. Lastly, the need for small businesses in any country cannot be overemphasized by their role of employment creation and contribution to the GDP.
Rickman, Cheryl, and Roddick, Dame. The Small Business Start-up Workbook: A Step-by-step Guide to Starting the Business You’ve Dreamed of. Begbroke: How to Books, 2005.