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CHAPTER 1Small Business: An Overview

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After reading this chapter,you should be able to:

• Describe the characteristics of small business.• Recognize the role of small business in the U.S.

economy.• Understand the importance of diversity in the

marketplace and the workplace.• Identify some of the opportunities available to small

business.• Suggest ways to court success in a small business

venture.• Name the most common causes of small business

failure.

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Facts About Small Businesses

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What Is a Small Business

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Figure 1.1: Almost All Established Firms Are Small Businesses

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Small Business and the SBA

• SBA Size Board’s Factors for Business Size Standards:• Industry structure analysis• Degree of competition• Average firm size• Startup cost• Entry barriers, distribution of sales, and employment by

firm size• Effects of different size standard levels on objectives of SBA

programs• Comments from the public on notices of proposed

rulemaking

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Table 1.1: Small Business Size Standards

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Class Exercise

• Using the SBA business size guidelines, which of the following are small businesses?• A car assembly plant that employs 7,000 workers• A local wholesaler with 95 employees• A local retail store with $1.5M in yearly sales receipts• A home builder with annual receipts of $2.8M• A mall developer with a $50M construction contract• A farmer with annual sales of $3M• A farmer with annual sales of $500K• A travel agent with annual sales from $1.2M to $2.5M• A dry cleaning firm with $175K in annual receipts

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Figure 1.2: Small Business Employment Share of NAICS Industries

SOURCE: Small Business Administration, Office of Economic Research, “Research Publications— Small Business Share of NAICS Industries,” Research Summary #218.

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Small Businesses in the U.S. Economy

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Recent Growth Trends

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Recent Growth Trends

• Increased Business Startups• Small business growth (startups) in last 30 years

• 1970 - 264,000 • 1980 - 532,000 • 1990 - 585,000 • 2000 - 574,000• 2006 – 670,100

• Increasing Interest at Colleges and Universities• 1971 – 16 schools offer entrepreneurship courses• 2010 – 2000 schools offer entrepreneurship courses

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Recent Growth Trends: Forces Driving Change in 2011

• Gen Y- Market of 76 million people wanting senior-friendly products such as supermarkets with lower shelves

• Growth of travel and tourism-Industry revenue expected to reach nearly $1.4 trillion

• “Mancession”-Increase in sales of men’s lifestyle products, such as bacon-flavored toothpicks

Source: http://www.entrepreneur.com/trends/index.html

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The Best Industries for Starting a Business Right Now

• Candy• Recession-resistant industry• Snickers, Tootsie Pops, and 3 Musketeers started during the

Great Depression• iPhone Apps

• Marketplace predicted to be worth $1 billion someday• Health-Care Technology

• Employment in field expected to grow by 18 percent between now and 2016, according to the BLS

Source: http://www.inc.com/ss/best-industries-for-starting-a-business

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Work Force Diversity andSmall Business Ownership

Aging population

More women entering the work force

Increased birthrate of

minoritygroups

Needs and abilities of

people with handicaps

Factors Increasing Work Force Diversity

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Secrets of Small Business Success

Identifying Your Competitive Advantage

Remaining Flexible and Innovative

Building Close Relations with Customers

Small Business Success Factors

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Innovation’s Role in Small Business

Product Innovation

Management Innovation

Service Innovation

Types of Innovation

Process Innovation

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Getting Started on the Right Foot

Market size and

definition

Getting accurate

information

Gathering sufficient

capital

Right Tools to Succeed

Finding and

keeping effective

employees

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Understanding the Risks of Small Business Ownership

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Understanding the Risks of Small Business Ownership (cont’d)

Inadequate Management Insufficient Capital

Most Common Causes of Business Failure

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Figure 1.3: The Causes of Business Failures Are Many and Complex

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Understanding the Risks of Small Business Ownership (cont’d)

Termination occurs when a business no longer exists for any reason

Failureoccurs when a business closes with a financial loss to a creditor

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Understanding the Risks of Small Business Ownership (cont’d)

• Common Mistakes That Invite Business Failure• Planning: failing to look toward the future• Understanding what is required: commitment and hard

work• Trying to do it all: not hiring enough employees or not

using employees effectively• Financial myopia: inaccurately estimating cash flows and

capital requirements

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Table 1.2: U.S. Business Startups, Closures, and Bankruptcies

Myth: 90% of all new businesses fail within one year.

Truth: Only about 18% of all businesses are forced to close their doors with a loss to creditors; the rest either close voluntarily or are still in business.

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Figure 1.4: Analysis of Business Closure