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CHAPTER 3 I THE NATURE OF SMALL BUSINESS

INTRODUCTION
Business size is one factor that does not prevent one from engaging in
entrepreneurship. Since only a small number of people have capital large enough to
start a large enterprise, the bigger number of people with minimal resources are
forced to operate on a small-scale basis, if they decide on becoming entrepreneurs.
Since most new ventures will be small businesses, it is expected that majority of the
efforts of those involved in the propagation of entrepreneurship will focus on small
business management.
The premise is that if small businesses are managed properly, their chances of
becoming large enterprises are increased. Since it is well-known that the large
enterprise brings certain benefits to the economy, small business management is an
activity worth pursuing. But if many small businesses will not develop into large
businesses, their contribution is still very significant.
LEARNING OUTCOMES
At the end of this chapter, students will be able to:
1. Define the meaning of small business and what are its types.
2. Know the characteristics and importance of the small business to our
economy.
3. Discuss the advantages and disadvantages of small business.

SMALL BUSINESS
Small business may be defined by using any of the two approaches: market share or
total assets.
Under market share approach, small business may be defined as one which is
independently owned and operated and which is not dominant in its field of
operation. It means ownership is by a private individual, a partnership, or a
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corporation. It indicates that a small business does not control a sizable share of its
market. When the total sales of a business firm is less than one percent of the total
demand of its products, the firm may be considered small business.
On the other hand, small may be defined under the total asset approach as one having
total asset that fall within a certain bracket. For example, the Magna Carta for small
Enterprises (R.A 6977) indicates that the firm must have total assets valued at above
1.5 million pesos to 15 million pesos to be considered as small business. The
government prefers this approach because it simplifies formulation and
implementation of policy.
With the assets value bracket assigned to a small business, it is inevitable that all
enterprises having total assets valued at million pesos and below will be classified
as “microenterprise”.

TYPES OF SMALL BUSINESS

Small business may be classified into five types:
Manufacturing – manufacturing business is one involved in the conversion of
raw materials into products needed by society. Examples of small business
engaged in manufacturing are: bakeries, tricycle sidecar assembly shops,
bagoong manufacturers, restaurants and others.
Service – service businesses are those that provide service in one way or
another. They may be further classified into the following:
1. Business services. (Accounting firms, janitorial service firms, security
service firms, collection agencies and the like)
2. Personal services. (Tutoring services, massage parlors, voice lessons.)
3. Repair services. (Auto repair shops, watch repair shops, plumbing
services.)
4. Entertainment and recreation. (Movie houses, resorts, billiard pool
centers.)
5. Hotel and motels.
6. Education services. (Montessori schools, high schools,
correspondence.)
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Wholesaling – wholesaling refers to the activities of person or establishments

which sell to retailers and other merchants, and/or to industrial, institutional,
and commercial users, but who do not sell in large amounts to final
consumers.
Retailing – retailing covers all activities involved in the sale of goods and/or
services to the final consumers. The bulk retailing activities are performed by
small businesses.
General construction firms – businesses that engaged in the construction of
the buildings whether for private individuals or firms, or for government.
Many of them perform subcontracting job for bigger contractors such as
installing electrical facilities and sewerage.

CHARACTERISTICS OF SMALL BUSINESS

✓ Independent management – the owner is also the manager
✓ Small capital requirement – it requires only small capital and this can be
supplied by a single or few individuals
✓ Mostly local operation – it usually operates in a certain locality although there
are cases when the market is not confined to a local area.

ECONOMIC IMPORTANCE OF SMALL BUSINESS

Small businesses play an important role in the development of our economy. They
assume the following functions.
1. Providers of economic opportunities for entrepreneurs.
People who do not feel comfortable as employees have the option of
engaging in small business operation.

2. Providers of products and services to consumers

The production of many products and services is oftentimes not feasible with
big and medium business operation. These limited opportunities are naturally
fitted for small businesses.
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3. Suppliers of products and services to the other businesses

Some businesses require raw materials, semi-furnished parts, finished
components, or even labor, which they cannot economically produce.

4. Distributors of products and services to other businesses

Some manufacturers do not have the ability to distribute their product and
services. Many small businesses assume this role for them.

5. Supporters of government
Small businesses support the government with the taxes they pay, as well as
performing other functions.

6. Providers of employment
a large proportion of the labor force are employed by small businesses.

ADVANTAGES OF OPERATING SMALL BUSINESS

1. Opportunity to gain control over his own destiny.
2. Opportunity to reach full potential.
3. Opportunity to reap unlimited profits.
4. Opportunity to make a contribution to society and receive recognition for his
efforts.
DISADVANTAGES OF OPERATING A SMALL BUSINESS
Although certain advantages accrue to the small business operator, there are
certain disadvantages that must be considered. These are the following:
Uncertainty of income.
Risk of losing your entire capital investment.
Lower quality of life until the business gets established.
Complete responsibility.
Having to serve undesirable customers.
Paperwork and other chores
Long hours and demanding work condition.
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SUMMARY
Businesses, especially small enterprises, are important segments of our society.
A small business is one which is independently owned and which is not dominant
in its field of operation.
Small business may be classified as manufacturing, service, wholesaling, retailing,
and general construction firms.
Small businesses play an important role in the development of our economy, they
provide economic opportunities for entrepreneurs, products and services to
consumers and industrial users, services to other firms by way of distributing their
products and services, payment of taxes to the government, and employment.

References
Medina, Roberto G. Entrepreneurship and small business management. Rex
Book Store, Inc. Manila 2014