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Nature of Small Business - Vocabulary Flashcards

Definition of Small Business

  • Usually independently owned and operated and is not dominant in its field of operation.
  • Definition focuses on ownership, operations and their scope of influence in the operating environment; small businesses are not dominant in their field of operation.
  • A small business is typically defined as a privately owned enterprise that operates on a smaller scale in terms of capital investment, number of employees, market reach, and revenue compared to medium or large enterprises.

Characteristics of Small Business

  • Ownership: Usually owned by a single individual, a family, or a small group of partners.
  • Capital & Assets: Operates with relatively low initial capital and limited resources.
  • Employees: Employs a small workforce (e.g., fewer than 100 employees in many definitions).
  • Market Area: Serves local or regional markets rather than national or international ones.
  • Management: Often managed directly by the owner(s), with less formal organizational structures.
  • Revenue: Generates lower annual sales compared to larger corporations, often subject to government-defined thresholds.

Philippine Context (RA 9501 – Magna Carta for Micro, Small and Medium Enterprises)

  • Micro enterprises: 1-9 ext{ employees}, ext{ assets } < ext{₱}3{,}000{,}000.
  • Small enterprises: 10-99 ext{ employees}, ext{ assets } ₱3{,}000{,}000- ₱15{,}000{,}000.
  • Medium enterprises: 100-199 ext{ employees}, ext{ assets } ₱15{,}000{,}000- ₱100{,}000{,}000.

Identifying A Small Business

  • Initial Capital Outlay (start-up capital): total money required to establish a new business and make it operational before revenue starts; covers one-time costs and early expenses.

    • Includes:
    • Business registration and legal fees (permits, licenses, documentation).
    • Facilities and equipment (purchase or rental of space, furniture, tools, machinery).
    • Initial inventory or raw materials.
    • Technology (computers, software, systems).
    • Marketing and promotion (advertising, branding, launch campaigns).
    • Working capital reserve (salaries, utilities, and other operating costs until income is generated).
    • Example: With as low as ext{₱}100{,}000 you can start:
    • Newspaper vending business
    • Pay phone center
    • Pure water distribution
    • Street hawking
    • Note: There is no specific capital threshold that separates small from large; many different business types qualify as small with small initial layouts.

  • Number of Employees: RA 9501 categories

    • Micro: 1-9 ext{ employees}, assets < ext{₱}3{,}000{,}000
    • Small: 10-99 ext{ employees}, assets ₱3{,}000{,}000- ₱15{,}000{,}000
    • Medium: 100-199 ext{ employees}, assets ₱15{,}000{,}000- ₱100{,}000{,}000

  • Ownership Structure: legal organization and distribution of ownership/management.

    • Sole Proprietorship: owned and managed by a single individual; full control but unlimited liability.
    • Partnership: two or more individuals share capital, skills, profits, and risks; general or limited partnerships.
    • Corporation (Close or Small Corporation): separate legal entity from owners; provides limited liability but requires more compliance and capital.
    • One Person Corporation (OPC): in the Philippines, allows a single individual to form a corporation.
    • Cooperative: owned and controlled by a group with a common interest; profits shared by participation.

  • Types of Technology Employed (overview):

    • 1) Information and Communication Technology (ICT): computers, smartphones, internet, business software for communication, record-keeping, and customer management.
    • 2) Digital and Online Technology: social media, websites, e-commerce for marketing and online selling.
    • 3) Production and Operations Technology: machines, tools, equipment suited to the business type (e.g., sewing machines, food processors, 3D printers).
    • 4) Financial Technology (FinTech): mobile banking, digital wallets, POS systems for convenient transactions and record-keeping.
    • 5) Management and Productivity Tools: accounting software, inventory systems, scheduling apps, cloud storage.
    • 6) Green or Sustainable Technology (optional): solar panels, energy-efficient equipment, eco-friendly processes.

Types of Small Business

  • Trading and Commerce Enterprises: buy and sell goods, not produce; examples include sari-sari stores, retail shops, mini-groceries, online resellers, distributors of basic goods; key feature is profit from the margin between purchase price and selling price.
  • Service Enterprises: provide skills, expertise, or labor as the main product; examples include barber shops, repair services, laundry, internet cafés, transport services, salons, small accounting or consultancy firms; revenue from service fees.
  • Small Manufacturing Enterprises: produce goods on a small scale; examples include small bakeries, furniture makers, tailoring shops, handicraft producers, small-scale food processing (banana chips, dried fish, jams, vinegar).

Advantages and Disadvantages of Small Business

Advantages

  • Low Start-up Capital Requirement: can be established with relatively little initial investment.
  • Flexibility and Quick Decision-Making: owners can adapt quickly; fewer management layers.
  • Close Customer Relationships: local markets; personal connections; personalized service; rapid feedback.
  • Additional advantages (from later sections):
    • Employment Generation: creates jobs in local communities, reducing unemployment in rural and urban areas.
    • Encourages Innovation and Creativity: owners experiment with new ideas, products, or services; rapid testing and implementation.
    • Supports Local Economy: profits reinvested in the community; supports local suppliers and producers.
    • Independence and Control: autonomy in management; pride and fulfillment.
    • Diverse Business Opportunities: ability to operate in trading, services, or manufacturing.

Disadvantages

  • Limited Capital and Resources: funding constraints for expansion; difficult access to loans.
  • High Risk of Failure: many close in the first years due to poor planning, weak capital, or competition; vulnerable to economic changes.
  • Limited Market Reach: typically local/regional; harder to compete with national/international players.
  • Dependence on Owner's Skills: success hinges on owner's knowledge and management ability.
  • Low Economies of Scale: limited ability to purchase materials in bulk; higher unit costs; limited production capacity.
  • Difficulty in Attracting Skilled Workers: budget constraints affect salaries/benefits; higher turnover.
  • Vulnerability to Competition: larger firms can outcompete on price, marketing, and product variety.
  • Limited Use of Technology: financial constraints may keep technology basic or outdated, reducing efficiency and growth potential.

Small Manufacturing Enterprise (SME): Definition, Features, and Role

  • Definition: Small businesses that convert raw materials or semi-finished goods into finished products on a limited scale using small to medium-sized equipment, local labor, and modest capital investment.

Key Features

  • Small-scale production: output limited relative to large factories.
  • Local raw materials: inputs sourced from the community.
  • Labor-intensive: relies on manual work with simple machinery.
  • Limited capital: equipment and facilities investment smaller than large manufacturers.
  • Market scope: serves local or regional markets.

Examples

  • Small bakeries (bread, pastries, cakes)
  • Furniture-making shops (wood, bamboo)
  • Tailoring and garment shops
  • Handicraft and souvenir producers
  • Small-scale food processing (banana chips, dried fish, vinegar, jams)

Advantages

  • Generates local employment.
  • Adds value to raw materials.
  • Encourages entrepreneurship and innovation.

Challenges

  • Limited capital and machinery.
  • Difficulty competing with large-scale manufacturers.
  • Dependence on local demand and raw material supply.

Production and Operations Technology (Overview)

  • Machines, tools, and equipment suited to the business type (e.g., sewing machines for tailoring, food processors for small restaurants, 3D printers for design businesses).
  • Often small-scale and affordable compared to large enterprises.
  • 3 examples of technology in use:
    • Information and Communication Technology (ICT)
    • Digital and Online Technology
    • FinTech
    • Management and Productivity Tools
    • Green or Sustainable Technology (optional)

Production and Operations Technology (Detailed Subtopics)

  • Production and Operations Technology: machines/tools/equipment tailored to the production process.
  • FinTech: mobile banking, digital wallets, POS systems for smoother financial operations.
  • Management and Productivity Tools: software for accounting, inventory, scheduling, cloud storage for efficiency.
  • Green/Sustainable Technology: energy-saving options that reduce costs and support sustainability.

Connections to Foundational Principles and Real-World Relevance

  • Scale and scope: Small businesses operate at a smaller scale but can be pivotal for local economies and employment.
  • Ownership and control: Simpler ownership structures (sole proprietorship, partnerships) influence liability and decision speed.
  • Resource constraints: Capital, labor, and technology constraints shape business models and competitive strategies.
  • Local economic impact: Small and micro firms often source locally, create local jobs, and contribute to community resilience.
  • Policy context: National definitions (RA 9501) help in policy targeting, financing, and support programs.

Ethical, Philosophical, and Practical Implications

  • Autonomy vs liability: Owners gain control but bear most of the financial risk personally in many structures.
  • Equity and inclusion: Small firms can promote local entrepreneurship and inclusive growth but may struggle with equitable access to credit.
  • Sustainability: Small firms can adopt green tech; this may require up-front investment but yields long-term cost savings and environmental benefits.
  • Social responsibility: Employment generation and support for local suppliers align with community welfare goals.

Summary of Key Numerical References

  • RA 9501 categories:
    • Micro: 1-9 ext{ employees}, ext{ assets } < ext{₱}3{,}000{,}000
    • Small: 10-99 ext{ employees}, ext{ assets } ₱3{,}000{,}000- ₱15{,}000{,}000
    • Medium: 100-199 ext{ employees}, ext{ assets } ₱15{,}000{,}000- ₱100{,}000{,}000
  • Start-up capital example: ext{₱}100{,}000 can cover multiple small ventures (newspaper vending, pay phone center, pure water distribution, street hawking).
  • Manufacturing examples and features mention local materials, labor-intensive processes, and small-scale machinery.

Final Takeaways

  • Small businesses are a vital part of the economy, offering flexibility, local employment, and opportunities for entrepreneurship.
  • They face capital, market, and scale constraints but can leverage local networks, rapid decision-making, and personalized customer service to compete.
  • Small manufacturing is a distinct sub-category with its own features, advantages, and challenges, emphasizing local sourcing, labor intensity, and community impact.