SME Management

1. SME Management

2. 1 Entrepreneurship and Small Industries by C. L. Bansal • 2 Small Industries and the Developing Economy in India by R. V. RAO • 3 Small Entrepreneurs in Developing Countries Dr. AsgharNasir

3. Definition of small business • It could be argued that there is no definition of a ‘small business’ • Small business is one that is independently owned and operated and is not dominant in its field of operation/(Industry).

4. Definition of small business • Small businesses are usually characterized by their size. • This varies in different countries, according to Small Business Act 1953 (USA), • Micro-business < 20 people • Small business < 100 people • Medium business < 499 people • Large 500 and more

5. Concepts of Small Business According to Clifford Baum small business as one that is: • Actively managed by its owner • Highly personalized • Largely local in its area of operation • Relatively small in size within the industry and • Largely dependent on the internal resources of capital to finance its growth.

6. Concepts of Small Business contd According to the Committee for Economic Development (CED), is an independent, non-profit, non-partisan think tank based in Washington, DC, a business is small if it meets two or more of the following criteria.

7. Concepts of Small Business contd • Management of firm is independent in the sense that owners themselves are managers. • Capital is supplied by ownership and is held by an individual or a small group. • Area of operation is local. • The size of the firm in the industry is small as compared to the highest unit in its field.

8. Examples of Small Business Typical small businesses are • Restaurants • Food sellers • Clothing manufacturing • Clothing shops selling directly to the public • Small scale manufacturing • Home and office services, security, catering, transport, retailing • Health and personal services include hairstyling, healthcare, beauty clinics • The Above Can Be Large Businesses as well

9. Small business and Entrepreneurship • An entrepreneur is someone who creates new business activity in the economy • An entrepreneur is not the same as a small business owner: many entrepreneurs are small business owners, but not all business owners become entrepreneurs • Not all small business owners introduce new business activity You don’t have to be a small business owner to be an entrepreneur. • Look at Bill Gates the founder of Microsoft – he is an entrepreneur, and look how large his organization is?

10. Entrepreneurial skills and Small Business • The abilities and personal characteristics of the owner exert a powerful influence on the success of a small company. • Not only he gives a right direction to the business on right time but also motivate employees for hard work.

11. Characteristics of successful Entrepreneurs • Desire independence • Have a strong sense of initiative • Are motivated by personal and family considerations • Expect quick and concrete results • Are able to react quickly • Are dedicated to their business • Enter business as much by chance as by design

12. Contribution of small business • Poverty eradication goes hand in hand with introducing policies that allow people to - start their own businesses - trade without too much red tape • provide access to a good education The government needs to make sure ordinary people can • start businesses and grow them • create employment opportunities for others • If you want to eradicate poverty, then you have create the space for your citizens to do business • If you discourage entrepreneurs and continue to pay grants you will not end long term poverty

13. Contribution of small business • The small business sector makes a significant contribution to the development of the economy of a country: • provides new jobs • helps with social services • encourages innovation and flexibility • comprehensive learning experience for employees • stimulating economic competition • assisting big businesses in distribution and supply • producing goods and services efficiently • economic necessity

14. Problems Faced by Small Business • Inadequate Financing • Inadequate Management • Government Regulations and Paper work • Changing Technology used by firms • Industry Shifts towards technological products • Global Challenges (competition) • Dependency on Single Supplier

15. Small and Large Firm Differences (Employees)

16. Leading factors heading towards success for a small business Although it is difficult to determine precisely what leads to success in managing a small business, the following are some important factors: • Serving an adequate and well-defined market for the product • Acquiring sufficient capital • Recruiting and using human resources effectively • Obtaining and using timely information • Coping effectively with government regulations • Expertise of owner and employees • Quick reaction to the change in the market

17. Some areas of deep concerns • Poorly planned growth: • Incapability to plan • Loss of independence and control: • Expansion of business without proper control • Typical Growth pattern: • Professionals easily leave small business when they see an opportunity • Threat of failure • Formal and personal failures

18. Selecting the Right Legal form Factors to consider for choosing the right legal form: • Vision regarding the size of your business • The nature of your business • The level of control you desire • Business vulnerability to lawsuits • Tax implications • Expected profit and loss • Earning reinvestment • Personal cash needs

19. For example, to what extent is your family able to endure the physical, psychological and emotional strains associated with running the business? Second, up to what extent are you and your family willing to accept the financial risk involved? Finally, how much information about yourself, your family, and your economic status are you willing to make public? Based on these and some other important factors, you can choose a legal form of business that is suitable to your preferences.

20. Legal Forms of Businesses There are three most common forms of business • Sole Proprietorship • Partnership • Corporation

21. 1 Sole Proprietorships 1) Sole proprietorship: A business which is being run by one person. It’s the simplest form of business ownership. • Most popular form of business organization – 72% of all • Most common in: • Retailing • Service • Agriculture

22. Advantages of Sole Proprietorship • Ease of Startup • Little legal documentation • Least expensive to start • Retention of profits • Flexibility in operation • No Business Income Tax (Single Taxation) • High level of secrecy

23. Disadvantages of Sole Proprietorship • Unlimited Liability • Limited Life – Business ends when owner leaves the business • Limited Capital • Limited Access to Credit • Limited Management and employee expertise

24. 2 Partnership When business is start up with two or more people (2-20) is known as partnership. Almost 8% of all world businesses consist of partnership A least form of business

25. Advantages of Partnership • Greater Access to Capital • Greater Access to Credit • Retention of Profits • More Management Expertise • No Business Income Tax

26. Disadvantages of Partnership • Shared Profits • Unlimited Liability • Limited Life • Business ends when any partner withdraws • Management Disagreements • Non transferability of shares • Everyone is responsible for one partner actions

27. Corporation • Corporation is an organization which is chartered by a state and given many legal rights as an entity separate from its owner. • It is the most common form of business organization.

28. Advantages of Corporations • Limited Liability • Ease of Ownership Transfer • Unlimited Life • Greater Access to Capital • Specialized Management Expertise • Diffusion of risk

29. Disadvantages of Corporations • More difficult & costly to form • Governmental inspections • Paper work • Double taxation • No secrecy • Less Personal interest of employees

30. How to go into business for yourself Becoming the owner of a Small business

31. How a business is formed and operated The following activities are done in starting and operating a business: • A relevant and worthy idea (Product or service) • Ownership and management, and money • Building, machinery, equipment, supplies and materials • Starting operations and production • Revenue receipts • Cost of factors of production, depreciation, taxes • Profit or loss • Repeating the cycle

32. How to go into business for yourself • Search for and identify a needed product • Study the market for that product • Whether to start a new business, buy an existing one or buy a franchise • Make strategic plan • Make operational plan (policies, budgets, standards, procedures, production and marketing) • Make financial plans (estimate income and expenses, initial investment, and sources of funds) • Make a detailed business plan from them • Implement the plan

33. Idea of a needed product • Many people are motivated by glamour of a business. Some succeed while majority fail • Finding a profitable product is not an easy task, millions of products are already available • Idea needs original thinking, putting the idea in an organized form • Extensive reading and contacts with variety of people are needed • Idea can come by chance, from your family/friends business background, from using some product, social conversations, also bankers, consultants, salespeople or anyone else can be a good source of idea • So one can have bundle of ideas at one time

34. Choosing the business to enter 1 The following questions are necessary for selecting an idea • How much capital is needed? • How long will it take to recover my investment? • How long will it take to reach a specific income level? • How will I live until that level? • How much risk? Am I willing to take that risk? • Can I make it on my own or need my family help? • How much time and effort is needed for that business? • Am I starting from scratch or purchasing a franchise? • Do I have the potential of success in this business? • Do I have sufficient information to make a decision? • Is it something I would enjoy?

35. Choosing the business to enter 2 • Now first eliminate the least attractive ideas from consideration and then concentrate on selecting the most desirable one. It is important to eliminate ideas that Will Not provide the challenges, opportunities and rewards- personal and financial. • Also concentrate the things you would like to do – and can do – not on what someone else wants for you. • Now select the businesses to which you plan to devote your energy and resources. • You can discuss your chosen idea(s) with your friends, relatives, small business owners, financial advisors or lawyers for sorting out expected problems and complications and then consider the market for suggested products.

36. Choosing the business to enter 3 • Chambers of commerce are particularly effective sources of information. Being private businessmen and professional, they are quite familiar with area’s needs and also have interest in expanding business opportunities. • As your resources are at stake, Remember, the ultimate decision must be yours. Do not let someone talk you into something you are uncomfortable with. • Select the business that seems best for you. • If you are uncomfortable with existing ideas, search again for an idea that matches your ability, training, experience, personality and interests.

37. Studying market for the product • After selecting the product or business, look at the market potential for each one. If a market does not exist or cannot be developed, don't pursue the project any further. On the other hand, there may be a market in a particular location or a segment of the population that needs your product. • Small businesses usually select one segment of the population for their customers because they don’t have sufficient resources to cover the whole market. • Also they can’t include as large a variety of products as large businesses can. Hence, a small business must concentrate its efforts on the customers it can serve most effectively.

38. Obtaining information about the market • Market research consists of gathering, recording, classifying, analyzing, and interpreting data related to the marketing of goods and services. • Formal research can be effective but are too expensive. • Another method is the study of the existing literature. Census data on population, business and housing can be useful. • Three things are so important in estimating your sales: • The size of the industry and market you want to enter • Your competition and your position • Estimate your own market share

39. Estimating the size of the market The following questions could be asked: • How large is the industry? • Where is the market for my company and how large it is? • What is income level and its distribution within population? • Sales volume is stable, increasing or decreasing for this type of business? • What are the number and size of competitors? • What is the success rate for competing businesses?

40. Estimating the competition • It is important to find that how many similar businesses have gone out of business or merged with competitors. A high number would signal risk. • The competitors activities of controlling the market will tell you about the needed hard work. • What features – such as lower price, better quality or more promotion – will attract business? Can these features be developed for a new firm? • Small companies should stay out of the path of focused market leaders and deliver high extraordinary value to the chosen customers in their selected market.

41. Estimating your market share • By now, you should be able to arrive at an estimated figure for your sales volume and market share. • First, determine the geographic boundaries of the market area and estimate how much of your product might be purchased. • Finally, make an educated guess as to what part of this market you might attract as your share.

42. Deciding whether to Start a New Business, Buy an Existing One, or Buy a Franchise • After choosing the industry, the next step is to decide whether to start a business from the scratch, buy an existing one or buy a franchise • Depending on your personal interest, resources, skills, energy, experience and the amount of risk you are ready for, you can easily make the decision. • Each type has its advantages and disadvantages

43. To start new business from scratch 1 The following reasons/advantages motivate you to start a new business • Make and define rules • Create the preferred type of physical facilities • Obtain fresh inventory • Free hand in selecting and training personnel • Advantage of latest technology, equipments, materials and tools • Can select a competitive environment

44. To start new business from scratch 2 There are some reasons/disadvantages for not starting a new business • Problems in finding the right business • Problems associated with assembling resources, location, equipment, materials, and work force • Lack of an established product line • Lack of an established market and channels of distribution • Establishing basic management systems and controls • Higher risk of failure

45. To Buy an Existing Business 1 This can mean different to different people. The benefits are as follows: • Personnel are already working • The facilities are already available • A product is already being produced for an existing market • The location is already chosen • Already in relation with banks, suppliers and distributers • Revenues and profits are being generated and goodwill exists

46. To Buy an Existing Business 2 There are some reason people don’t like to buy an existing business: • The physical facilities may be old or obsolete • The employees may have a poor production record or attitude • The accounts receivable may be past-due or uncollectible • The location may be bad • The financial condition and relations with financial institutions may be poor • The inventory may be obsolete or of poor quality

47. To Buy a Franchise 1 Majority of businessmen prefer this option. The strong reasons for buying a franchise are: • Each party (franchiser and franchisee) desires the success of other • Franchiser gives readymade successful methods of doing business • Franchises are available in variety of businesses • The market is developed and the market share is already known

48. 2007 Top Global Franchises

49. To Buy a Franchise 2 There are some problems with buying a franchise as well: • A successful franchise would be costly • Payments in the form of initial investment, fee and royalty payments • New franchise can have a high risk of failure • There may not be enough independence for franchisee that he desires (from franchiser)

50. What is your Decision? Now, after a thorough understanding of costs and benefits of each type of business your decision should be based on many factors: • Your background, experience, education, financial resources, interest and energy • Availability of business • Market conditions • The amount of risk you want to take • Availability of experts Based on these and some other factors, one can decide about a business type. Then, the success of business solely depends on proper management and planning