CHAPTER TWO

SMALL BUSINESS

What is business?

A business can be defined as an organization that provides goods and services to others
who want or need them. When many people think of business careers, they often think of
jobs in large, wealthy corporations. Many business-related careers, however, exist in
small businesses, non-profit organizations, government agencies, and educational
settings. Furthermore, you don't need a degree in business to obtain many of these
positions.
A small business is a business that is privately owned and operated, with a small number
of employees and relatively low volume of sales. Small businesses are normally
privately owned corporations, partnerships, or sole proprietorships. The legal
definition of "small" varies by country and by industry, ranging from fewer than 15
employees under Fair Work Act 2009, 50 employees in the European Union, and fewer
than 500 employees to qualify for many U.S. Small Business Administration programs.
Small businesses can also be classified according to other methods such as sales, assets,
or net profits.
Small businesses are common in many countries, depending on the economic system in
operation. Typical examples include: convenience stores, other small shops (such as a
bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest
houses, photographers, small-scale manufacturing etc.

Bases of defining SMEs in various countries

Country Category of Criterion
Industry
Ethiopia  Micro  Investment paid up capital not exceeding < 20,000
Enterprise ETB ( 1200 USD)
 SE  Investment paid up capital USD 2300-5747

USA  Very small  <20 employees

 Small  20-99 employees
 Medium  100-499 employees
France  SME  10-499 employees

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Economic, social and political aspects of small business enterprise
Small businesses have a vital role to play in the Ethiopian economy. Small businesses
need a strong support from the government and the society on grounds of the following
socio-economic and political benefits they provide.
1. Equitable income distribution or improved standard of living
The objective of the incumbent Ethiopian government is to ensure an economic system
where there is decentralization of economic power and equitable distribution of wealth.
The benefits of economic growth should be shared by as many people as possible and
should also provide better quality of life by enhancing the general standard of living of
the people.
2. Inadequate financial resources and vast human resources
Ethiopia, like any other developing and developed country, lacks financial resources
(capital) but has abundant human resources. This lack of finance has lead to state where
there is high unemployment. A better alternative to mitigate this situation is to encourage
the establishment of small and micro enterprises.
Small enterprises are requiring less capital to establish and at the same time they generate
more employment according to the capital invested.
3. Rectifying regional imbalance/rural /urban divide
A country would be having some regions, mostly urban regions, which are very much
developed than other areas, especially rural areas. This leads to disparity among these
regions, and the well developed regions, in turn, will face problems like high migration.
This high migration puts high severe stress on the existing infrastructure and would lead
to poor performance in supplying civic services adequately to people. The establishment
of many small enterprises in rural areas, particularly agro-industry will help the nation
reduce migration of people and avoid stress on civic system by providing employment
within their region.
4. Generation of foreign hard currency
From the experience of several developing and developed country, it could be said that
small enterprises play a big role in exports than the large exports.

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 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 do not 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. Small-scale
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industries find it difficult to get raw materials of good quality and at cheaper rates in the
field of production.
Setting small business
Business idea
A business idea is a concept which can be used for commercial purposes. Business ideas
are all around you. Some business ideas come from a careful analysis of market trends
and consumer needs; others come from serendipity. If you are interested in starting a
business, but don't know what product or service you might sell, exploring these ways of
getting business ideas flowing will help you choose.

Sources of Business Idea

1) Examine your own skill set for business ideas. Do you have a talent or proven track
record that could become the basis of a profitable business? To find a viable business
idea, ask yourself, "What have I done? What can I do? Will people be willing to pay for
my products or services?"
2) Keep up with current events and be ready to take advantage of business
opportunities.
If you read or watch the news regularly with the conscious intent of finding business
ideas, you'll be amazed at how many business opportunities your brain generates.
Keeping up with current events will help you identify market trends, new fads, industry
news - and sometimes just new ideas that have business possibilities.
For instance, same-sex marriages are now legal in Canada. There are now also
entrepreneurs who are selling tourist travel packages that include a marriage ceremony to
same-sex couples from other countries. Would you have identified that business
opportunity when you heard that the Canadian marriage laws had changed?
3) Invent a new product or service.
Think back 30 years ago. Was there a huge demand for anti-virus software, Internet
Service Providers, or desktop computers? No! The key to coming up with business ideas
for a new product or service is to identify a market need that's not being met. The clamor
for ever-increasing security, for instance, has led to an explosion of new security products
and services, ranging from iris-recognition machines through home security services.
Look around and ask yourself, "How this situation could be improved?" Ask people
about additional services that they'd like to see. Focus on a particular target market and
brainstorm business ideas for services that group would be interested in.
4) Add value to an existing product.
The difference between raw wood and finished lumber is a good example of putting a
product through an additional process which increases its value, but additional processes
are not the only way value can be added. You might also add services, or combine the
product with other products. For instance, a local farm which sells produce also offers a
vegetable delivery service; for a fee, consumers can have a box of fresh vegetables
delivered to their door each week.
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What business ideas can you develop along these lines? Focus on what products you
might buy and what you might do to them or with them to create a profitable business.
5) Investigate other markets.
Some business ideas aren't suited to local consumption - but appeal greatly to a foreign
market. Finding out about other cultures and investigating other market opportunities is
an excellent way to find business ideas.
6) Improve an existing product or service.
There are very few products (or services) that can't be improved. Start generating
business ideas by looking at the products and services you use and brainstorming ideas as
to how they could be better.

What project an entrepreneur should have?

• Project is a system involving the co-ordination of a number of separate
department entities through the organization, and which must be completed within
prescribed schedules and time constraints.

Definition of Industry and Small Scale Industry

What is Industry?
An industry is an institution where raw material is purchased from suppliers, converted
into a finished product, using machinery, labor and sold to buyers. Conversion of raw
material means changing the size, shape, chemical properties, and assembling different
parts. 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. It is a basic
category of business activity. The term industry is sometimes used to describe a very
precise business activity (e.g. semiconductors) or a more generic business activity (e.g.
consumer durables). If a company participates in multiple business activities, it is usually
considered to be in the industry in which most of its revenues are derived.
Small Scale Industry
Small scale industries have been defined as industrial units engaged in
manufacturing/preservation activities or repairing/servicing operations not exceeding
approximately Br. 1,000,000.

Characteristics of Small-scale Industries

1. Closely held: - the unit is generally a one-man show. Even if the unit is run by a
partnership concern/company, the activities are mainly carried out by one of the
partners/directors and the others are merely sleeping partners who generally assist in
providing finance.
2. Personal character: - there is close personal contact/supervision of all activities, say
purchase, production, labor, and sale of products.

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3. Limited scale of operation: - has a lesser gestation (development) period. Small
scale unit has a limited share of a given market. The size of the firm in the industry
is small.
4. Indigenous resources: - Small scale industries can be easily located anywhere
subject to availability of raw materials, labor, finance, etc. small scale units use local
resources.
5. Labor intensive:-they are generally more labor oriented with comparatively smaller
capital investment than the larger units.
6. Local area of operation: - the operations of a small scale unit are generally
localized. However, market for its products need not be local. It may cater to local
and regional demands or its products may even be exported.
7. Simple organization: - A small business unit has few or no layers of management.
Division of labor or specialization is low and the resources are limited.

Relationship between Small and Large Units

Small Scale Units Large Scale Units
 Personal character  Impersonal
 Local area of operation  Wide area
 Labor intensive  Capital intensive
 Small fixed investment  Large investment
 Decentralized location  Centralized location
 Independent management  Divorce between ownership and
management
 Proprietorship and partnership  Joint stock company
 Small uneconomic size  Large economic size
 Unorganized labor  Organized labor
 Limited scope for expansion  Greater scope for expansion
Steps in setting up a small scale unit
Search for business ideas

Process the ideas

Select the best idea

Assemble the necessary input resource

Establish the enterprise

Search for business ideas

 The idea may generate from various sources

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  Success story of a friend or relative,
 Demand for certain projects,
 Chances of producing a substitute for an imported article,
 Visits to trade fairs and exhibitions,
 Industrial potential surveys,
 Meeting with government agencies etc.
 The idea should be sound and workable. It should yield a reasonable return on
investment.
Process the ideas
 Once business ideas are discovered, screening &testing of these ideas is done.
 Considerations in the evaluation & testing of business ideas.
a. Technical feasibility: It refers to the possibility of producing the product. E.g.
availability of necessary technology, machinery, labor skills and raw materials.
b. Commercial viability: A cost-benefit analysis is required to ascertain the
profitability of the ideas. E.g. demand, expected sales volume, selling price, cost
of production, breakeven point will be conducted.
 In order to judge the workability & profitability of the proposed business,
feasibility analysis has to be conducted.
 After the evaluation of a business idea is completed, the findings are presented in
the form of a report known as ‘feasibility report’ or project report.

Select the best idea

 Based on the feasibility report analysis the most promising idea will be selected.
 The following considerations influence the selection of idea,
o Products on which the entrepreneur has manufacturing and/or marketing
experience.
o Parent ancillary relationship i.e. the product is to be manufactured for a parent
company.
o Products which showed high profitability
o Products based on the expansion or diversification plans of existing firms
o Products which ensured distinctive advantages
Assemble the necessary input requirements
 Once the promoter is convinced of the feasibility and profitability of the project,
he assembles the necessary resources to launch the enterprise.
 Decisions have to be made about the size, location, layout and form of owner ship
of the enterprise.
 main inputs required for launching an enterprise,
 Information and intelligence, Finance, Personnel