Principles of Small

Business Management

Prepared by : Chandani Karn

 BBM SEVENTH - SEMESTER
COURSE CONTENT :

Chapter 1 : Introduction

Chapter 2 : Option for Going into Business

Chapter 3 : Business Plan

Chapter 4 : Legal Issues

Chapter 5 : Financing New and Growing Business

Chapter 6 : Marketing

Chapter 7 : Operation Management

Chapter 8 : Human Resource Issues

 ENTREPRENEUR
Concept of Entrepreneur :

An entrepreneur is a person responsible for setting up a business

or an enterprise.

He has the initiative, skill for innovation and who looks for high
achievements. He is a catalytic agent of change and works for the
good of people.

He puts up new green field projects that create wealth, opens up
many employment opportunities and leads to growth of other
sectors.
Entrepreneurship development

Entrepreneurship is the process of setting up one’s business as

distinct from pursuing any other economic activity, be it
employment or practicing some profession.
 ENTREPRENEUR

The word origin from the French word, Entreprendre

 which means “ to undertake.”
The term entrepreneur was first used by Richard Cantillon, in his essay on
“ The Nature of Commerce” (1755).
According to Richard Cantillon an entrepreneur was one who buys factor
services at certain prices in order to combine them to produce a product and
sell it at uncertain prices at the moment at which he commits himself to his
costs .
Factor of service : land, labor, capital and organization.

According to Jean Baptiste Say, Entrepreneur is an economic agent.

Who units all means of production

Land of one, labour of another and capital of yet another and
Thus produce a product
By selling the product
He pays rent of land , wages to labour, interest on capital and
What remains is his profit.
 Entrepreneurship can be
defined as systematic,
purposeful and creative
activity of identifying a need,
mobilizing resources and
organizing production with a
view to delivering value to the
customers, returns for the
investors and profits for the
self in accordance with the
risks and uncertainties
associated with business .
Small Business
Small Business Management
Principles of Small Business Management
Concept :-

Small business is defined as a business that has a limited number of employees,

typically fewer than 500, and operates independently of larger corporations.

Small businesses are typically privately owned and operated and have a single owner
or a small group of owners.

The word small denotes something which has low value or virtually an insignificant
identity.

From the financial perspective, low value means the investment is low.

Therefore, when investment is low, it means that the person opting to start a business
has a small amount of money to invest in the business.

At the overall investment carried out by a single person and he is the small business
owner-manager
Top 5 small Business in Nepal

1. Tea and Coffee Shop

2. Poultry Farming

3. Electronics Repair Centre

4. Vehicle workshop

5. Bakery production
Measure of size criteria

American Congress in Small Business Act (1953) defined small business as

one that is independently owned and operated and is not dominant in its
field of operation. Based on this definition, the United States Small Business
Administration has established the following criteria:

1. Manufacturing : fewer than 250 employees

2. Wholesaling : $9.5 to $22 million in annual sales depending on the line

of wholesaling

3. Retailing : $2 to $7.5 million in annual sales depending on the line of

retailing.

4. Services : Not exceeding $1.5 to $10 million in annual sales depending

on the line of business.
Chapter : 1
Contents :
 Meaning of small business

 Economic significance of the small business sector

 Concept of small business – generic definition and national definition

 Differences between small business and large business

 Advantages and disadvantages of operating a small business

 Factors leading to success and failure of small business

 Entrepreneur vs. business owner – manager

 Small – business vs. Entrepreneurship

Meaning of Small Business:-
Several parameters can be used to measure the size of business units. These
include the number of persons employed in business, capital invested in
business, volume of output or value of output of business and power consumed
for business activities. However, there is no parameter which is without
limitations. Depending on the need, the measures can vary.

The industry of Nepal are classified into four broad groups : traditional
cottage industries, small scale industries, medium scale industries and large scale
industries.

According to Nepal Industrial Policy 2076 B.S. those industries which have
capital investment up to 5 crores are called small scale industries or business.
Power consumption uses up to 10 KW electricity for production and are operated
with the help of outside labour ranging in the most cases from 10 to 25
heads.(for cottage)

Note:- Parameters can change or revised every year.

Essentially the small scale industries are generally comprised of those
industries which manufacture, produce and render services which manufacture,
produce and render services with the help of small machines and less
manpower.

These enterprises must fall under the guidelines, set by the Government.

According to Megginson(2003), “a small business is independently owned and

operated, is not dominant in its field and doesn’t engage in new or innovative
practices.”

Nicholas Siropolis says, A small business is an independently owned and a

managed business characterized by its small market share. The size of the
business depends upon the yardstick (that covers the total assets of the owner’s
equity, and yearly sales revenues) and the cut-off point (that refers to the number
of employees engaged in the business).
Economic significance of the small business

1) Job Opportunities
2) Capital Formation
3) Balanced Regional Development
4) GDP and Per Capita Income
5) Helps in Utilization of Local Resources
6) Reduce Migrations
7) Support to Large Scale Industries
8) Develops Entrepreneurship
9) Promote Export
10)Develop International Relationship
11)Supply of Quality Product
1) Job opportunities :-

 Small business is second largest industry which creates huge employment

opportunities after agriculture.

 It uses labour intensive techniques.

 Hence, it provides employment problem to a great extent.

 Thus, it reduces the unemployment problem to a great extent.

 It provides job opportunities to skilled as well as unskilled labour.

 It provides employment opportunities in urban as well as rural areas.

2) Capital Formation :-

 Entrepreneurs mobilize the idle savings of the

public through the issues of industrial securities.

 Investment of the public savings in industry results

in productive utilization of national resources.

 Rate of capital formation increases which is

essential for rapid economic growth.

 Thus, an entrepreneur is the creator of wealth.

3) Balanced Regional Development :-

 Small business promotes decentralized

development of industries as most of the
small scale industries are set up in backward
and rural areas.

 It removes regional disparities by

industrializing rural and backward areas and
brings balanced regional development.

 The growth of industries and business in

these areas leads to infrastructure
improvements like better roads and airports,
stable electricity and water supply , schools,
hospitals, shopping malls and other public
and private services that would not otherwise urban rural
be available.

 It helps to reduce the problems of

congestion, slums, sanitation and pollution
in cities by providing employment and
income to people living in rural areas.
4) GDP and Per Capita Income :-

 In Nepal, it contribute about 22% to the country’s GDP, creating over 1.7
million job opportunities in the last 25 years.

 However, agriculture contributed the second largest amount.

 Each new addition to above makes use of even more resources like land,
labor and capital to develop products and services that add to the national
income, national product and per capita income of the country.
5) Helps in Utilization of Local Resources :-

 Small business helps to utilize local resources like small savings and
entrepreneurial talent of entrepreneur.

 All these might otherwise remain idle and unutilized.

 Therefore, there is an effective utilization of such resources.

 It promotes traditional family skills and handicrafts.

 There is a great demand for handicraft goods in foreign countries.

 It helps to improve the growth of local entrepreneurs and self-employed

professionals in small towns and villages in Nepal.
6) Reduce Migrations :-

 Small business/industries can create large number of employment in rural area.

 Therefore, migration of people from rural to urban can be reduced or minimized.

7) Support to Large Scale Industries :-

 Small business provides parts, components, accessories to large scale industries

and meets the requirements of large scale industries through setting up units
near the large scale units.

 Eg. Car manufacturing company can depend upon SSI manufacturing tyre,
glass, seats etc.
8) Develops Entrepreneurship :-

 Small business helps the job seekers to turn out as job givers.

 It promotes self-employment and spirit of self-reliance in the society.

 It has the potential to attract the young aspirants towards entrepreneurship.

 It can accommodate the technical and non-technical young first generation

entrepreneurs .

 Even government provides various incentives to set-up SSI, which motivates people
to start their own venture.

9) Promote Export

10) Develop International Relationship

11) Supply of Quality Product

 Generic definition of Small Business
Small businesses are typically privately owned and operated and have a single owner
or a small group of owners.
The word small denotes something which has low value or virtually an insignificant
identity.
From the financial perspective, low value means the investment is low.
Therefore, when investment is low, it means that the person opting to start a
business has a small amount of money to invest in the business.
At the overall investment carried out by a single person and he is the small business
owner-manager

Small business is defined as a privately owned corporation, partnership, or sole

proprietorship that has fewer employees and less annual revenue than a corporation
or regular-sized business

Several parameters can be used to measure the size of business units. These include
the number of persons employed in business, capital invested in business, volume of
output or value of output of business and power consumed for business activities.
However, there is no parameter which is without limitations. Depending on the need,
the measures can vary.
Small business have defined by various authors in various ways.

Small Business Act[SBA], 1934, “a business that is independently owned

operated and not dominant in its field.”

According to Richard Cantillon, an entrepreneur was one who buys factor

services at certain prices in order to combine them to produce a product and sell it
at uncertain prices at the moment at which he commits himself to his costs .
Factor of service : land, labor, capital and organization.

According to Megginson(2003), “a small business is independently owned and

operated, is not dominant in its field and doesn’t engage in new or innovative
practices.”

Nicholas Siropolis says, A small business is an independently owned and a

managed business characterized by its small market share. The size of the
business depends upon the yardstick (that covers the total assets of the owner’s
equity, and yearly sales revenues) and the cut-off point (that refers to the number
of employees engaged in the business).
Criteria for defining small business (generic definition )
The legal definition of “small” often varies by country and industry. Different countries have their own criteria fore
measuring small business

In USA, manufacturing firms employee up to 500 employees are regarded as small. For
wholesale, retail and service firms, the annual sales should not exceed not exceed US$ 3.5
million

In the U.K., manufacturing firms with 200 employees and construction/mining/quarrying firms
employing up to 25 employees regarded as small

In Japan, it is less than 300 employees for manufacturing/ mining, less than 100 employees on
wholesale and less than 50 for services. Continued…..

In Australia, it is less than 100 employees for manufacturing and less than 20 employees for
non-manufacturing.

In India, it is capital assets up to Rs 10 million (original value of plant and machinery only).

UNDP defines small business is the one that employs 20 to 100 employees.

In Nepal, small industry that has fixed assets up to Rs 30 million, such fixed assets include
specified movable and immovable assets.
 National definition of Small Business
Context of Nepal, those industries which have capital investment up to 5 crores
are called small scale industries.
Such industries are mostly capital-intensive and are operated by outside labours.
For example: rice mill, oil mill, painting and publication, carper knitting industries etc.

In Nepal, small industry that has fixed assets up to Rs 30 million, such fixed assets include
specified movable and immovable assets.

According to Nepal Industrial Policy 2076 B.S. those industries which have
capital investment up to 5 crores are called small scale industries or business.
Power consumption uses up to 10 KW electricity for production and are operated
with the help of outside labour ranging in the most cases from 10 to 25 heads.(for
cottage)

It is very important because it generates employment, helps to use local

resources, helps to generate income, supplies resources, helps to generate
income, supplies resources to small and large scale industries and helps to raise
the living standard of the people.
 Industrial development began rather late in Nepal. It started with the
establishment of Industrial council in 1936 A. D. “Gharelu Prachar Illam
Adda” was established in 1940 A.D.

 The cigarette, matches, cotton was gradually established thereafter.

 Raghupati Jute Mills, which is regarded as the first modern industry in Nepal,
was established in 1946.
Differences between Large Business and Small Business

Basis of
Large business Small business
differences
Large in size in terms of fixed assets, Small in size in terms of fixed assets, employees,
1. size employees, market shares and sales market shares and sales
High degree of complexity Low degree of complexity

In the hand of large number of shareholders It is with one or few individuals
2. ownership Risk reward decisions are made by employees Risk reward decisions are personal or group

3. Impact High impact on industry Low impacts on its industries

on Industry Strong in economic power Weak in economic power

4. Flexibility Less flexible to changing markets More flexible to changing markets

5. Mass production Customized production

Economies Low cost and low price Relatively, high cost and high price
of scale High competitiveness Low competitiveness

6. Concentrate on improvement of existing product Concentrate in development of new products and

innovation for big market segments innovative business ideas
 7. Quality Focus on standardization and total quality Focus on quality aspects that are most important
to customers
management

8. Customer Distant relationship with customers Close relationship with customers

Relationship Limited knowledge of customers First hand knowledge of customers

9. Life Tend to perpetuate or have a long life High failure rate leading to closure
Advantages of Operating a Small Business
1. Possibility of a huge workforce
2. Make use of local resources
3. Close supervision
4. Nature of demand
5. More employment
6. Need of small capital
7. Direct relation between the workers and employers
8. Direct relation between the customers and producers
9. Easy management
10.Contribution to the output of the large industrial sectors
11.Obtaining foreign currency
12.Migrator reduction
13.Personal interaction with clients
Disadvantages of Operating a Small Business
1. High cost of production
2. Less use of machine
3. Lack of division of labour
4. Difficulty in getting loans
5. Difficult to face economic crisis
6. Lack of standardized goods
7. Old techniques
8. Costly raw materials
9. Lack of resources
10.Lack of research
11.Difficult to face competition with large scale producers
 Factors Leading to Success of Small Business
The U. S. Small Business Administration claims that five factors determine the
success of a small business owner:

1. Drive
2. Thinking ability
3. People skills
4. Effective communication
5. Technical ability
1. Drive :

 The 13 drive factors that will accelerate your business

I. Customer first (you should on always putting the client at the forefront)
II. Energizing leadership (maintaining high energy is definitely imperative for every
leader)
III. Clarity
IV. Simplicity
V. Ownership
VI. Winning capabilities
VII. Innovation
VIII. Challenge
IX. Collaboration
X. Foresight
XI. Learning
XII. Adaptability
XIII. Resilience (flexibility)
2. Thinking ability :

 Entrepreneurial thinking is useful in any career. It is about taking initiative

learning from experience and being resourceful no matter what happens.
I. Creative problem-solving
II. Turning circumstances to our advantage
III. Seeing possibilities where others see problems

3. People skill :

 People skills are the ability to interacting other respectfully and develop
productive working relationship to minimize conflict and maximize productivity
I. Socially assertive
II. Craft a memorable presence
III. Be a master communicator
IV. Sustain lasting confidence
V. Highly likable
VI. Exceptional at decoding emotions
VII. Pitch your ideas
VIII. Be productive
4. Effective communication :
 It is the process of exchanging ideas, thoughts, opinions, knowledge, and data
so that the message is received and understood with clarity and purpose
 When we communicate effectively, both the sender and receiver feel satisfied.

5. Technical ability :
 A technical ability or skills is the ability to carry out a task associated with technical
roles such as IT, engineering, mechanics, science or finance.
I. General computer skills
II. programming language
III. Social media
IV. Design software
V. Video software
VI. Certified management skills
VII. Math's
VIII. Research skills
 Factors Leading to Failure of Small Business

Business will not always be successful. Some business become successful while
others fail.
In general there are many reasons for business failure.

A) Internal Factors B) External Factors

I. Inefficient management i. Intense competition

II. Insufficient resources II. Change in demand
III. Absence of business III. Legal obligations
morality IV. Natural calamities
IV. Other factors
• Inadequate capital
• Lack of business
knowledge
• Lack of motivation skills
trained employees
• Absence of market study
Entrepreneur
a

Vs
a Business owner-manager

Entrepreneur or entrepreneurial ventures focus on new, innovative offerings, while small

businesses usually deal with known and established products and services.

Because of this, small business owners tend to deal with known risks and entrepreneurs
face unknown risks.

The terms “entrepreneur” and “small business manager” are sometimes used
interchangeably, but an entrepreneur plays a different role than a small business manager.

Not all entrepreneurs make great managers, and not all managers are cut out to be
entrepreneurs.
 Entrepreneur Vs Business Owner-Manager
Entrepreneur Business owner-manager

1. Meaning An entrepreneur is a person who A business is someone who sets up

starts an enterprise with a new a business with an existing idea
idea or concept, undertaking offering products and services to
commercial activities. the customers.

2. Market and They create new market by new Create business in old market idea
market position idea, and they become leader on or they are market player.
that, first mover advantage or Start up are guidelines for
create start up businessman
3. Risk factor It is high because of new idea and It is low because of already available
concept in market
4.Methods of work on new and unconventional Work on old or conventional
competition idea, competition level is low business idea, high competition
level is high

5.Focus Main focus on people, not on Main focus on profit and revenue
profit
6. Nature Intuitive Calculative nature
 Small Business Vs Entrepreneurship
Bases of Small Business Entrepreneurship
difference
1. Dealing They deal with established They deals with new innovative offerings.
products and services.
2. Aim They aim at limited growth with They aim rapid growth with high
continued profitability. productivity.
3. Nature of Small business deal mostly with Entrepreneurs deal with unknown risks.
risk known risks.
4. Focus They focus on a limited area. They focus on a large area.

5. Ability They lack analytical and predictive They have analytical and predictive ability.
ability.
6. Reward Owners are not rewarded publicly They are rewarded publicly for their
for their efforts. efforts.

7. They usually employ less number They employ a large number of people.
Employment of people .
 Economic significance of the small business sector.
Enterprise is the ability to turn a thought into a successful business. A company is
different, as it combines the other three factors: land, employment, and capital. Enterprise
is a different word for profit enterprise or enterprise, but it is most often linked with
business enterprises.

There are many small enterprises in Nepal both inside Kathmandu Valley – The Capital City
of Nepal and outside Kathmandu Valley.
What Is The Role of Enterprises In Economic Development ?
In the economic development of a country, SMEs (Small and Medium sized
enterprises) play an important role. Their role is very critical in terms of
production, job creation, export contribution and income. The contribution of
small and medium – sized enterprises to generating jobs, eliminating poverty,
and to advancing the private sector, in general, is extremely important.

The 2010 study showed that SMEs employ about 57 % of the entire workforce
in Nepal. SMEs makeup over 96% of all industries and contribute 83% to the
generation of industrial jobs. They also account for 80% of the contribution of
the industry to the national gross domestic product (GDP). However, in
addition to the nation’s macro – challenges to political instability and
insufficient resources, access to finance and poor governance are restricted for
SMEs.
How is government helping to boost small business in
Nepal?
The services to help smaller producer improve their capacities by
spreading information about companies and markets, improving their
skills, regulating them minimally and making government agencies more
hastily, and easing alliances. It is also done by networking arrangements
between small enterprises as well as larger producers and exporters.

The government is taking various steps towards small and medium-sized

enterprises. Further, various government policies to support
infrastructure, upgrade technology, preferential access to credit policy
support etc. have supported and encouraged the SMEs. A large number of
capable and potential entrepreneurs, deprived of appropriate
opportunities, may be provided with opportunities by the small sector. It
can help to make small capital available for productive use. SMEs can take
advantage of lean output and find new, cost effective lean output
techniques.