The concept of small business has been defined by different countries in different ways. Moreover, the definition has been changing over time. The two main criteria used to define small business are as follows —
( 1 ) Size of Business – Size refers to the scale of operations. Size may be measured in the following ways —
- Total Capital investment
- The value of total assets or fixed assets
- Total investment in plant and machinery
- The number of persons employed
- Volume / value of production
- Volume / value of sales turnover
- A combination of the above
( ii ) Qualitative Criteria - Size does not always reflect the true nature of an enterprise. In addition, qualitative characteristics may be used to differentiate small business from big business. These characteristics are as follows ;
- Ownership — A small firm is generally owned by one individual or by a few individuals.
- Nature of Management — Management of small business tends to be personalised and independent. The owner himself serves as the chief executive of the firm.
- Technology — Small business is generally labour intensive.
- Geographical area of operating — The area of operation of a small firm is often local.
Nature and Characteristics
(1) Owner is Manager – In small scale industry, the owner himself is generally the manager. Therefore, these firms are controlled and managed by owner himself. The owner actively participates in all aspects of business decision making as owner himself is manager, management of the business in independently.
(2) One man show – A small scale enterprise is owned by one person or a small group of persons who supply the capital. Proprietorship and partnership are the dominant form of ownership in small scale sector.
(3) Local Area of Operation – The operation of a small scale unit is generally localised. However market for its product need not be local. It may cater to local and regional demand or its products may even be exported.
(4) Labour Intensive – Small scale units are generally labour intensive. Capital investment is limited due to the use of simple technology. They require large amount of working capital to meet their day to day expenses.
(5) Indigenous Resources – Small scale units use local resource. Therefore, they have decentralised or dispersed location.
(6) Simple Organisation – A small business unit has few or no layers of management. Division of labour or specialisation is low and resources are limited.
(7) Limited scale of Operations – A small- scale unit has a limited share of a given market. The size of the firm in the industry is small.
Problems of Small Business
(1) Competitive – Small -scale industry can compete with large industry in certain circumstances and in selected products. Examples of such industries are bricks and tiles, fresh baked goods and perishable edibles, preserved fruits, goods requiring small engineering skill, items demanding craftsmanship and artistry.
(2) Supplementary - Small industry can fill in the gaps between large scale production and standard output caused by large-scale units. This is due to this supplementary role of small units. A small tricycle factory sustained and flourished and alongside a large cycle factory in Chennai city.
(3) Complementary – Apart from supplementary relationship, small industry has been a complementary of its large counterparts. In the world, many small units produce intermediate products for large units.
(4) Initiative – Attracted by the high profits of large units, small units also take initiative to produce the particular product. If succeeds and the small grows to large over a period of time.
(5) Servicing – Small industries do also install servicing and repairing shops for the products of large units. In the case of India, such small servicing units can be seen proliferating in respect of large industries like refrigerators, radio and television sets, watches and clocks, cycle and motor, vehicles. Many small firms have been assigned the job of repair and maintenance of product manufactured by large units.
(6) Jobbing – In some cases, large enterprises provide materials and components to small units. The small units process these material and components into finished parts or sub assemblies.
(7) Merchandising – Some small scale units distribute and sell their products through large scale units. For example, Hindustan Unilever Limited distributes soaps and cosmetics produced by small firms. Footwear, refrigerators, voltage, stabilizers, manufactured by many small firms are marketed by large units.
(8) Anciliarisation – Many large firms purchase components, parts and accessories from small firms which serve as ancillaries. For instance, Maruti Udyog buys some components and accessories units in Maruti cars from ancillary units.