Chap 2

Chapter Two
Small Business
Definition
 Worldwide, individual countries apply their own
definitions and criteria in defining categories of
SSEs.
 A business is considered small if it
– Is independently owned, operated, and
financed.
– has few employees.
– has relatively little impact on its industry.
Cont’d…
 Micro enterprises - those firms with <10

workforces and with a paid up capital of not
exceeding birr 20,000.
 Small enterprises - are those ventures with < 10
workforces and with paid up capital of not
exceeding birr 50,000.
Cont’d…
 The most common criteria used to
distinguish between large and small
businesses
The number of employees
Sales volume
The total value of assets
 The volume of deposits
Cont’d…
 For a business to be small, it should meet the
following criteria:
– One individual or small group finance the business
– Its operations are geographically localized
– It has relatively small share of the market in which
it operates
– It is run by its owners or part owners
– Its management is personalized rather than formal
– The number of employees are fewer than 100
Special Contribution or importance of
Small Business
1. Providing New Jobs- provide new job
opportunities. Small businesses produce the
“lion’s share” of the new jobs.
2. Introducing Innovation-
3. Stimulating Economic Competition
4. Aiding Big Business- contribute to the success
of larger ones.
5. Producing goods and services efficiently
Characteristic of Small Scale
Industries
 Closely held: activities are mainly carried out by one of the
partners & others are assist in providing finance.
 Personal character: close personal supervision of all activities,
 Limited scale operations: has a limited share of a given market,
small size.
 Indigenous resources: use local resources
 Labor intensive: more labor oriented, use of simple technology.
 Local area of operation:
 Simple organization: has few or no layers of mgt, low Division of
labor or specialization, limited resources.
Small Business Failure factors
A. External factors of failure

 Economic condition /business cycles
 Fluctuating interest rates
 Unstable financial markets
 Interrupted suppliers
 Government regulations
 Labor market trends
 Inflation
B. Personal factors of failure
 Inexperience:
 Arrogance: unable to get advice from others.
 Mismanagement:
 Over investment in fixed asset:
 Poor inventory control: Purchasing too much inventory.
 Poor financial control and inadequate record:
 Poor business philosophy:
 Lack of planning:
 Lack of marketing research:
Small Business Problems in
Ethiopia
 Lack of adequate finance and credit
 Do not have easy access to the capital market
 Difficult to get raw materials of good quality &
at cheaper rates in the field of production.
 Outdated techniques of production
 Manufacturers do not correctly know how much
raw material and accessories are required to
make one unit of a product.
Cont’d…
A. Product- Lack of product diversity, similar
products are over-crowding the market, lack the
skill to modify their products.
B. Price: Lack of basic costing knowledge, sell at
below cost.
C. Promotion: refrain from undertaking promotional
activities such as issuing flyers, posters and
business cards.
D. Retailing: do not have the necessary retail
outlets.
Cont’d…
E. Finance: Shortage of funds
 Do not use the money for the intended purpose.
 Loss of credibility to get repeated loans when needed
most.
F. Lack of Market related Knowledge
 Lack of information where the best market areas are
located
 Lack of skills to set competitive prices
 Inability to effectively promote products
Setting Small Business
 The first and the foremost step in starting a small
business is to find out a suitable business idea and give
a practical shape to the idea.
What is basic business idea?
 The long term thinking of a goal for the unit in the long
run.
 A great product, an untapped market, and good timing
are essential ingredients in any guidelines for success.
Cont’d…
1. Search for business idea
 Sources of idea- Observing Markets, Prospective consumers
Developments in Other Nations, Study of project profile,
Government organizations, Trade fair and Exhibitions
2. Idea Processing
 Preliminary evaluation and testing of ideas
– Technical feasibility- availability of necessary technology, machinery and
equipment, labor skills and raw materials.
– Commercial viability- cost benefit analysis
 Detailed analysis- Consultations with experts in various areas of
the industry.
The findings are presented in the form of ‘feasibility report or project
report’
Cont’d…
3. Select the best idea

 The feasibility report is analyzed to finally choose the
most promising idea.
 Considerations
 Products, which can be exported easily and profitably.
 Products, which showed high profitability & ensured
specific advantages. .
 Products for which incentives and subsidies are
available.
Definition of Industry and Small
Scale 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.
 Small Scale Industry- are those industries in
which manufacturing, providing services,
productions are done on a small scale manner.
Steps in Setting a Small Scale Unit
1. Select the right product-
 Examining Marketing, Technical, and Financial
aspects.
2. Preparing detailed project report-
 Requirements of space- land
- Determination of Manpower requirements
- Gathering information - financing policies of
financial institutions.
- Equipment required & there sources are to be
specified.
3. Implementation of detailed project
report
 deciding on form of ownership and
registration, obtaining finance,
 obtaining license,
 establishing necessary infrastructure.
4. simultaneous action is to be taken
 Ordering machinery from suppliers.
 Obtaining utilities like power and water connections after
construction of shed, if necessary.
 Recruitment of staff.
 Arranging supplies of materials.
5. The plant is ready for commissioning
 Trial run of machineries
 Introduce the product to the market and obtain feedback
 The unit is then ready for commercial production.
Chapter Two
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Chapter Two

 Micro enterprises - those firms with <10

A. External factors of failure

3. Select the best idea

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