What’s it: Small businesses refer to businesses with small operating sizes. There are several criteria for categorizing companies based on their business 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.
Categorizing a company as 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.
In addition to the number of employees and revenue, other criteria for classifying a business are:
- Sales volume
- Production volume
- Total asset
- Market capitalization
Small business characteristics
Here are some characteristics of a small business:
- Often owned and operated by one person.
- A small number of employees usually coming from the local workforce.
- Low sales value, often targeting local markets, except for those developing online channels.
- Low competitive capacity due to limited capital and resources.
- Less structured organizations where business functions may not be clearly divided.
- Not supported by a professional workforce.
- More flexible in response to changes in the business environment, where owners can easily change business models or even close and pursue other businesses.
Importances of small business
Small companies are important to the economy and to households. Despite their small size, their contribution to the economy can be significant because of their large numbers, especially in developing countries. The following reasons explain the importance of small businesses to the economy.
Driving economic growth. Despite having a low output, small businesses contribute to productive activity by providing goods and services within the economy.
Creating jobs. Small businesses provide many jobs. In addition, they may recruit local workers around them, who are often not absorbed by large companies due to inadequate skills.
Creating more income. Businesses hire and pay their workers. So, they contribute to reducing unemployment and offer income to workers, although not as high as large companies.
Meeting local demand. Small businesses can provide specialized products and services that companies may be reluctant to fulfill because of the small market size.
Encouraging efficiency and competition. Despite low competitiveness, small companies can provide competition to large companies by providing customized goods and services.
Disadvantages of small business
Small companies often face several problems, such as the owner’s low managerial skills. As a result, they often face operating problems such as poor debt and inventory management. Then, they are also difficult to attract skilled workers because people usually like to work in larger, more established companies.
The disadvantages of a small business are:
- High failure rate due to unstructured organization and low management skills.
- Low competitive capacity due to limited resources.
- Not having enough capital to scale up operations.
- Low product quality, usually due to relying more on labor and poor quality management.
- High product prices due to low economies of scale.
- Limited access to finance, where lenders may be reluctant to lend large sums of money because of the high risk.
- High cost of funds due to the high business failure rate.
