Module 2: Entrepreneurial Mind (PDF)

# MODULE 2: THE NATURE OF SMALL BUSINESS # What is a Small Business? ## Defining a Small Business - A small business can be defined using two main approaches: - **Market Share Approach**: - Small business may be defined as one which is independently owned and operated and which is not...

# MODULE 2: THE NATURE OF SMALL BUSINESS # What is a Small Business? ## Defining a Small Business - A small business can be defined using two main approaches: - **Market Share Approach**: - Small business may be defined as one which is independently owned and operated and which is not dominant in its fields of operation. - The term “independently owned” means ownership is by a private individual, a partnership, or a corporation. - The term "not dominant" indicates that small business does not control a sizable share of its market. When the total sales of a business firm is less than one - **Total assets approach**: - A small business may be defined as one having total assets that fall within a certain bracket. - For example, the Magna Carta for Small Enterprises (R.A. 6977) indicates that the firm must have total assets valued at above P1.5 million to P15 million to be considered small business. The government prefers this approach because it simplifies formulation and implementation of policy. - With the assets value bracket assigned to small business, it is inevitable that all enterprises having total assets valued at P1.5 million and below will be classified as "Microenterprises". # Types of Small Business - **Manufacturing**: - A manufacturing business is one involved in the conversion of raw materials into products needed by society. - Examples: tricycle sidecar assembly, restaurants. - **Service**: - Service businesses are those that provide service in one way or another. - **Business services** - provides service to other business. Examples are accounting firms, janitorial service firms, security service firm, collection agencies and the like. - **Personal services** - provide service to the person. Examples are tutoring. - **Repair services** – provide repair services to owners of various machinery and appliances. - **Entertaining and recreation** - includes movie house, resorts, billiard pool center, and the like. - **Hotels and Motels**; and - **Education Services** - include Montessori school for schools for children, high school, correspondence schools, among others. - **Wholesaling** - Wholesaling refers to the activities of persons or establishments which sell to retailers and other merchants, and/or industrial, institutional, and commercial users, but who do not sell in large amount to final consumers. - Examples are soft drinks wholesalers in local areas, dealers of supplies and office equipment, grains wholesalers, and the like. - **Retailing** - Retailing covers all activities involved in the sale of good and/or services to the final consumers. The bulk of retailing activities are performed by small businesses. Example are retail drugstores, fast foods shops, appliance stores, and other. - **General Construction Firms** - General construction firms are those engaged in the construction of buildings whether for private individuals or firms, or for the government. Many of them performs subcontracting jobs for the bigger contractors such as installing electrical facilities and sewerage. # Economic Importance of Small Business - Small business play an important role in the development of our economy. 1. **Providers of economic opportunities for entrepreneurs** - People who do not feel comfortable as employees have the option of engaging in small business operation. 2. **Providers of products and services to consumers** - the production of may products services is oftentimes not feasible with big and medium business operation. These limited opportunities are naturally fitted for small businesses. 3. **Suppliers of products and services to other business** - some businesses require raw materials, semi-finished parts, finished components, or even labor, which they cannot economically produce. The small businesses perform this task for them. 4. **Distributions of products and services of other businesses** - some manufacturers do not have the ability to distribute their products and services. Many small businesses assume this role for them. 5. **Supporters of government** - small businesses support the government with the taxes they pay, as well as performing other functions. 6. **Providers of employment** - a large proportion of the labor force are employed by the small businesses. # Advantages of Operating a Small Business - An individual has various option to improve his economic lot. They are the following: - **Be an employee**; - An employee enjoys a fixed working schedule like 8:00 A.M. to 5:00 P.M. The pay he receives, however, is limited and dependent to a large extent on industry norms and the financial capability of the company. In some firms, the employee's pat depends on the whims of the owner. - **Be a professional**; - A professional may generate higher income though the effective practice of his profession. - **Be a small business operator (SBO)** - A small business operator keeps long working hours and absorbs whatever damages that happens as result of his faulty decision-making. # However, he is afforded the following benefits: 1. **Opportunity to gain control over his own destiny** - The prospective small business owner can choose from several business opportunities that he would like to take advantage of. - If, after a few years, he thinks that the business is not worth operating anymore, then he can dissolve it and open a new one. This option is not available to plain employees and professionals. 2. **Opportunity to reach his full potential** - The employee will do his work based on prescribed targets which may only require less than his full potential. This is not so with the small business operator. His freedom to act is limited only by his potential and he can revise or amend his targets within short notice. 3. **Opportunity to Reap Unlimited Profits** - If the small business succeeds, all profits, big or small, accrue to the owner. If he is not satisfied, he may exert more efforts to increase his profit. This opportunity is not afforded to the plain employee. 4. **Opportunity to make a contribution to Society and receive recognition for his effort.** - Entrepreneurs who make innovative products available to the public are recognized properly by society. Some of them, like Henry Ford, became billionaires. Other like Walter Disney, merited listings in books of eminent personalities. # Disadvantages of Operating a Small Business 1. **Income Uncertainty** - Income is not guaranteed. 2. **Risk of Losing Investment** - Chance of losing entire capital investment. 3. **Quality of Life** - May suffer until business is established. 4. **Complete Responsibility** - Owner is responsible for all decisions and outcomes. 5. **Undesirable Customers** - Must serve all customers, even undesirable ones. 6. **Administrative Tasks** - Includes paperwork and other chores. 7. **Demanding Work** - Long hours and demanding conditions.