THE NATURE OF

SMALL BUSINESS
CHAPTER II
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 business, 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 enterprise are increased. Since it is well-
known that large enterprises bring 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.
WHAT IS A SMALL BUSINESS?
Small business may be defined by using any of the two approaches:
Market share or total assets.

• Under the 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
• A small business may be defined under the total assets approach as one
having total assets that fall within a certain bracket.
• One of the disadvantages of the total assets approach is that asset values
are affected by inflation.
TYPES OF SMALL BUSINESS
• Small business may be
classified into five types:
(1) manufacturing,
(2) service,
(3) wholesaling,
(4) retailing, and
(5) general construction firms.
SMALL MANUFACTURING BUSINESS
• A 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.
SMALL SERVICE BUSINESS
Service businesses are those that provide service in one way or
another. They may be further classified into the following:

Business services – those that provide service to other business.

Examples are accounting firms, janitorial service firms, security service
firms, collection agencies, and the like.
Personal services - those that provide service to the person. Examples
are tutoring services, massage parlors, voice lesson, among others.
Repair services – those that provide repair services to owners of
various machinery and appliance. Examples are auto repair shops, watch
repair shops, plumbing services, and others.
Entertainment and recreation – include movie houses, resorts, billiard
pool centers, and the like.
Hotel and motels.
Education services – include Montessori schools for children, high
school, correspondence schools, among others.
WHOLESALING
Wholesaling refers to the activities of persons or establishments
which sell to retailers and other merchants, and/or to industrial,
institutional, and commercial users, but who do not sell large amounts to
final consumers.

Examples are soft drinks wholesalers in local areas, dealers of supplies

and office equipment, grains wholesalers, and the like. A big number of
these wholesale business are owned by small business operators.
RETAILERS
Retailing covers all activities involved in the sale of goods
and/or services to the final consumers. The bulk of retailing activities
are performed by small businesses. Examples are retail drugstores,
fast food shops, appliance stores and others.
GENERAL CONSTRUCTION FIRMS
General construction firms are those engaged in the construction of
buildings whether for private individuals or firms, or for the government. Many of
the perform subcontracting jobs for the bigger contractors such as installing
electrical facilities and sewerage.

As a whole, general construction firms employ hundreds of thousands of

people and they operate mostly in the countryside.
CHARACTERISTICS OF SMALL BUSINESS
Small businesses have their own distinctive characteristics. They are the
following:
Independent management – The owner is also the manager.
Small capital requirement – Small business requires only small capital and
this can be supplied by a single or a few individual.
Mostly local operation – Small business 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 business plays an important role in the development of
our economy. They assume the following functions:
Providers of economic opportunities for entrepreneurs – People
who do not feel comfortable as employees have option of engaging in
small business operation.
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.
Suppliers of products and services to other businesses – Some
businesses require raw materials, semi-finished parts, finished components,
or even labor, which they cannot economically produce. The small
businesses perform this task for them.
Distributors of products and services of other businesses – Some
manufacturers do not have the ability to distribute their products and
services. Many small businesses assume this role for them.
Supporters of government - Small businesses support the government
with taxes they pay, as well as performing other functions.
Providers of employment – A large proportion of the labor force are
employed by small businesses.
ADVANTAGES OF OPERATING
A SMALL BUSINESS
An individual has various options to improve his economic lot. They are
the following:
1. Be an employee
2. Be a professional; or
3. Be a small business operator (SBO
• An employee enjoys a fixed working schedule like 8:00 A.M. to 5:00 PM. The pay he receives
however, is limited and dependent to a large extent on industry norms and the financial
capability of the company. In some firms, the employee’s pay depends on the whims of the
owner.
• A professional may generate higher income through the effective practice of
his profession.
• The first two options, however, can only be considered depending on certain
conditions. Finding a job is not an easy task. The rate of rejection for job
applicants, especially in the Philippines, is just too high. In reality, there are too
many people who cannot exercise this option.
• Entertaining a certain profession is also not an easy task. First, one must
undergo long years of study, and second, one must pass a rigorous entrance
requirement like passing the board examination. There are also too many
people who cannot exercise this option.
• The last option is small business operation. Although entrance requirements
are not as difficult as the first two options, it does not mean this option is
easier to put into practice. A small business operator keeps long working
hours and absorbs whatever damages that happen as a result of his faulty
decision-making. However, he is afforded the following benefits:
1. The opportunity to gain control over his own destiny,
2. The opportunity to reach his full potential,
3. The opportunity to reap unlimited profits, and
4. The opportunity to make a contribution to society and receive recognition
for his efforts.
The Opportunity to Gain Control Over His Own Destiny
The prospective small business owner can choose from several business
opportunities that he would like to take advantage of. If, after a few years, he
thinks that the business is not worth operating anymore, then he can dissolve it
and open a new one. This option is not made available to plain employees and
professionals.
The Opportunity to Reach Full Potential
The employee will do his work based on prescribe targets which may
only requires less than his full potential. This is not so with the small business
operator. His freedom to act is limited only by his potential and he can revise or
amend his targets within short notice.
The Opportunity to Reap Unlimited Profits
If the small business succeeds, all profits, big or small, accrue to the
owner. If he is not satisfied, he may exert more efforts to increase his profits. This
opportunity is not afforded to the plain employee.

The Opportunity to Make a Contribution to Society and Receive

Recognition for his Efforts
Entrepreneurs who make innovative products available to the public are
recognized properly by society. Some of them, like Henry Ford, became
billionaires. Others, like Walter Disney, merited listings in books of eminent
personalities.
MOST ADMIRED ENTREPRENEURS
Jon Ramon Melendez
Aboitiz (April 26, 1948 –
November 30, 2018) was
a Spanish Filipino businessman,
and president of the Aboitiz &
Company Inc. (ACO)
and Aboitiz Equity
Ventures (AEV), part of the
Aboitiz Group.
Dr. Amable R. Aguiluz V
is the Founder, Owner and
Chairman of the AMA Group of
Companies and currently the Special
Envoy of the President of the
Republic of the Philippines to the
Gulf Cooperation Council. He is
much known for building Asia’s
largest school system, AMA
Education System and is considered
as the Father of IT Education in the
Philippines.
Ferdinand V. Agustin
Under Agustin’s leadership, Bayo has
been recognized by the Philippine Retailers
Association and theDepartment of Trade and
Industry (DTI) as Outstanding Filipino Retailer
in 2002 and the Most PromisingFilipino
Franchise in 2003 by the DTI and the
Philippine Franchise Association.
From souvenir T-shirts to a full set
of tourism services, Jonathan
Jay Aldeguer, president of The
Islands Group, has grown the family
business into one that would give
each tourist the best tourism
experience while they are in the
country.
Jaime Aristotle Alip
is a Filipino [social
entrepreneur], and the Founder and
Managing Director of the CARD
Mutually Reinforcing Institutions, a
group of companies composed of a
foundation, a bank, a micro
insurance, a development institute,
and a business development service.
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:
1. Uncertainty of income;
2. Risk of losing your entire capital investment;
3. Lower quality of life until the business gets established;
4. Complete responsibility;
5. Having to serve undesirable customers;
6. Paperwork and other chores; and
7. Long hours and demanding work condition.
• Operating a small business does not provide the assurance of an income, unlike
getting employment which offers fixed monthly salaries.

• Complete independence in making decision exposes the small business

operator to the consequences of errors of judgement which in some cases
could wipe out his investment. The high rate of small business failures proves
the point.

• As the small business operator assembles the needed resources, starts actual
production, and makes moves to attract customers, income and profit are held
in abeyance, i.e., if they will ever be realized at all. Until then, the owner
experiences a lower quality of life.
• The owner-operator will take full responsibility foe whatever happens to the
business. If the firm is sued for selling unsafe products, for instance, then he
suffers and carries whatever burden or penalty is imposed by authorities, he
cannot pass the blame to anybody else.

• Even if the small business operator has freedom in his actions, he is not
completely free. He cannot choose his customers. Even if he dislikes a
particular customer, he cannot just send him away or even ignore him. He is
bound to give his customers satisfactory service even if they are rude.

• A big company can hire several persons to attend to specific task related to
paperwork like bookkeeping or other unpleasant tasks. The small business
operator is forced to do these tasks himself.
• It is a well-known fact that a small business must maintain long hours of work
to keep the business going. If it cannot acquire sales volume within a short time
frame every day, it must stretch its business hours to accommodate more
customers.

• The limited volume of production and sales limits the number of activities that
can be economically served by hired personnel.

• The residual functions, even if they must be done under harsh working
conditions, must be borne by the small business operator. See comparison of
employment and small business operation (Figure7).