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Chapter 2

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The document provides an overview of small businesses, including their definition, importance, types, and challenges in setting one up. It defines small businesses based on both quantitative measures like number of employees and qualitative measures like independence and personalized management. The three main types of small businesses are family enterprises, personal service firms, and franchises. Setting up a small business requires finding a suitable idea, evaluating it, analyzing it in detail, and selecting the best idea based on factors like demand, experience, and profitability. Some challenges include financial problems, lack of resources, and managerial issues.

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1 CHAPTER TWO SMALL BUSINESS 2.1. Definition and importance Definition Small Business is independently owned & operated and not dominated in its fields of operation. There are two approaches to define small business:  By some measure of size-quantitative approach  Using an economic /control definition-qualitative approach 1. Size criteria It may base on: 1. Sale volume 2. Asset size 3. Insurance in force 4. Volume of deposited 5. Number of employee – most commonly used criteria The following are general criteria for defining a small business A. Financing of the business is supplied by one individual or a small group. B. Except for its marketing activity, the firms operations are geographically localized. C. Compared to the biggest firms in the industry, the business is small D. The number of employees in the business is usually fewer than 100 2. ECONOMIC/CONTROL CRITERIA Size doesn’t always reflect the true nature of an enterprise. In addition qualitative characteristics may be used to differentiate small business from other business. The economic/control definition covers: A. Market share B. Independence C. Personalized management
2 All three of these characteristics must be satisfied if the business is to rank as a small business. A. MARKET SHARE Small firms market share is that it is not large enough to enable it to influence the market price and quantity of the national goods sold at any significant extent. B. INDEPENDENCE The owner has control over the business by himself. It therefore rules out those small subsidiaries which though in many ways fairly autonomous, nevertheless have to refer major decisions to a higher level of authority. So according to this criterion the sells branch of big business cannot be considered as small business with the ground of not independently organized. C. PERSONALIZED MANAGEMENT PM is the most characteristics factor of all. It implies that the owner actively participates in all aspects of the management of the business and in all decision making processes. There is only every little devolution or delegation of authority. One person is involved when anything material is concerned. Generally we have three types of small businesses: 1. Family enterprises Owned and operated, often by one person called a sole proprietor. Undertaken to supplement or replace family income. Many are service based firms that rely on an owner’s skill. In the absence of a successor, the life of a venture is limited to the working life of its founder. But usually these kinds of ventures run through the participation of the whole family so that succession most likely is possible. 2. Personal service firms Rely crucially on unique skills of their founders or key employees. Succession is unlikely unless a son or a daughter develops comparable skills. A professional service firm is usually categories under these kind of venture e.g. Designer, business consulting, medical treatment.
3 3. Franchises It is created by contract. An individual receives help and advantages in exchange for a franchise fee and usually a percentage of sales. The individual who buys a franchisor is called franchisee and those who sell franchises, the patron corporation are called franchisors. These two companies share a common name use common materials and sell similar products or services. The franchisee may receive financial help, training guaranteed supplies, a protected market and technical assistance with matters such as site selection, purchasing, accounting and operations management. Merit of small Business a. Independence b. Financial opportunity c. Community service d. Job security e. Family employment f. Challenge Demerit of Small Business g. - Sales fluctuations h. - Competition i. -increased responsibilities: social, economical, political, etc increases as their operations get larger j. -Financial loses/financial risk k. -Employee relations l. - Law and regulations 2.2 The economic, social, and political aspects of small business enterprise Small businesses (enterprise) have to play a vital role in Ethiopian economy. They need a strong support on socio-economic and political grounds. a. Social Idea (the Equality Argument) b. Less Capital and More Labor ( the Employment Argument) c. Removing Regional Imbalance (the Decentralization Argument) d. Creating Self Employment Opportunities
4 e. Ancillary function f. Export promotion g. Supply of Critical raw Material ECONOMICS SIGNIFICANCE AND ROLE OF SMALL BUSINESSES Their general economic contribution is similar to that of big business. 1. Providing new jobs  New jobs comes from the birth of new firms and their subsequent expansion 2. Introducing innovation  Research and development of big business usually tend to emphasize on the improvement of existing products i.e. Sometimes blind one to the value of a new idea. The greater effectiveness of small firms is research and development. Strength of small business is the ability to innovate and bring significant change and benefits to customers. 3. Stimulate economic competition When producers consist of only a few big businesses: - they may set high prices without any improvement - they may exclude new competitors - otherwise abuse their position of power If competition is to have a cutting edge there is need for small firms. Small businesses are the means to stimulate economic competition in the prevailing economic competition. 4. Aiding big businesses The fact that some functions are more expertly performed by small business enables small firms to contribute to the success of larger ones. Two functions that small can often perform efficiently than big businesses are the distribution and the supply function. 5. Producing goods and services efficiently Big businesses are better to manufacturing automobiles but that small business is better in repairing them. Due to their small size, small business forced to specialize in some activities these specialization by itself helps to be efficient in producing goods and services. Reasons for growth of small firms; 1. - New technologies – it may permit efficient production on a smaller scale than formerly 2. - Greater flexibility – SB are more flexible than large businesses. Greater flexibility is required as result of increased global competition; this is a requirement that favors to small firms.
5 3. - small firms may be more flexible in employing the increasing number of working mothers i.e. qualified in the labor force 4. - Consumers are coming to prefer personalized products over mass produced goods, and this opens a door of opportunity for small businesses. 2.3 SMALL BUSINESS FAILURE FACTORS The most frequent cause is failure to pay debts. In other instances businesses go out of existence because the owners realize that although currently they are solvent but if they continue operations they will incur debts they can not met. This instance is called Halt of operation i.e. problem in financing of operations. Some specific causes of failure Incompetence – owners simply do not know how to run the enterprise, well trained entrepreneur would see quickly and easily take side steps for any environmental issues that may have a potential to significantly influence the business Unbalanced experience – to mean that the owners may not have all rounded experience in the major business activities such as finance, purchasing, selling and production Lack of managerial experience – the owners simply does not know how to manage people. Lack of experience in the line of business-when the owner has entered to the business field in which he or she has very little or total no knowledge. Neglect, fraud and disaster are also other common causes of business failure. More specific managerial causes of small business failure: o Inadequate record – no basis for estimating its costs and correcting the problem it may lead to have bids unsuccessfully. The partner never knew where they are? o Expansion beyond resources – it create crisis in management so that the growth of small business must go in line with the structural requirements. o Lack of information about customers – credit sales for the customers while most of the customers are on the way to be bankrupt or to mean giving credit sales without assessing the credit worthiness (financial position) of customers. Know the need and demand of
6 customers helps to be competitive throughout time, business must be responsive for customers need change. o Failure to diversify market-one company contracted its entire output to one buyer when that buyer canceled the contract the company went bankrupt. So firms must diversify their demand and supply side of their market. Should not depend on a single buyer as well as a single supplier. o Lack of marketing research – in designing of their product negotiating with suppliers, sub-contracting of its operation – small business must have current market information just like technological change, price, quality, competitors action o Legal problems – the company must carry on its operation with harmony of the legal problems like respecting the tax laws of the country, environmental protection stipulations o Nepotism – favoritism towards family members or to mean sacrificing the interest of the business for family interest just like employing family member with higher salary while they are contributing little o One person management – since managers of small businesses are not professionals often are less effective than they should be. So specially after intermediate level of small business managers must couple their management with pit outside management assistance or by employing of professionals o Lack of technical competence – technical knowledge regarding operations, contract management o Absentee management 2.4. Problems in Ethiopia small business Small-scale industries have not been able to contribute substantially as needed to the economic development particularly because of-financial, production, and marketing problems. These problems are still major handicaps to their development. Lack of adequate finance and credit has always been a major problem of Ethiopian small business. Small-scale units do not have easy access to the capital market because they mostly organized on proprietary partnership basis and are of very small size. They don’t have access to industrial sources of finance partly because of their size and partly because of the fact that their surpluses which can be utilized to repay loans are negligible. Because of their size and partly because of their fact limited profit, they search for funds for investment purposes. Consequently, the approach money lenders who charge high rate of interest hence small enterprise continuo to be financially weak. Small-scale enterprises
7 find it difficult to get raw materials of good quality and act cheaper rates in the field of production. Very often they do not get raw material in time. It is only by overcoming all these constraints that small entrepreneurs can hope to make their enterprises successful. 2.5 Setting a small business Setting up of small new enterprise is a very challenging and rewarding task. Several problems are involved in this task. Right from the conception of a business idea up to the start of production, numerous decisions have to be taken. In order to be taken. In order to succeed in this task, an entrepreneur must correctly perceive the nature and intensity of problems to be faced and prepare and implement appropriate plans. The first end the foremost step in starting a small business is to find out a suitable business idea and give a practical shape to the idea. The entrepreneur should be convinced that idea is in fact a sound one and likely to give reasonable return on his investment. The search for an appropriate business idea is a complicated exercise because the entrepreneur comes across innumerable business opportunities. 2.5.1 What is a basic business idea? The long term thinking of a goal for the unit in the long run rather than to look for the immediate tomorrow is called basic business idea. The basic business idea and the product through hierarchy can be represented as follows. Basic Business Idea Product line Product Range Product
8 Figure 2.1 Hierarchical presentation of business idea Business should think of long term goal and the profit when they start a business. The basic business idea, which is at the top of the hierarchy, is to meet the broadest needs of the customers and has a long life perhaps from 5-50 years. Thus, entrepreneur may think of being in the entertainment film, in automobiles, in medicines, in service industries, etc. The basic business idea facilitates choice of product under an overall plan. The product line is relatively narrow and has a shorter life. The product line consists of different families of products. A unit with a basic business idea for example of packaging can manufacture any of the following groups of the products. 1. Glass bottle, 2. Plastic packages, 3. Paper or wooden packages, and 4. Metal packages. The product- range-on the other includes different sizes of the product within the product line. The product is one item of the product range having difference specifications like size, material, used and weight, etc. The basic business idea, which facilitates a choice of the products at different stages of the product, allows for diversification and expansion. But the basic business idea is not always the same. In dynamic business scheme, one has to carefully watch is one of the basic idea degenerating as regards:- 1. Its ability to generate quick returns 2. Its ability to permit quickly changes in the products The general business atmosphere guides the choice of basic idea. A basic business idea results from the identification of business opportunities in the market. To be successful in business, consistently watch the opportunities to spot where the entrepreneur has to be sensitive to the market changes, watch demand and supply, study consumer behavior, and grasp the basic business idea. In order to establish a business venture with an entrepreneurial system an entrepreneur needs to take the following steps:
9 1. Search for business idea The task of promotion begins with the search for a suitable business idea or opportunity. The idea may originate from various sources, e.g. success story of a friend or relative, demand for certain products, chances of producing a substitute for an imported article, visits to trade fairs and exhibitions, study of project profiles, and industrial potential surveys, meeting with government agencies etc. the idea may relate to the starting of a new business or take over of an existing enterprise. Sources of idea:- a business idea may be discovered from the following sources: i. Observing Markets- careful observation of markets can reveal a business idea. ii. Prospective consumers- consumer knows best what he wants and the habits/tastes, which are going to be popular in the near future. Contacts with prospective consumers can also reveal the features that should be build into a product or service. The customer is the foundation of a business and it is who he keeps it going. Therefore, data on consumer needs and preference must be collected. iii. Developments in Other Nations- people in under developed countries generally follow the fashion trends of developed countries. Therefore, an entrepreneur can discover good business idea by keeping in touch with developments in advanced nations. iv. Study of project profile- various government and private agencies publish periodic profiles of various projects and industries. A careful scrutiny of such project profile is very helpful in choosing in the line of business. v. Government organizations- several government organizations nowadays assist entrepreneurs in discovering and evaluating business ideas. vi. Trade fair and exhibitions-National and international trade affairs are very good sources of business ideas. Trade fairs and exhibitions provide for; a. Assessing the market trends in terms of demand potential and type of product required. b. Meeting a large number of buyers from different states/countries. c. Assessing the attitude of the competitors in a particular product or marketing area. d. Comparing the price and quality of similar products. e. Establishing personal contacts with dealers/importers/customers. f. Projecting new ideas on commercial publicity for promoting sales in the country and abroad.
10 2. Idea Processing i. Preliminary evaluation and testing of ideas- once business ideas are discovered, screening and testing of ideas is done. The following considerations are significant in the evaluation and testing of business ideas. a. Technical feasibility- refers to the possibility of producing the product. Technical feasibility of an idea is judged in terms of availability of necessary technology, machinery and equipment, labor skills and raw materials. The advice and assistance of technical experts may be necessary to judge the technical feasibility of various business ideas. b. Commercial viability- a cost benefit analysis is required to ascertain the profitability of the ideas. There is a different between a business idea and a business opportunity. While the idea for a product or service may be workable (technically feasible), the proposed business built on this may not profitable. It is normal for an entrepreneur to have several ideas for business that have to be rejected before finding one that is not only workable but also worthwhile. In order to judge the workability and profitability of the proposed business feasibility analysis has to be conducted. ii. Detailed analysis- after preliminary evaluation of the idea, the promising idea is subjected to a thorough analysis from all angles. At this stage a lot of information is required. Consultations with experts in various areas of the industry may be necessary to carry out the detailed analysis. Due care should be exercised at this stage because the idea is finally accepted or rejected at this stage. After evaluation of a business idea is completed, the findings are presented in the form of a report known as ‘feasibility report or project report’. This report helps in the final selection of project. It is also useful for procuring licenses, finance, etc from governmental agencies. 3. Select the best idea The feasibility report is analyzed to finally choose the most promising idea. Generally, the following considerations influence the selection of idea for a product or service. a. Products whose imports are restricted or banned by the government. b. Products, which can be exported easily and profitably.
11 c. Products whose demand exceeds their supply so that there exists ready demand. d. Products in which the entrepreneur has manufacturing and or marketing experience. e. Parent ancillary relationships, i.e., the product are to be manufactured for a parent company. f. Products, which showed high profitability. g. Products based on the expansion or diversification plans of existing firms of the family/friends/relatives. h. Products, which ensured specific advantages. The advantages might accrue because of the scale of the industry or the location of the factory or technology of manufacture. i. Products favored by the country’s industrial/licensing policy, e.g., delicensed industries. j. Products for which incentives and subsidies are available. 2.5.2 Project identification and classification/What project an entrepreneur should have? Project- can be defined as a scientifically evolved work plan devised to achieve specific objective within a specified period of time. Taken in this perspective, while projects can differ in size, nature, objectives and complexity, they must all partake of three basic attributes of being a course of action, of having specific objectives and of involving a definite time perspective. The objective may be to create, expand and/or develop certain facilities in order to increase the production of goods and/or services in the community. Project classification Projects have been classified in various ways by different authorities. Little and Mirrelees divide projects into two broad categories, viz., quantifiable projects and non quantifiable projects. Sector wise also projects can be classified in to different categories. Projects can also be classified on the bases of techno-economic characteristics. Some financial institutions classify projects on the basis of the nature of the project and its life cycle. 1. Quantifiable and non-quantifiable projects Quantifiable projects are those in which a plausible quantitative assessment of benefits can be made. Example, industrial development, power generation, and mineral development are forming part of quantifiable projects. Non-quantifiable projects are those where such an assessment is not possible. For example: health, education, and defense.
12 2. Sectoral projects A project may fall in the following sectors; i. Agriculture and allied sector. ii. Irrigation and power sector. iii. Industry and mining sector. iv. Transport and communication sector. v. Social services sector. vi. Miscellaneous sector. The sector classification of projects is quite useful for resources allocation at macro levels. 3. Techno-economic projects Techno-economic projects classification includes factors intensity-oriented classification, causation-oriented classification, and magnitude-oriented classification. These three groupings are narrated as under; a.Factor intensity oriented classification; the factor intensity is used as a base for classification of projects such as capital intensive or labor intensive which depends upon the large scale investments in plant and machinery or human resources. b.Causation oriented classification; the causation-oriented project are determined based on its causes namely demand based or raw material based projects. The non-availability of certain goods or services and consequent demand for such goods or services or the availability of certain raw materials, skills or other inputs is the dominant reason for starting the project. c.Magnitude oriented classification; the size of investments from the basis for magnitude- oriented projects. Projects may thus be classified based on its investment such as large- scale, medium-scale, and small-scale projects. 4. Financial institutions classification Some financial institutions in some countries classify projects according to their age and experience and the purpose for which the project is being take up. They are as follows;
13 a.New projects b.Expansion projects c.Modernization projects d.Diversification projects The projects listed above are generally profit-oriented and the service-oriented projects are classified as under; a.Welfare projects b.Service projects c.Research and development projects d.Education projects Project identification Project identification is concerned with the collection, compilation, and analysis of economic data for the eventual purpose of locating possible opportunities for investment and development of the characteristics of such opportunities. Opportunity refers to any factor that offers promise or potential for moving closer or more quickly towards the firm’s goal. For example, new market, a growing demand for the products or services that a small business provides. According to Peter Drucker (1955), opportunities are of three types; a. Additive opportunities- are those opportunities which enable the decision maker to better utilize the existing resources with out, in any, involving a change in the character of the business and involves minimum disturbance and hence a least risk. b. Complementary opportunities- involve the introduction of new idea that lead to a certain amount of change in the existing firm’s structure. c. Breakthrough opportunities- involve fundamental change in both structure and character of a business. Additive opportunities involve the least amount of disturbance to the existing state of affairs and hence the least amount of risk. The element of risk is more in the other two opportunities. When the element of risk increases, it becomes more important to precisely define the scope and nature of the project idea, to develop alternative solution for achieving the project
14 objectives and to select the best possible approach so as to minimize both resources consumption and risks and to optimize the return or gains. Projects identification cannot be complete without identifying the characteristics of a project. Every project has three basic dimensions- inputs, out puts, and social costs and benefits. The input characteristics define with the project will consume in terms of raw materials, energy, manpower, finance and organizational setup. The nature and magnitude of each of these inputs must be determined in order to make the input characteristics explicit. The output characteristics of a project define what the project will generate in the form of goods and services, employment, revenue, etc. the quantity and quality of all these outputs should be clearly specified. The project should have to consider the SWOT and should be designed accordingly. SWOT is a series of steps one has to consider in evaluating a business opportunity and arriving at a decision on starting a business or not. The SWOT approach compels individuals to think or reason out systematically and analytically the important factors strengths, weakness opportunities, and threats, which can be termed as the internal (strength and weakness) and external factors (opportunities and threats). Project Objectives Project objective is an important element in the project planning cycle. Project objectives are concerned with defining in a precise manner what the project is expected to achieve and to provide a measure of performance for the project as a whole. Objectives are the foundations on which the entire edifice of the project design is built. The essential requirements for project objectives are; 1. Specific, not general 2. Not overly complex 3. Measurable, tangible and verifiable 4. Realistic and attainable 5. Established within resources bounds 6. Consistent with resources available or anticipated
15 7. Consistent with organizational plans, policies and procedures. The project objectives are aimed to complete the project on time, completion of the project within contemplated costs and the completion of the project at a profit to the company. Project objectives are divided into two categories, namely, ‘retentive’ objectives and ‘acquisitive’ objectives. Retentive objectives are concerned with the retention and preservation of resources like money, time, energy, equipment and skills. Acquisitive objectives involve acquisition of resources or attaining states that the organization or its managers do not have. Project objectives are also economical and social in nature. The economical objectives of the project are in the form of profit oriented. The social project objectives are service-oriented. Techniques of Project Identification Desk research and Techno-Economic Survey- are two important techniques of project identification. Desk research implies the collection and use of information from published sources like journals, magazines reports, etc. techno-economic survey is an investigation conducted by a team of experts for identifying the industrial development potential of an era. Data and product identification may be obtained from the following source; a. Industrial potential surveys b. Lead bank survey reports c. New process/product development in research laboratories d. Literature on industries within the country and abroad e. Import/export statistics f. Profitability studies of selected industries g. Studies on price and shortage of certain commodities Project life cycle Like human beings, projects also have a life cycle. Project life cycle consists of three main stages: 1. The pre-investment phase: this is the first phase in the life of a project. It is primarily concerned with objective formulation, demand forecasting, selection of optimal strategy, evaluation of input characteristics, projections of the financial profile, and if necessary cost
16 benefit analysis and ultimately the pre-investment appraisal. The project idea is developed into an investment proposition during this phase. 2. The construction phase: this is phase begins after the investment decision is taken. Resources are invested during this phase in building the basic assets of the projects, which can in due course be utilized to achieve the project objectives. The assets may be in the nature of land and buildings, plants and machinery, ancillary accommodation, communication services, control systems and marketing organization. In projects not involving the use of plant and machinery, the construction phase may merely consist of developing necessary manpower resources. Thus the construction phase consists mainly of developing the infrastructure for the project. It is one time effort. 3. The normalization phase: this phase starts after the trial turn of the project framework developed during the construction phase. It involves routine procedures, which are performed in a cyclic order. The primary objective of this phase is to produce the goods and services for which the project was established. For this purpose, a provision has to be made for raw materials and other consumables. These can be determined by analyzing the process cycle identifying the sequences of process operations. Projects, which do not involve production of goods, do not require raw material but only supplies or supporting goods needed to sustain the project process. Thus, the assets created during the construction phase are utilized during the normalization. 2.5.3 Definition of Industry and Small Scale Industry What is industry? An industry is an institution where raw material is purchased from suppliers, converted into finished product, using machinery and labor, and sold to buyers. Conversion of raw material means changing the size, shape, chemical properties, and assembling different parts, etc. An industry is able to carry out the functions of buying, manufacturing and selling its product with the use of an organization; an organization being a collection of people with of different skills, who coordinate the various functions involved. Small business- would include individuals and firms managing a business enterprises established mainly for the purpose of providing a business enterprise established mainly for the purpose of providing any services other than professional. The original cost price of the
17 equipment used for the purpose of such business doesn’t exceeding Br. 3500 with working capital limits of Br. 17000. Advances for acquisition, construction renovation of houseboats and other tourist accommodation will be included here. Small Scale industries- have been defined as industrial units engaged in manufacturing/preservation activities or repairing/servicing operations including such operations as quarrying, with original environments in plant and machinery not exceeding Br. 1000,000. 2.5.4 Steps in Setting a Small Scale Unit 1. The first key to success in any manufacturing activity is to select the right product. In the beginning, information of possible lines of activity must be obtained, by talking to knowledgeable people, from industrial publications, or from various organizations. The information available from these sources may be supplemented by one’s ideas and some alternative feasible lines of activity identified. These lines of activity must necessarily be those, which are consistent with one’s own personal qualities and capacity. They must essentially be of interest to the entrepreneur. These must be examined with a view to assess: a. The marketing aspects b. Technical aspects c. Financial aspects 2. Having selected a product, detailed project report needs to be prepared. This will cover the following aspects: a. A detail estimate of demand is to be made. b. Technical specifications of the process should be carefully studied. c. The equipment required and there sources are to be specified. d. Requirements of space-land, shed etc. and other utilities like power and water are be assessed e. Manpower requirements of direct and indirect personnel are to be determined and their availability ensured.
18 f. The total cost of the project to be worked out and the means for financing it identified; quotation for equipment, material, etc., have to be obtained; information of financing policies of banks and other financial institutions has to be gathered. g. Like the above information, the economics of the entire scheme at projected operating levels is to be assessed. The break-even point must be well below the envisaged levels of operations for adequate profit. 3. The detail project report having been prepared and availability of the enterprise established, the action phase begin. The form of ownership is to be decided upon and the company formed and registered. Following this, action directed towards obtaining finance, necessary license, and necessary infrastructure is to be taken. This would be involve dealing with various government bodies and other institutions like: financial institutions- for finance; Sales tax, income tax authorities- for respective registration; license authority –for obtaining industrial license and license like for raw material procurement; Municipal Authorities and Electricity Boards- for requisite utilities. Directorate of industries, Municipal authorities, etc, for land, factory, and shed, etc. 4. Once all the required authorizations and sanctions have been obtained, simultaneous action is to be taken for the following: a. Ordering machinery from suppliers. b. Obtaining utilities like power and water connections after construction of shed, if necessary. c. Recruitment of staff. d. Arranging supplies of materials. e. Arranging for distribution of the product. 5. Once these are complete, the plant is ready for commissioning Trail run may be made and at this stage promotional work like efforts may be made to pave the way for introducing the product. When the first few batches of the product are introduced in the market, information regarding its acceptance is to be gathered. On the basis of feedback obtained, the process/product has to be modified until acceptable out-put is obtained. 6. The unit is then ready for commercial production.

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Chapter 2

  • 1. 1 CHAPTER TWO SMALL BUSINESS 2.1. Definition and importance Definition Small Business is independently owned & operated and not dominated in its fields of operation. There are two approaches to define small business:  By some measure of size-quantitative approach  Using an economic /control definition-qualitative approach 1. Size criteria It may base on: 1. Sale volume 2. Asset size 3. Insurance in force 4. Volume of deposited 5. Number of employee – most commonly used criteria The following are general criteria for defining a small business A. Financing of the business is supplied by one individual or a small group. B. Except for its marketing activity, the firms operations are geographically localized. C. Compared to the biggest firms in the industry, the business is small D. The number of employees in the business is usually fewer than 100 2. ECONOMIC/CONTROL CRITERIA Size doesn’t always reflect the true nature of an enterprise. In addition qualitative characteristics may be used to differentiate small business from other business. The economic/control definition covers: A. Market share B. Independence C. Personalized management
  • 2. 2 All three of these characteristics must be satisfied if the business is to rank as a small business. A. MARKET SHARE Small firms market share is that it is not large enough to enable it to influence the market price and quantity of the national goods sold at any significant extent. B. INDEPENDENCE The owner has control over the business by himself. It therefore rules out those small subsidiaries which though in many ways fairly autonomous, nevertheless have to refer major decisions to a higher level of authority. So according to this criterion the sells branch of big business cannot be considered as small business with the ground of not independently organized. C. PERSONALIZED MANAGEMENT PM is the most characteristics factor of all. It implies that the owner actively participates in all aspects of the management of the business and in all decision making processes. There is only every little devolution or delegation of authority. One person is involved when anything material is concerned. Generally we have three types of small businesses: 1. Family enterprises Owned and operated, often by one person called a sole proprietor. Undertaken to supplement or replace family income. Many are service based firms that rely on an owner’s skill. In the absence of a successor, the life of a venture is limited to the working life of its founder. But usually these kinds of ventures run through the participation of the whole family so that succession most likely is possible. 2. Personal service firms Rely crucially on unique skills of their founders or key employees. Succession is unlikely unless a son or a daughter develops comparable skills. A professional service firm is usually categories under these kind of venture e.g. Designer, business consulting, medical treatment.
  • 3. 3 3. Franchises It is created by contract. An individual receives help and advantages in exchange for a franchise fee and usually a percentage of sales. The individual who buys a franchisor is called franchisee and those who sell franchises, the patron corporation are called franchisors. These two companies share a common name use common materials and sell similar products or services. The franchisee may receive financial help, training guaranteed supplies, a protected market and technical assistance with matters such as site selection, purchasing, accounting and operations management. Merit of small Business a. Independence b. Financial opportunity c. Community service d. Job security e. Family employment f. Challenge Demerit of Small Business g. - Sales fluctuations h. - Competition i. -increased responsibilities: social, economical, political, etc increases as their operations get larger j. -Financial loses/financial risk k. -Employee relations l. - Law and regulations 2.2 The economic, social, and political aspects of small business enterprise Small businesses (enterprise) have to play a vital role in Ethiopian economy. They need a strong support on socio-economic and political grounds. a. Social Idea (the Equality Argument) b. Less Capital and More Labor ( the Employment Argument) c. Removing Regional Imbalance (the Decentralization Argument) d. Creating Self Employment Opportunities
  • 4. 4 e. Ancillary function f. Export promotion g. Supply of Critical raw Material ECONOMICS SIGNIFICANCE AND ROLE OF SMALL BUSINESSES Their general economic contribution is similar to that of big business. 1. Providing new jobs  New jobs comes from the birth of new firms and their subsequent expansion 2. Introducing innovation  Research and development of big business usually tend to emphasize on the improvement of existing products i.e. Sometimes blind one to the value of a new idea. The greater effectiveness of small firms is research and development. Strength of small business is the ability to innovate and bring significant change and benefits to customers. 3. Stimulate economic competition When producers consist of only a few big businesses: - they may set high prices without any improvement - they may exclude new competitors - otherwise abuse their position of power If competition is to have a cutting edge there is need for small firms. Small businesses are the means to stimulate economic competition in the prevailing economic competition. 4. Aiding big businesses The fact that some functions are more expertly performed by small business enables small firms to contribute to the success of larger ones. Two functions that small can often perform efficiently than big businesses are the distribution and the supply function. 5. Producing goods and services efficiently Big businesses are better to manufacturing automobiles but that small business is better in repairing them. Due to their small size, small business forced to specialize in some activities these specialization by itself helps to be efficient in producing goods and services. Reasons for growth of small firms; 1. - New technologies – it may permit efficient production on a smaller scale than formerly 2. - Greater flexibility – SB are more flexible than large businesses. Greater flexibility is required as result of increased global competition; this is a requirement that favors to small firms.
  • 5. 5 3. - small firms may be more flexible in employing the increasing number of working mothers i.e. qualified in the labor force 4. - Consumers are coming to prefer personalized products over mass produced goods, and this opens a door of opportunity for small businesses. 2.3 SMALL BUSINESS FAILURE FACTORS The most frequent cause is failure to pay debts. In other instances businesses go out of existence because the owners realize that although currently they are solvent but if they continue operations they will incur debts they can not met. This instance is called Halt of operation i.e. problem in financing of operations. Some specific causes of failure Incompetence – owners simply do not know how to run the enterprise, well trained entrepreneur would see quickly and easily take side steps for any environmental issues that may have a potential to significantly influence the business Unbalanced experience – to mean that the owners may not have all rounded experience in the major business activities such as finance, purchasing, selling and production Lack of managerial experience – the owners simply does not know how to manage people. Lack of experience in the line of business-when the owner has entered to the business field in which he or she has very little or total no knowledge. Neglect, fraud and disaster are also other common causes of business failure. More specific managerial causes of small business failure: o Inadequate record – no basis for estimating its costs and correcting the problem it may lead to have bids unsuccessfully. The partner never knew where they are? o Expansion beyond resources – it create crisis in management so that the growth of small business must go in line with the structural requirements. o Lack of information about customers – credit sales for the customers while most of the customers are on the way to be bankrupt or to mean giving credit sales without assessing the credit worthiness (financial position) of customers. Know the need and demand of
  • 6. 6 customers helps to be competitive throughout time, business must be responsive for customers need change. o Failure to diversify market-one company contracted its entire output to one buyer when that buyer canceled the contract the company went bankrupt. So firms must diversify their demand and supply side of their market. Should not depend on a single buyer as well as a single supplier. o Lack of marketing research – in designing of their product negotiating with suppliers, sub-contracting of its operation – small business must have current market information just like technological change, price, quality, competitors action o Legal problems – the company must carry on its operation with harmony of the legal problems like respecting the tax laws of the country, environmental protection stipulations o Nepotism – favoritism towards family members or to mean sacrificing the interest of the business for family interest just like employing family member with higher salary while they are contributing little o One person management – since managers of small businesses are not professionals often are less effective than they should be. So specially after intermediate level of small business managers must couple their management with pit outside management assistance or by employing of professionals o Lack of technical competence – technical knowledge regarding operations, contract management o Absentee management 2.4. Problems in Ethiopia small business Small-scale industries have not been able to contribute substantially as needed to the economic development particularly because of-financial, production, and marketing problems. These problems are still major handicaps to their development. Lack of adequate finance and credit has always been a major problem of Ethiopian small business. Small-scale units do not have easy access to the capital market because they mostly organized on proprietary partnership basis and are of very small size. They don’t have access to industrial sources of finance partly because of their size and partly because of the fact that their surpluses which can be utilized to repay loans are negligible. Because of their size and partly because of their fact limited profit, they search for funds for investment purposes. Consequently, the approach money lenders who charge high rate of interest hence small enterprise continuo to be financially weak. Small-scale enterprises
  • 7. 7 find it difficult to get raw materials of good quality and act cheaper rates in the field of production. Very often they do not get raw material in time. It is only by overcoming all these constraints that small entrepreneurs can hope to make their enterprises successful. 2.5 Setting a small business Setting up of small new enterprise is a very challenging and rewarding task. Several problems are involved in this task. Right from the conception of a business idea up to the start of production, numerous decisions have to be taken. In order to be taken. In order to succeed in this task, an entrepreneur must correctly perceive the nature and intensity of problems to be faced and prepare and implement appropriate plans. The first end the foremost step in starting a small business is to find out a suitable business idea and give a practical shape to the idea. The entrepreneur should be convinced that idea is in fact a sound one and likely to give reasonable return on his investment. The search for an appropriate business idea is a complicated exercise because the entrepreneur comes across innumerable business opportunities. 2.5.1 What is a basic business idea? The long term thinking of a goal for the unit in the long run rather than to look for the immediate tomorrow is called basic business idea. The basic business idea and the product through hierarchy can be represented as follows. Basic Business Idea Product line Product Range Product
  • 8. 8 Figure 2.1 Hierarchical presentation of business idea Business should think of long term goal and the profit when they start a business. The basic business idea, which is at the top of the hierarchy, is to meet the broadest needs of the customers and has a long life perhaps from 5-50 years. Thus, entrepreneur may think of being in the entertainment film, in automobiles, in medicines, in service industries, etc. The basic business idea facilitates choice of product under an overall plan. The product line is relatively narrow and has a shorter life. The product line consists of different families of products. A unit with a basic business idea for example of packaging can manufacture any of the following groups of the products. 1. Glass bottle, 2. Plastic packages, 3. Paper or wooden packages, and 4. Metal packages. The product- range-on the other includes different sizes of the product within the product line. The product is one item of the product range having difference specifications like size, material, used and weight, etc. The basic business idea, which facilitates a choice of the products at different stages of the product, allows for diversification and expansion. But the basic business idea is not always the same. In dynamic business scheme, one has to carefully watch is one of the basic idea degenerating as regards:- 1. Its ability to generate quick returns 2. Its ability to permit quickly changes in the products The general business atmosphere guides the choice of basic idea. A basic business idea results from the identification of business opportunities in the market. To be successful in business, consistently watch the opportunities to spot where the entrepreneur has to be sensitive to the market changes, watch demand and supply, study consumer behavior, and grasp the basic business idea. In order to establish a business venture with an entrepreneurial system an entrepreneur needs to take the following steps:
  • 9. 9 1. Search for business idea The task of promotion begins with the search for a suitable business idea or opportunity. The idea may originate from various sources, e.g. success story of a friend or relative, demand for certain products, chances of producing a substitute for an imported article, visits to trade fairs and exhibitions, study of project profiles, and industrial potential surveys, meeting with government agencies etc. the idea may relate to the starting of a new business or take over of an existing enterprise. Sources of idea:- a business idea may be discovered from the following sources: i. Observing Markets- careful observation of markets can reveal a business idea. ii. Prospective consumers- consumer knows best what he wants and the habits/tastes, which are going to be popular in the near future. Contacts with prospective consumers can also reveal the features that should be build into a product or service. The customer is the foundation of a business and it is who he keeps it going. Therefore, data on consumer needs and preference must be collected. iii. Developments in Other Nations- people in under developed countries generally follow the fashion trends of developed countries. Therefore, an entrepreneur can discover good business idea by keeping in touch with developments in advanced nations. iv. Study of project profile- various government and private agencies publish periodic profiles of various projects and industries. A careful scrutiny of such project profile is very helpful in choosing in the line of business. v. Government organizations- several government organizations nowadays assist entrepreneurs in discovering and evaluating business ideas. vi. Trade fair and exhibitions-National and international trade affairs are very good sources of business ideas. Trade fairs and exhibitions provide for; a. Assessing the market trends in terms of demand potential and type of product required. b. Meeting a large number of buyers from different states/countries. c. Assessing the attitude of the competitors in a particular product or marketing area. d. Comparing the price and quality of similar products. e. Establishing personal contacts with dealers/importers/customers. f. Projecting new ideas on commercial publicity for promoting sales in the country and abroad.
  • 10. 10 2. Idea Processing i. Preliminary evaluation and testing of ideas- once business ideas are discovered, screening and testing of ideas is done. The following considerations are significant in the evaluation and testing of business ideas. a. Technical feasibility- refers to the possibility of producing the product. Technical feasibility of an idea is judged in terms of availability of necessary technology, machinery and equipment, labor skills and raw materials. The advice and assistance of technical experts may be necessary to judge the technical feasibility of various business ideas. b. Commercial viability- a cost benefit analysis is required to ascertain the profitability of the ideas. There is a different between a business idea and a business opportunity. While the idea for a product or service may be workable (technically feasible), the proposed business built on this may not profitable. It is normal for an entrepreneur to have several ideas for business that have to be rejected before finding one that is not only workable but also worthwhile. In order to judge the workability and profitability of the proposed business feasibility analysis has to be conducted. ii. Detailed analysis- after preliminary evaluation of the idea, the promising idea is subjected to a thorough analysis from all angles. At this stage a lot of information is required. Consultations with experts in various areas of the industry may be necessary to carry out the detailed analysis. Due care should be exercised at this stage because the idea is finally accepted or rejected at this stage. After evaluation of a business idea is completed, the findings are presented in the form of a report known as ‘feasibility report or project report’. This report helps in the final selection of project. It is also useful for procuring licenses, finance, etc from governmental agencies. 3. Select the best idea The feasibility report is analyzed to finally choose the most promising idea. Generally, the following considerations influence the selection of idea for a product or service. a. Products whose imports are restricted or banned by the government. b. Products, which can be exported easily and profitably.
  • 11. 11 c. Products whose demand exceeds their supply so that there exists ready demand. d. Products in which the entrepreneur has manufacturing and or marketing experience. e. Parent ancillary relationships, i.e., the product are to be manufactured for a parent company. f. Products, which showed high profitability. g. Products based on the expansion or diversification plans of existing firms of the family/friends/relatives. h. Products, which ensured specific advantages. The advantages might accrue because of the scale of the industry or the location of the factory or technology of manufacture. i. Products favored by the country’s industrial/licensing policy, e.g., delicensed industries. j. Products for which incentives and subsidies are available. 2.5.2 Project identification and classification/What project an entrepreneur should have? Project- can be defined as a scientifically evolved work plan devised to achieve specific objective within a specified period of time. Taken in this perspective, while projects can differ in size, nature, objectives and complexity, they must all partake of three basic attributes of being a course of action, of having specific objectives and of involving a definite time perspective. The objective may be to create, expand and/or develop certain facilities in order to increase the production of goods and/or services in the community. Project classification Projects have been classified in various ways by different authorities. Little and Mirrelees divide projects into two broad categories, viz., quantifiable projects and non quantifiable projects. Sector wise also projects can be classified in to different categories. Projects can also be classified on the bases of techno-economic characteristics. Some financial institutions classify projects on the basis of the nature of the project and its life cycle. 1. Quantifiable and non-quantifiable projects Quantifiable projects are those in which a plausible quantitative assessment of benefits can be made. Example, industrial development, power generation, and mineral development are forming part of quantifiable projects. Non-quantifiable projects are those where such an assessment is not possible. For example: health, education, and defense.
  • 12. 12 2. Sectoral projects A project may fall in the following sectors; i. Agriculture and allied sector. ii. Irrigation and power sector. iii. Industry and mining sector. iv. Transport and communication sector. v. Social services sector. vi. Miscellaneous sector. The sector classification of projects is quite useful for resources allocation at macro levels. 3. Techno-economic projects Techno-economic projects classification includes factors intensity-oriented classification, causation-oriented classification, and magnitude-oriented classification. These three groupings are narrated as under; a.Factor intensity oriented classification; the factor intensity is used as a base for classification of projects such as capital intensive or labor intensive which depends upon the large scale investments in plant and machinery or human resources. b.Causation oriented classification; the causation-oriented project are determined based on its causes namely demand based or raw material based projects. The non-availability of certain goods or services and consequent demand for such goods or services or the availability of certain raw materials, skills or other inputs is the dominant reason for starting the project. c.Magnitude oriented classification; the size of investments from the basis for magnitude- oriented projects. Projects may thus be classified based on its investment such as large- scale, medium-scale, and small-scale projects. 4. Financial institutions classification Some financial institutions in some countries classify projects according to their age and experience and the purpose for which the project is being take up. They are as follows;
  • 13. 13 a.New projects b.Expansion projects c.Modernization projects d.Diversification projects The projects listed above are generally profit-oriented and the service-oriented projects are classified as under; a.Welfare projects b.Service projects c.Research and development projects d.Education projects Project identification Project identification is concerned with the collection, compilation, and analysis of economic data for the eventual purpose of locating possible opportunities for investment and development of the characteristics of such opportunities. Opportunity refers to any factor that offers promise or potential for moving closer or more quickly towards the firm’s goal. For example, new market, a growing demand for the products or services that a small business provides. According to Peter Drucker (1955), opportunities are of three types; a. Additive opportunities- are those opportunities which enable the decision maker to better utilize the existing resources with out, in any, involving a change in the character of the business and involves minimum disturbance and hence a least risk. b. Complementary opportunities- involve the introduction of new idea that lead to a certain amount of change in the existing firm’s structure. c. Breakthrough opportunities- involve fundamental change in both structure and character of a business. Additive opportunities involve the least amount of disturbance to the existing state of affairs and hence the least amount of risk. The element of risk is more in the other two opportunities. When the element of risk increases, it becomes more important to precisely define the scope and nature of the project idea, to develop alternative solution for achieving the project
  • 14. 14 objectives and to select the best possible approach so as to minimize both resources consumption and risks and to optimize the return or gains. Projects identification cannot be complete without identifying the characteristics of a project. Every project has three basic dimensions- inputs, out puts, and social costs and benefits. The input characteristics define with the project will consume in terms of raw materials, energy, manpower, finance and organizational setup. The nature and magnitude of each of these inputs must be determined in order to make the input characteristics explicit. The output characteristics of a project define what the project will generate in the form of goods and services, employment, revenue, etc. the quantity and quality of all these outputs should be clearly specified. The project should have to consider the SWOT and should be designed accordingly. SWOT is a series of steps one has to consider in evaluating a business opportunity and arriving at a decision on starting a business or not. The SWOT approach compels individuals to think or reason out systematically and analytically the important factors strengths, weakness opportunities, and threats, which can be termed as the internal (strength and weakness) and external factors (opportunities and threats). Project Objectives Project objective is an important element in the project planning cycle. Project objectives are concerned with defining in a precise manner what the project is expected to achieve and to provide a measure of performance for the project as a whole. Objectives are the foundations on which the entire edifice of the project design is built. The essential requirements for project objectives are; 1. Specific, not general 2. Not overly complex 3. Measurable, tangible and verifiable 4. Realistic and attainable 5. Established within resources bounds 6. Consistent with resources available or anticipated
  • 15. 15 7. Consistent with organizational plans, policies and procedures. The project objectives are aimed to complete the project on time, completion of the project within contemplated costs and the completion of the project at a profit to the company. Project objectives are divided into two categories, namely, ‘retentive’ objectives and ‘acquisitive’ objectives. Retentive objectives are concerned with the retention and preservation of resources like money, time, energy, equipment and skills. Acquisitive objectives involve acquisition of resources or attaining states that the organization or its managers do not have. Project objectives are also economical and social in nature. The economical objectives of the project are in the form of profit oriented. The social project objectives are service-oriented. Techniques of Project Identification Desk research and Techno-Economic Survey- are two important techniques of project identification. Desk research implies the collection and use of information from published sources like journals, magazines reports, etc. techno-economic survey is an investigation conducted by a team of experts for identifying the industrial development potential of an era. Data and product identification may be obtained from the following source; a. Industrial potential surveys b. Lead bank survey reports c. New process/product development in research laboratories d. Literature on industries within the country and abroad e. Import/export statistics f. Profitability studies of selected industries g. Studies on price and shortage of certain commodities Project life cycle Like human beings, projects also have a life cycle. Project life cycle consists of three main stages: 1. The pre-investment phase: this is the first phase in the life of a project. It is primarily concerned with objective formulation, demand forecasting, selection of optimal strategy, evaluation of input characteristics, projections of the financial profile, and if necessary cost
  • 16. 16 benefit analysis and ultimately the pre-investment appraisal. The project idea is developed into an investment proposition during this phase. 2. The construction phase: this is phase begins after the investment decision is taken. Resources are invested during this phase in building the basic assets of the projects, which can in due course be utilized to achieve the project objectives. The assets may be in the nature of land and buildings, plants and machinery, ancillary accommodation, communication services, control systems and marketing organization. In projects not involving the use of plant and machinery, the construction phase may merely consist of developing necessary manpower resources. Thus the construction phase consists mainly of developing the infrastructure for the project. It is one time effort. 3. The normalization phase: this phase starts after the trial turn of the project framework developed during the construction phase. It involves routine procedures, which are performed in a cyclic order. The primary objective of this phase is to produce the goods and services for which the project was established. For this purpose, a provision has to be made for raw materials and other consumables. These can be determined by analyzing the process cycle identifying the sequences of process operations. Projects, which do not involve production of goods, do not require raw material but only supplies or supporting goods needed to sustain the project process. Thus, the assets created during the construction phase are utilized during the normalization. 2.5.3 Definition of Industry and Small Scale Industry What is industry? An industry is an institution where raw material is purchased from suppliers, converted into finished product, using machinery and labor, and sold to buyers. Conversion of raw material means changing the size, shape, chemical properties, and assembling different parts, etc. An industry is able to carry out the functions of buying, manufacturing and selling its product with the use of an organization; an organization being a collection of people with of different skills, who coordinate the various functions involved. Small business- would include individuals and firms managing a business enterprises established mainly for the purpose of providing a business enterprise established mainly for the purpose of providing any services other than professional. The original cost price of the
  • 17. 17 equipment used for the purpose of such business doesn’t exceeding Br. 3500 with working capital limits of Br. 17000. Advances for acquisition, construction renovation of houseboats and other tourist accommodation will be included here. Small Scale industries- have been defined as industrial units engaged in manufacturing/preservation activities or repairing/servicing operations including such operations as quarrying, with original environments in plant and machinery not exceeding Br. 1000,000. 2.5.4 Steps in Setting a Small Scale Unit 1. The first key to success in any manufacturing activity is to select the right product. In the beginning, information of possible lines of activity must be obtained, by talking to knowledgeable people, from industrial publications, or from various organizations. The information available from these sources may be supplemented by one’s ideas and some alternative feasible lines of activity identified. These lines of activity must necessarily be those, which are consistent with one’s own personal qualities and capacity. They must essentially be of interest to the entrepreneur. These must be examined with a view to assess: a. The marketing aspects b. Technical aspects c. Financial aspects 2. Having selected a product, detailed project report needs to be prepared. This will cover the following aspects: a. A detail estimate of demand is to be made. b. Technical specifications of the process should be carefully studied. c. The equipment required and there sources are to be specified. d. Requirements of space-land, shed etc. and other utilities like power and water are be assessed e. Manpower requirements of direct and indirect personnel are to be determined and their availability ensured.
  • 18. 18 f. The total cost of the project to be worked out and the means for financing it identified; quotation for equipment, material, etc., have to be obtained; information of financing policies of banks and other financial institutions has to be gathered. g. Like the above information, the economics of the entire scheme at projected operating levels is to be assessed. The break-even point must be well below the envisaged levels of operations for adequate profit. 3. The detail project report having been prepared and availability of the enterprise established, the action phase begin. The form of ownership is to be decided upon and the company formed and registered. Following this, action directed towards obtaining finance, necessary license, and necessary infrastructure is to be taken. This would be involve dealing with various government bodies and other institutions like: financial institutions- for finance; Sales tax, income tax authorities- for respective registration; license authority –for obtaining industrial license and license like for raw material procurement; Municipal Authorities and Electricity Boards- for requisite utilities. Directorate of industries, Municipal authorities, etc, for land, factory, and shed, etc. 4. Once all the required authorizations and sanctions have been obtained, simultaneous action is to be taken for the following: a. Ordering machinery from suppliers. b. Obtaining utilities like power and water connections after construction of shed, if necessary. c. Recruitment of staff. d. Arranging supplies of materials. e. Arranging for distribution of the product. 5. Once these are complete, the plant is ready for commissioning Trail run may be made and at this stage promotional work like efforts may be made to pave the way for introducing the product. When the first few batches of the product are introduced in the market, information regarding its acceptance is to be gathered. On the basis of feedback obtained, the process/product has to be modified until acceptable out-put is obtained. 6. The unit is then ready for commercial production.