Contents
What’s it? Small businesses refer to businesses with small operating sizes. Several criteria are used to categorize companies based on their size, including the number of employees, income, invested capital, market capitalization, and output volume.
However, the categories and the basis for categorizing can vary between countries. In some definitions, they may have fewer than 100 employees. They are usually privately owned by a single individual or a small group of individuals.
Importance of small business
Small businesses, despite their individual size, hold significant power in driving a healthy economy. Their large numbers, particularly in developing countries, contribute substantially through various means.
Small businesses act as engines of economic growth by providing a constant stream of goods and services. They are also significant job creators, offering opportunities to those who might not qualify for positions in larger corporations.
Furthermore, small businesses contribute to income generation by employing local workforces and stimulating the local economy. They cater to specific needs in their communities by offering specialized products and services that larger companies might overlook.
Finally, even though they may not be the most competitive players, small businesses promote an environment of efficiency and innovation by providing customized options and fostering competition within the market.
Classifying a small business
As I’ve mentioned, each country or institution has a slightly different description for small businesses. For example, some may use the number of employees indicator, while others use other indicators.
In Indonesia, the Central Bureau of Statistics defines small businesses as those with 5 to 19 employees. Meanwhile, in Europe, the European Commission defines them as having less than 50 workers and an annual turnover of less than €10 million.
Then, in the United States, businesses with annual revenues of less than $38.5 million and no more than 1,500 employees are small businesses, according to the Small Business Administration (SBA). But, it depends on the industry where they operate.
Beyond revenue criteria
In addition to the number of employees and revenue, other criteria for classifying a business are:
Sales volume: Small businesses typically generate lower annual sales compared to larger corporations. This is because they often cater to niche markets, have a smaller customer base, or operate in a local area. However, some small businesses with strong online presence can achieve significant sales volume through e-commerce channels.
Production volume: The volume of goods or services produced by a small business is often lower than that of larger companies. This can be due to limitations in factors like:
- Manufacturing capacity: Smaller production facilities or reliance on outsourcing can restrict output.
- Workforce size: A smaller employee base naturally translates to lower production volume compared to larger companies with extensive workforces.
- Financial resources: Limited capital might restrict investment in machinery, technology, or raw materials needed for high-volume production.
Total assets: The total value of a small business’s assets, including property, equipment, and inventory, is generally lower than that of larger companies. This is due to several reasons:
- Startup costs: They typically require less initial investment compared to larger companies, leading to a lower overall asset base.
- Focus on operational assets: A higher proportion of their assets might be tied up in operational needs like inventory and basic equipment rather than expansive properties or large-scale machinery.
- Limited access to capital: Smaller businesses may have difficulty securing funding for major asset acquisitions, hindering their ability to build a substantial asset portfolio.
Market capitalization: This refers to the total market value of a publicly traded company’s outstanding shares. Since most small businesses are privately held, they won’t have a market capitalization. However, for those that are publicly traded, their market capitalization would be relatively small compared to larger corporations.
Small business characteristics
Small businesses are the backbone of many economies, fostering innovation, job creation, and local community development. But what exactly defines a small business? While specific criteria can vary by country and industry, some key characteristics set them apart from larger corporations. Here are some characteristics of a small business:
Ownership and staffing
Small businesses are often owned and operated by a single person (sole proprietorship) or a small group of individuals (partnership). This can lead to a close relationship with the business and passionate leadership. However, it can also limit access to diverse skill sets and perspectives.
They typically have a small number of employees, frequently drawing talent from the local workforce. This fosters a close-knit team environment but may restrict access to highly specialized professionals.
Market focus and sales
Small businesses often have lower sales volumes than larger corporations. They frequently target local markets or specific niches, limiting their customer base. However, some innovative ones with a strong online presence can achieve significant sales through e-commerce channels.
Due to limited capital and resources, low competitive capacity can be a challenge for small businesses. This can make it difficult to compete with larger companies on price, advertising, or product development.
Structure and flexibility
Small businesses often have a less structured organization compared to larger companies. Business functions like marketing, finance, and human resources might be handled by a single person or a small team. While this can lead to less bureaucracy, it can also result in knowledge gaps and inefficiencies.
They may not have a large professional workforce with specialized skills in areas like accounting, law, or human resources. This can be overcome by outsourcing tasks or relying on the owner’s skills, but it can also limit the business’s growth potential.
Adaptability and change
A key strength of small businesses is their flexibility. Owners can quickly adapt to changes in the business environment by modifying their product offerings, marketing strategies, or operational processes. This allows them to seize new opportunities and respond to challenges more swiftly than larger corporations.
In extreme circumstances, a small business’s flexibility can also allow the owner to easily change business models or even close and pursue other ventures. This can be a positive strategy for adapting to a changing market, but it can also create uncertainty for employees and long-term planning.
Advantages of small business
Small businesses play a vital role in driving innovation, job creation, and fostering a dynamic business landscape. Beyond their economic contributions, however, they offer several distinct advantages that make them attractive to aspiring entrepreneurs, established investors, and the communities they serve. Let’s delve into some of the key benefits associated with them:
Breeding ground for innovation: Unburdened by large bureaucracies and hierarchical structures, their organizational structure are often nimbler and more adaptable. This allows them to experiment with new ideas, develop innovative products and services, and quickly respond to changing market trends. This focus on innovation can lead to groundbreaking advancements that benefit entire industries and consumers.
Job creation powerhouse: They are significant contributors to job creation, particularly at the local level. They employ a vast number of people, often providing opportunities for individuals seeking their first job or those looking to re-enter the workforce. This can have a ripple effect, boosting local economies and contributing to overall community development.
Community focus and local impact: They are often deeply rooted in the communities they serve. It understands the specific needs and preferences of local customers, allowing it to tailor its offerings and build strong relationships. This local focus can revitalize neighborhoods, preserve cultural heritage, and create a vibrant and diverse business environment.
Flexibility and swift decision-making: Small businesses, with their lean structures and fewer layers of management, can adapt and react to market changes much faster than larger corporations. This agility allows them to seize new opportunities, capitalize on emerging trends, and course-correct strategies quickly if needed.
Entrepreneurial spirit and ownership: They offer individuals passionate about a particular idea or product the opportunity to be their own boss and turn their vision into reality. This entrepreneurial spirit can be a powerful motivator, leading to dedication, innovation, and a strong commitment to the business’s success.
Reduced bureaucracy and lower operating costs: Compared to larger corporations, smaller businesses typically have simpler operational structures and less administrative overhead. This can translate to lower operating costs and less time spent navigating complex regulations. This allows them to focus their resources on core business activities and potentially offer more competitive pricing to customers.
Disadvantages of small business
While small businesses offer numerous advantages, they also face distinct challenges that can hinder their growth and success. Here’s a closer look at some of the common disadvantages of small businesses:
High failure rate: Small businesses are more susceptible to failure than larger corporations due to factors like unstructured organization and limited management expertise. This can be due to a lack of experience in areas like financial planning, marketing strategy, or operational efficiency.
Limited resources: Small businesses typically have fewer financial resources than larger companies. This restricts their ability to invest in areas like marketing campaigns, research and development, or hiring highly skilled employees. The low competitive capacity that results can make it difficult to compete with larger players on price, product features, or brand recognition.
Scaling challenges: Even with a successful business model, a small business might struggle to scale up operations due to a lack of capital. This can limit their ability to meet growing customer demand, expand into new markets, or take advantage of economies of scale that could bring down production costs.
Quality control: A reliance on a smaller workforce or limited resources can sometimes lead to inconsistencies in product quality. Poor quality management can further exacerbate this issue. This can damage the business’s reputation and customer loyalty.
Pricing challenges: Small businesses often operate with lower profit margins due to their inability to achieve economies of scale in production. This can result in higher product prices compared to larger competitors, potentially limiting their customer base.
Financial constraints: Securing funding can be a challenge for small businesses. Lenders may be reluctant to provide large loans due to the perceived higher risk of failure associated with small businesses. This can restrict their access to working capital needed for day-to-day operations or growth initiatives.
High borrowing costs: Even when they do secure financing, small businesses often face higher interest rates on loans compared to larger corporations. This is due to the perceived higher risk they represent to lenders. These high costs of funds can further strain a small business’s financial resources.
