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Small Business: An Overview

This chapter provides an overview of small businesses, including their characteristics, role in the economy, importance of diversity, ways to achieve success, and common causes of failure.

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Small Business: An Overview

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  1. CHAPTER 1 Small Business: An Overview

  2. Learning Objectives • Describe the characteristics of small business • Recognize the role of small business in the U.S. economy • Understand the importance of diversity in the marketplace and the workplace • Suggest ways to court success in a small business venture • Name the most common causes of small business failure

  3. Describe the characteristics of small business LO - 1.1

  4. Small Business • An independently owned, operated, and financed organization • Includes fewer than 100 employees • Involves a minor impact on the industry

  5. Criterion Used to Identify a Small Business

  6. Figure 1.1 - Almost All Established Firms are Small Businesses Source: U.S. Census Bureau, Statistics of the U.S., “Number of Firms, Number of Establishments, Employment, and Annual Payroll by Employment Size of the Enterprise—Totals 2006,” www.census.gov/econ/susb.

  7. SBA • Federally funded agency that provides loans and assistance to small businesses • Establishes definitions of business size that vary by industry • Definitions are based on annual sales revenue or number of employees which vary by industry codes assigned by the North American Industrial Classification System (NAICS)

  8. Factors for Business Size Standards Considered by SBA’s Size Policy Board • Industry structure analysis • Degree of competition • Average firm size • Startup cost • Entry barriers, distribution of sales, and employment by firm size • Effects of different size standard levels on objectives of SBA programs • Comments from the public on notices of proposed rulemaking

  9. Class Exercise • Using the SBA business size guidelines, which of the following are small businesses? • A car assembly plant that employs 7,000 workers • A local wholesaler with 95 employees • A local retail store with $1.5M in yearly sales receipts • A home builder with annual receipts of $2.8M • A mall developer with a $50M construction contract • A farmer with annual sales of $3M • A farmer with annual sales of $500K • A travel agent with annual sales from $1.2M to $2.5M • A dry cleaning firm with $175K in annual receipts

  10. Types of Industries Having Small business Operations • Construction - Includes over 80 percent of companies classified as small by the SBA • Manufacturers and mining • Real estate • Arts, entertainment, and recreational services • Restaurants, lawn care, and telecommunications services

  11. Recognize the role of small business in the U.S. economy LO - 1.2

  12. Small Businesses in the U.S. Economy

  13. Small Businesses in the U.S. Economy • Marketing concept: Determining consumers’ needs and providing goods which satisfy their needs • Offers increased opportunities for small business • Led to an increased importance ascribed to the service economy • Service sector: Provide services, rather than tangible goods

  14. Recent Growth Trends

  15. Understand the importance of diversity in the marketplace and the workplace LO - 1.3

  16. Factors affecting employee diversity Aging population Increased birthrate of minoritygroups Attention to the needs and abilities of people with handicap Increased number of women entering the work force Work Force Diversity

  17. Resources to Assist Women- and Minority-Owned Businesses

  18. Understand the importance of diversity in the marketplace and the workplace LO - 1.4

  19. Factors for Achieving Success in a Small Business

  20. Types of Innovation

  21. Right tools to succeed Market size and definition Gathering sufficient capital Finding and retaining effective employees Getting accurate information Starting Own Business

  22. Name the most common causes of small business failure LO - 1.5

  23. Business Failure

  24. Figure 1.3 - Causes of Business Failures Are Many and Complex Source: Dun & Bradstreet Corporation, Business Failure Record, NFIB Foundation/VISA Business Cord Primer, as shown in William J. Dennis Jr., A Small Business Primer (Washington, DC: National Foundation of Independent Business, 1993), 23. Reprinted by permission of the National Federation of Independent Business

  25. TerminationOccurs when a business terminates operation for any reason FailureOccurs when a business closes with a financial loss to a creditor Business Termination versus Failure

  26. Mistakes Leading to Business Failure • Neglecting to plan for the future • Failing to identify the commitment and hard work required • Incapability to utilize existing employees optimally and hire additional employees in a timely manner • Inaccurate estimates of cash flow and capital requirements

  27. Figure 1.4 - Analysis of Business Closure Source: With kind permission from Springer Science+Business Media. Small Business Economics, 21(1). August 2003, 51–61. Brian Headd, “Redefining Business Success: Distinguishing between Closure and Failure.”

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