Small businesses- Introduction

Franchise businesses

Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchiser). McDonald’s and Subway 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. It is an assumption that small businesses are just franchisees, but the truth is many franchisers are also small businesses, Although considered to be a successful way of doing business, literature has proved that there is a high failure rate in franchising as well, especially in UK, where research indicates that out of 1658 franchising companies operating in 1984, only 601 remained in 1998, a mere 36%.^[10]

Retailers’ cooperative

A retailers’ cooperative is a type of cooperative which employs economies of scale on behalf of its retailer members. Retailers’ cooperatives use their purchasing power to acquire discounts from manufacturers and often share marketing expenses. It is common for locally-owned grocery stores, hardware stores, and pharmacies to participate in retailers’ cooperatives. Ace Hardware, True Value, and NAPA are examples of a retailers’ cooperative.

Many small businesses can be started at a low cost and on a part-time basis, while a person continues a regular job with an employer or provides care for family members in the home. In developing countries, many small businesses are sole-proprietor operations such as selling produce at a market stall or preparing hot food to sell on the street, that provide a small income. In the 2000s, a 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. Internet marketing gives small businesses the ability to market with smaller budgets. Adapting to change is crucial in business and particularly small business; not being tied to the bureaucratic inertia associated with large corporations, small businesses can respond to changing marketplace demand more quickly. Small business proprietors tend to be in closer personal contact with their customers and clients than large corporations, as small business owners see their customers in person each week.

One study showed that small, local businesses are better for a local economy than the introduction of new chain stores. By opening up new national-level chain stores, the profits of locally owned businesses greatly decrease and many businesses end up failing and having to close. This creates an exponential effect. When one store closes, people lose their jobs, other businesses lose business from the failed business, and so on. In many cases, large firms displace just as many jobs as they create.^[11]

Independence is another advantage of owning a small business. A small business owner does not have to report to a supervisor or manager. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners possess the flexibility and freedom to make their own decisions within the constraints imposed by economic and other environmental factors.^[12] However, entrepreneurs have to work for 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.^[13] Small businesses (often carried out by family members) adjust quicker to the changing conditions; however, they are closed to the absorption of new knowledge and employing new labor from outside.^[14]

Challenges

Small businesses often face a variety of problems, some of which are related to their size. A frequent cause of bankruptcy is under capitalization. This is often a result of poor planning rather than economic conditions. It is a 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 or her anticipated expenses. For example, if the prospective owner thinks that he or she will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he or she should have not less than $250,000 available. Start-up expenses are often grossly underestimated adding to the burden of the business. Failure to provide this level of funding for the company could leave the owner liable for all of the company’s debt should he or she 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.^[15] In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.^[16]

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 an expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly. Some of this misunderstanding arises from the failure to distinguish between small business managers as entrepreneurs or capitalists. While nearly all owner-managers of small firms are obliged to assume the role of capitalist, only a minority will act as entrepreneurs.^[17] The line between an owner-manager and an entrepreneur can be defined by whether or not their business is growth-oriented. In general, small business owners are primarily focused on surviving rather than growing; therefore, not experience the five stages of the corporate life cycle (birth, growth, maturity, revival, and decline) as an entrepreneur would.^[18]

Another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success. Business networking and social media has been used as major tool by small businesses in the UK, but most of them just use a “scatter-gun” approach in a desperate attempt to exploit the market which is not that successful.^[19] Over half of small firms lack a business plan, a tool that is considered one of the most important factors for a venture’s success. Business planning is associated with improved growth prospects. Funders and investors usually require a business plan. A plan also serves as a strategic planning document for owners and CEOs, which can be used as a “bible” for decision-making ^[20]

An international trade survey indicated that the British share of businesses that are exporting rose from 32% in 2012 to 39% in 2013. Although this may seem positive, in reality, the growth is slow, as small business owners shy away from exporting due to actual and perceived barriers. Learning the basics of a foreign language could be the solution to open doors to new trade markets, it is a reality that not all foreign business partners speak English. China is stated to grow by 7.6% in 2013 and still, sadly 95% of business owners who want to export to China have no desire and no knowledge to learn their local language.^[21]

Bankruptcy

When a small business fails, the owner may file for 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 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]} Researchers have examined small business failures in some depth, with attempts to model the predictability of failure.^[22][23]

Social responsibility

Small businesses can encounter several problems related to engaging in corporate social responsibility, due to characteristics inherent in their size. 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, such as supporting local charities or not-for-profit activities.^[24] Additionally, a small business owner’s expertise often falls outside the realm of socially responsible practices, which contributes 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.^[24] 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. ^[24]

Job quality

While small businesses employ over half the workforce in the US ^[25] and have been established as a main driving force behind job creation,^[26] 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.^[26] 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.^[27] Both lower wages and fewer benefits combine to create a job turnover rate among U.S. small businesses that is three times higher than large firms.^[26] Employees of small businesses also must adapt to the higher failure rate of small firms, which means that they are more likely to lose their job due to the firm going under. In the U.S. 69% of small businesses last at least two years, but this percentage drops to 51% for firms reaching five years in operation.^[25] The U.S. Small Business Administration counts companies with as much as $35.5 million in sales and 1,500 employees as “small businesses”, depending on the industry. Outside government, companies with less than $7 million in sales and fewer than five hundred employees are widely considered small businesses.

Marketing

Although small businesses have close relationships with their existing customers, finding new customers and reaching new markets is a major challenge for small business owners. Small businesses typically find themselves strapped for time to do marketing, as they have to run the day-to-day aspects of the business. To create a continual stream of new business and find new clients and customers, they must work on marketing their business continuously. Low sales (the result of poor marketing) is one of the major reasons for small business failure. ^[28] Common marketing techniques for small businesses include business networking (e.g., attending Chamber of Commerce events or trade fairs), “word of mouth” promotion by existing customers, customer referrals, Yellow pages directories, television, radio, and outdoor ads (e.g., roadside billboards), print ads, and Internet marketing. TV ads can be quite expensive, so they are normally intended to create awareness of a product or service. Another means by which small businesses can advertise is through the use of “deal of the day” websites such as Groupon and Living Social. These Internet deals encourage customers to patronize small businesses.

Many small business owners find internet marketing more affordable. Google AdWords and Yahoo! Search Marketing are two popular options for getting small business products or services in front of motivated web searchers. Social media has also become an affordable route of marketing for small businesses. It is a fraction of the cost of traditional marketing and small businesses are able to do it themselves or find small social marketing agencies that they can hire out for a small fee. Statistically, social media marketing has a higher lead-to-close rate than traditional media.^{[citation needed]} Successful online small business marketers are also adept at utilizing the most relevant keywords in their website content. Advertising on niche websites that are frequented by potential customers can also be effective, but with the long tail of the Internet, it can be time-intensive to advertise on enough websites to garner an effective reach.

Creating a business website has become increasingly affordable with many do-it-yourself programs now available for beginners. A website can provide significant marketing exposure for small businesses when marketed through the Internet and other channels. Some popular services are WordPress, Joomla Squarespace, Wix, and EXAI. Social media has proven to be very useful in gaining additional exposure for many small businesses. Many small business owners use Facebook and Twitter as a way to reach out to their loyal customers to give them news about specials of the day or special coupons, generate repeat business and reach out to new potential clients. The relational nature of social media, along with its immediacy and twenty-four-hour presence lends an intimacy to the relationships small businesses can have with their customers while making it more efficient for them to communicate with greater numbers. Facebook ads are also a very cost-effective way for small businesses owners to reach a targeted audience with a very specific message. In addition to social networking sites, blogs have become a highly effective way for small businesses to position themselves as experts on issues that are important to their customers. This can be done with a proprietary blog and/or by using a back-link strategy wherein the marketer comments on other blogs and leaves a link to the small business’ own website. Posting to a blog about the company’s business or service area regularly can increase web traffic to a company website.