Problems faced by small businesses

Definitions of Business or Enterprise Type

To be eligible for funding under the Agricultural and Forestry Processing and Marketing Grant Scheme an enterprise must meet the size criteria detailed below for the whole of the enterprise, including subsidaries.

Micro Enterprise
This is an enterprise whichhas fewer than 10 employees; andhas either an annual turnover not exceeding € 2 million or an annual balance sheet not exceeding € 2 million.

Small Enterprise
This is an enterprise which has fewer than 50 employees; and has either an annual turnover not exceeding € 10 million or an annual balance sheet not exceeding € 10 million.

Medium Enterprise
This is an enterprise which has fewer than 250 employees; and has either an annual turnover not exceeding € 50 million or an annual balance sheet not exceeding € 43 million.

Intermediate Enterprise
This is an enterprise which has less than 750 employees; or has an annual turnover of less than € 200 million.

Return to Agricultural and Forestry Processing and Marketing Grant Scheme 2007 - 2013

Exercise 6

Match the expressions with their definitions.

trade-off               the name manufacturers give to a product

trade union           a name or symbol a company uses on its products

trade secret      a situation of compromise

trade name            a buyer and seller of stocks and shares

trade mark        information a company is not willing to divulge

trade fair                an area specially planned for a lot of factories

trading estate         an event where manufacturers exhibit their products

trader                an organisation protecting the interests of workers

A small business, also called a mom and pop store by some in the United States, is a business that is privately owned and operated, with a small number ofemployees 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 the Australian Fair Work Act 2009, 50 employees in the European Union,[2] and fewer than 500 employees to qualify for many U.S. Small Business Administration programs.^[1] 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, and online business, such as web design and programming, etc.

Characteristics of small businesses

Size definitions

The legal definition of "small" varies by country and by industry. In the United States the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7 million in annual receipts for most nonmanufacturing businesses.^[1] The definition can vary by circumstance – for example, a small business having fewer than 25 full-time equivalent employees with average annual wages below $50,000 qualifies for a tax credit under the healthcare reform billPatient Protection and Affordable Care Act.^[2]

In the European Union, a small business generally has under 50 employees. However, in Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than 15 employees. By comparison, a medium sized business or mid-sized business has under 500 employees in the US, 250 in the European Union and fewer than 200 in Australia.

In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.

The table below serves as a useful guide to business size nomenclature.

Business Size definitions

• Most cells reflect size not defined in relevant legislation • Some definitions are mulit-parameter, e.g., by industry, revenue, market share

Demographics

According to a survey run in the United States among businesses having <500 employees in late 2010, about 50% of minute/micro-businesses are owned by women.^[3]

Franchise businesses

Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchiser). McDonald's restaurants, TrueValue hardware stores, and NAPA Auto Parts stores are examples of a franchise. The small business owner can leverage a strong brand name and purchasing power of the larger company while keeping their own investment affordable. However, some franchisees conclude that they suffer the "worst of both worlds" feeling they are too restricted by corporate mandates and lack true independence. However, in some chains, such as the aforementioned TrueValue and NAPA, franchises may have their own name alongside the franchise's name.

Advantages of small business

A small business can be started at a very low cost and on a part-time basis. Small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity.

Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses.^{[citation needed]} Freedom to operate independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors.^[4] However, entrepreneurs have to work very long hours and understand that ultimately their customers are their bosses.

Several organizations, in the United States, also provide help for the small business sector, such as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.^[5]

Problems faced by small businesses

Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is undercapitalization. This is often a result of poor planning rather than economic conditions - it is common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have no less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's debt should he end up in bankruptcy court, under the theory of undercapitalization.

In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners underprice their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.

In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs, taxes and tax compliance.^[6] In the United Kingdom andAustralia, small business owners tend to be more concerned with excessive governmental red tape.^[7]

Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly.

Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success.

Small business bankruptcy

When small business fails, the owner may file bankruptcy. In most cases this can be handled through a personal bankruptcy filing.^{[citation needed]} Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors there is little advantage to going to the expense of a corporate bankruptcy.^{[citation needed]} Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy.^{[citation needed]} However, corporate assets are normally not exempt, hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy.^{[citation needed]}

Social Responsibility

Small businesses can encounter several problems related to Corporate social responsibility due to characteristics inherent in their construction. Owners of small businesses often participate heavily in the day-to-day operations of their companies. This results in a lack of time for the owner to coordinate socially responsible efforts. ^[8] Additionally, a small business owner's expertise often falls outside the realm of socially responsible practices contributing to a lack of participation. Small businesses also face a form of peer pressure from larger forces in their respective industries making it difficult to oppose and work against industry expectations. ^[9] Furthermore, small businesses undergo stress from shareholder expectations. Because small businesses have more personal relationships with their patrons and local shareholders they must also be prepared to withstand closer scrutiny if they want to share in the benefits of committing to socially responsible practices or not. ^[10]

Job Quality

While small businesses employ over half the workforce ^[11] and have been established as a main driving force behind job creation ^[12] the quality of the jobs these businesses create has been called into question. Small businesses generally employ individuals from the Secondary labor market. As a result, in the U.S. wages are 49% higher for employees of large firms.^[13] Additionally, many small businesses struggle or are unable to provide employees with benefits they would be given at larger firms. Research from the U.S. Small Business Administration indicates that employees of large firms are 17% more likely to receive benefits including salary, paid leave, paid holidays, bonuses, insurance, and retirement plans.^[14] Both lower wages and fewer benefits combine to create a job turnover rate among U.S. small businesses that is 3 times higher than large firms.^[15] Employees of small businesses also must adapt to the higher failure rate of small firms. In the U.S. 69% last at least 2 years, but this percentage drops to 51% for firms reaching 5 years in operation.^[16]