UNIT: 9 SMALL BUSINESS

Meaning of small business:

A business which operates on a small scale and requires less capital, less labor
and fewer machines is called small business.

Nature of small business:

In India, the Village and small industries sector consists of both traditional as
well as modern small industries which can be classified as follows:
A) Traditional industries: These industries consist of six types of industries;
1. Handlooms 2. Handicrafts
2. Coir 4. Sericulture
5. Khadi 6. Village industries
B) Modern industries:
1. Small scale industries 2. Power looms

Small scale enterprises under MSMED act 2006 (Micro, Small, & Medium
Enterprises Development Act) are classified into two sectors. They are

 Manufacturing sector
 Service sector
Manufacturing enterprises
The enterprises which are engaged in
the production of goods and are
defined in terms of investment in plant
and machinery.
1.Micro enterprises: investment in
plant and machinery does not exceed
25 lakh
2.small enterprises: more than 25 lakh
but does not exceed 5 crore
Medium enterprises: more than 5
crore but does not exceed 10 crore
Service Enterprises
The industries which are engaged in
rendering services and are defined in
terms of investment in equipment.
1. Micro enterprises: investment in
equipment does not exceed 10 lakh
2. small enterprises: more than 10
lakh but does not exceed 2 crore
3.Medium enterprises: More than 2
crore but does not exceed 5 crore

Village industries: Any industry located in the rural area which produces goods
or renders any service with or without the use of power is called village
industry.

Cottage industry: also known as rural industries and traditional industries.

 Organized by individuals with private resources.
 Normally use family labor and locally available talent.
 Capital investment is small.

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  Simple equipment is used.
 Produce simple products.
 Produce the goods by using indigenous technology.

ROLE OF SMALL BUSINESS IN INDIA:

1. Major portion in industrial units:
About 95% of the industrial units in the country consist of small
industries.
2. Low cost of production:
The cost of production in these industries is very low. Establishment and
running cost also very low.
3. Quick decisions:
Small size of the organization enables the business firm to take quick
decisions and to capture new business opportunities at the right time.
4. Opportunities for entrepreneurship:
These industries provide various opportunities for entrepreneurship
with little capital investment, few formalities to start, the latent skills
and talent.
5. Second largest employment provider:
After agriculture, these industries are the second largest employment
provider. They generate more number of employments.
6. Large variety of products:
These industries provide a large variety of products like ready-made
garments, soaps and detergents, leather, plastic, processed foods and
vegetables, wood and steel furniture, safety matches etc. also provide a
large variety of electronic and engineering goods like televisions, air
conditioners, calculators, pharmaceuticals, electronic teaching aids etc.
7. Simple and flexible production techniques:
Simple and flexible production techniques are used by these enterprises
which make them designing a product according to the tastes,
preferences and requirements of the customers.
8. Balanced Regional Development:
These industry can be easily set up anywhere in the country because they
produce simple products, use simple technology and depend on locally
available resources. Thus it helps balanced regional development of the
country.
9. Good personal relations:
Small business organizations have limited number of customers and
employees. It enables them to maintain good personal relationship with
both customers and employees.

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PROBLEMS OF SMALL BUSINESS:
1. Finance:
Non availability of adequate funds in order to carry out business
operation is one of the main problems faced by these industries. Due to
lakh of creditworthiness, many of these units fail to raise funds from the
capital market. Banks also hesitate to lend money to these units because
many of these units fail to provide adequate collateral security or
guarantees.
2. Raw materials:
Obtaining good quality raw material is another important problem
faced by small business. They have to either compromise with the quality
or have to pay a high price to get good quality materials. Also the
bargaining power is relatively low because of the small quantity of
purchase made by them.
3. Managerial Skill:
Small business is established and managed by a single individual. Hence
he/she may not possess all the managerial skills needed to run the
business.
4. Labor:
Due to shortage of funds these enterprises are not in a position to afford
high salaries to the employees. As a result the productivity per employee
is low and the rate of labor turnover is high.
5. Marketing:
Direct marketing is not feasible for these units since they lack the
necessary infrastructure. Hence they have to depend on middlemen who
sometimes exploit them by paying low prices and delaying the payments.
6. Quality:
The weakest point of small scale units is maintaining the quality. These
business firms have neither adequate resources to invest in quality
research nor the expertise to upgrade technology for improving the
quality of their products.
7. Capacity utilization:
Many small business firms have to operate below full capacity due to
lack of marketing skills or lack of demand. This increases their
operating cost and hence may result in even closure of the business.
8. Technology:
The technology used by these firms is usually outdated, hence as a result
the production is uneconomical and low.
9. Sickness:
Many of these units are becoming sick because of various internal and
external problems. Lack of talented and skilled labor and managerial
and marketing skills are the various internal problems while delayed

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 payments, inadequate loans, lack of demand for their products etc. are
the various external problems faced by them.
10. Global competition:
it is very difficult for small business to compete with large industries
and multinationals in terms of quality standards, marketing capabilities,
financial credit worthiness, technological and managerial strength etc.
they also facing cut throat competition from multinational companies
which are giants in terms of size and business volume.

GOVERNMENT SCHEMES & AGENCIES FOR SMALL SCALE

INDUSTRIES
AGENCIES:
The following Government Schemes and agencies provide assistance to
small scale industries.
1. National Small Industries Corporation (NSIC)
In order to promote aid and foster the growth of small business units
in the country, National Small Industries Corporation (NSIC) was
established in the year 1955. Following are its main functions-
 To create awareness about technological up gradation.
 To obtain, supply and distribute indigenous and imported raw
materials.
 To provide mentoring and advisory services.

2. National Bank for Agricultural and Rural Development (NABARD)

This bank is established in the year 1982 within the main aim to
promote rural development. Besides agricultural it supports cottage
and rural industries by offering counselling and consultancy services
and easy credit facilities. It also organizes training and development
programs for rural entrepreneurs.

3. Rural and Women Entrepreneurship Development (RWED)

Functions:
 Providing necessary training to women entrepreneurs.
 To create a business environment in order to encourage
initiatives of rural and women entrepreneurs.
 To render any other advisory services.

INCENTIVES:
1. Land: Developed plots are offered by every state for establishing
industries.
2. Power: Some states supply power at a concessional rate of 50% while
some give it free of cost during the initial years.

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3. Water: water is either supplied at 50% concession or is totally free
for a period of five years.
4. Sales Tax: Exemption from sales tax is extended by some states for a
period of 5 years while all Union Territories provide full exemption
from sales tax.
5. Octroi: it is a tax on goods on entering a city which most of the states
have abolished to charge.
6. Finance: Small business units are offered loans at a very low rate of
interest.
7. Industrial estates: Establishment of industrial estates in backward
areas is encouraged by some estates.
8. Raw materials: Units located in backward areas get preferential
treatment in the matter of allotment of scarce raw materials like
cement, iron, steel etc.
9. Tax holiday: Industries established in backward, hilly, and or tribal
areas are provided tax exemption for 5 to 10 years.