Nature of Small Business and Economic Impact and Big Business Notes

Learning Objectives

  • Define Small Business: Explain the fundamental definition and parameters of what constitutes a small business.

  • Identify Business Types: Categorize and identify the various different types of small businesses existing in the marketplace.

  • Economic Impact: Discuss the specific economic importance and contributions of small businesses to the broader economy.

Defining a Small Business

A small business can be defined by applying two primary approaches to evaluate its size and influence:

1. Market Share Approach

Under this approach, a small business is defined based on its independence and market presence:

  • Independently Owned and Operated: This means the ownership resides with a private individual, a partnership, or a corporation, rather than being a subsidiary of a larger entity.

  • Not Dominant: This indicates that the business does not control a sizable or significant share of its specific market or field of operation.

2. Total Sales / Demand Approach

This quantitative approach focuses on the volume of business relative to the total industry demand:

  • A firm may be formally considered a Small Business when its total sales are less than 1%1\% of the total demand for its specific products.

Types of Small Business

There are five major categories of small business firms, categorized by their primary activities:

1. Manufacturing Business

This involves the conversion of raw materials into finished products required by society. Examples include:

  • Bakeries.

  • Tricycle sidecar assembly shops.

  • Bagoong manufacturers.

  • Restaurants.

2. Service Businesses

These businesses provide value through services rather than physical goods. They are further classified into six sub-types:

  • Business Service: Provides services to other commercial entities.

    • Examples: Accounting firms, janitorial services firms, security services firms, and collection services.

  • Personal Service: Provides services directly to individuals.

    • Examples: Tutoring services, massage parlors, and voice lessons.

  • Repair Service: Provides maintenance and repair for machinery and appliances.

    • Examples: Auto repair shops, watch repair shops, and plumbing services.

  • Entertainment and Recreation: Offers leisure activities.

    • Examples: Movie houses, resorts, and billiard pool centers.

  • Hotels and Motels: Provides lodging and hospitality.

  • Education Services: Provides instructional or academic training.

3. Wholesaling

This refers to the activities of an individual or establishment that sells products to retailers, other merchants, or industrial, institutional, and commercial users.

  • Wholesalers do not typically sell in large amounts to the final consumers.

4. Retailing

This covers all activities involved in the direct sale of goods and/or services to the final consumers for personal use.

5. General Construction Firms

These firms are engaged in the construction of buildings. Clients may include:

  • Private individuals.

  • Private firms.

  • Government entities.

Characteristics of a Small Business

Small businesses typically exhibit three core characteristics:

  1. Independent Management: The owner of the business is usually the active manager of the daily operations.

  2. Small Capital Requirement: The amount of funding needed to start and maintain the business is relatively low compared to large enterprises.

  3. Mostly Local Operation: The business generally serves a local market or community rather than operating on a national or international scale.

Economic Importance of Small Business

Small businesses are vital to the economy for the following reasons:

  1. Economic Opportunities: They provide a primary pathway for entrepreneurs to create wealth and innovate.

  2. Consumer Products and Services: They act as a direct provider of essential goods and services to the public.

  3. Suppliers to Other Businesses: They provide materials or services necessary for the operations of other firms.

  4. Distributors: They act as middlemen or distribution channels for the products of other businesses.

  5. Government Support: They contribute to the nation’s tax base and support government initiatives.

  6. Employment Providers: They are a significant source of jobs for the local workforce.

Advantages and Disadvantages of Operating a Small Business

Advantages

  • Control over Destiny: The owner has the opportunity to gain full control over their professional life.

  • Full Potential: It provides a platform for an individual to reach their maximum personal and professional potential.

  • Unlimited Profit: There is the opportunity to reap profits that are not capped by a salary, depending on the success of the venture.

  • Social Contribution: Owners can make meaningful contributions to society and receive public recognition for their efforts.

Disadvantages

  • Uncertainty of Income: Revenue is not guaranteed and can fluctuate significantly.

  • Risk of Loss: There is a constant risk of losing the entire capital investment if the business fails.

  • Lower Quality of Life: During the startup phase, the owner may experience a lower quality of life until the business is established.

  • Complete Responsibility: The owner bears the full burden of all decisions and consequences.

  • Undesirable Customers: Having to manage and serve difficult or undesirable clients.

  • Administrative Burdens: Dealing with extensive paperwork and other mundane chores.

  • Demanding Conditions: Small business ownership often requires long hours and stressful work conditions.

Research Assignment

Assignment No. 2: Conduct research on a specific small business located in the Philippines. Document the following details in your assignment notebook:

  • Number: (Identifying count or registration information).

  • Capitalization: The amount of capital invested.

  • General Location: Where the business is situated.

  • Products or Services Sold: The specific offerings of the business.