Small Firms and Its Management

Reference:
“Entrepreneurship” by Dr. A R Khan
(Chapter-3, 8, 11, 12)

1
 Defining Small Business
• Businesses may be large, medium, or small. Basically, the size of a business is
determined by the amount of capital, number of employees, volume of sales,
and management style. However, the size of small business varies from one
industry to another industry. Moreover, the definition of small business even
varies from country to country.
• Small business is a business which is independently owned and operated &
not dominant in its field. (Small Business Act, 1934.)
• Small business refers to business locally owned and managed, often with
very few employees working at a single location. (Stoner, Freeman & Gilbert,
1995.)
• Small businesses are normally privately owned corporations, partnerships,
or sole proprietorships.

2
 …Defining Small Business
• According to BSCIC (Bangladesh Small and Cottage Industry
Corporation), a small business is a business in which the
value/ replacement cost of durable resources other than
land and factory buildings is between Taka 0.5 million and
15 million and employment generation is not more than 50
people. Whereas cottage industry means an industry in
which members of a family are engaged in part-time or full-
time in manufacturing or service-oriented activities.

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 …Defining Small Business
Manufacturing Services industry and Businesses
Cottage Run by family members
enterprise Assets :  Worth Tk 10 lakh or less (excluding land and factory building) 
Employee No. : Less than 15 workers including outsiders.
Micro Assets:  Worth Tk 10 lakh to Tk 75 Assets : Worth Tk 10 lakh or less
enterprise lakh (excluding land and factory (excluding land and factory building)
building) Employee No . : Less than 15 workers
Employee No. : 16 to 30 workers
Small-size Assets : Worth Tk 75 lakh to Tk 15 Assets : Worth Tk 10 lakh to Tk 2 crore
enterprise crore (excluding land and factory (excluding land and factory building)
building)  Employee No. : 16 to 50 workers
Employee No. : 31 to 120 workers
Medium-size Assets: Worth Tk 15 crore to Tk 50 Assets : Worth Tk 2 crore to Tk 30
enterprise crore (excluding land and factory crore (excluding land and factory
building)  building)
Employee No. : 121 to 300 workers Employee No. : 51 to 120 workers.
Large-size Assets: Worth above Tk 50 crore Assets : Worth above Tk 30 crore
enterprise (excluding land and factory building)  (excluding land and factory building)
Employee No. : Above 300 workers. Employee No. : Above120 workers
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Proposal of SME Foundation (2021)

5
 Types of Small Business
The following are the broad types or classifications of
small businesses:
 Retailing (grocery, fast food, restaurant, appliance,
hardware etc.)
 Services (repairing, plumbing, travel agencies, electrician,
hair-dressing etc.)
 Manufacturing (sheet metal, mini steel mill, plastics, food
processing etc.)
 Agriculture (crop production, food processing, dairy farm,
vegetation etc.)
 R&D (software development, specialized machinery,
materials, products etc)
 Consulting (Financial, investment, advisory, marketing, risk
management etc)
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 Features of a Small Business
 Managed and run by the owner independently with little or no delegation of authority
 Family workers and fewer hired workers
 Mostly owner financed and limited borrowed funds with no excess to the share market
 No scope for specialist service
 Little emphasis on long term planning
 Close labor –owner/management relations.
 No or limited innovative production /marketing
 Business is housed in small establishments
 Rational cost control possible
 Maximum possible safety of business secret
 Local market and limited non-local market
 Size of investment is relatively smaller
 Volume of sales relatively smaller [limited market share]
 Unable to adopt modern technology
 Mostly handicraft with no use of electricity
 Requirement of minimum legal formalities
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 Role of Small Business
Small businesses play a significant role in the socioeconomic development of a
country. Important ones of such roles of indicated hereunder:
• Large industry wastage/by –product can be put to use
• Desired industrial spread &Decentralization is facilitated
• Business/industry diversification is made easier
• Innovation for new products / services are made
• Development of new technologies with regard to methods, inputs &skills are
silently undertaken
• Ensures wide competition &thereby provides reasonable price advantage to
customers
• Promotion & development of entrepreneurship are facilitated
• Contribute in raising the GDP of the country
• Enable equitable distribution of income among persons & reasons
• Make better use locally available skill, expertise & technical know-how
• More personalized contacts possible with all customers, suppliers, employees &
others interested in the business.
• Explore innovative marketing at home &abroad 8
 …Role of Small Business
• Act as seed bed for new venture
• Help in foreign currency earning  personalized push exports
• Help in correcting  some of the problems created by unplanned urbanization
• Provide an honorable alternative livelihood in a land starved/scarce country.
• Traditional indigenous technologies are kept alive through adaptation
• A controlling factor over big business tendency toward monopoly
• Greater community life
• Development of leadership in the field of business, society & otherwise.
• Large number of small investors can become owner of such businesses.
• Large number of low cost job opportunities can be created.
• Act as backward linkages of the relatively large industries.
• Cost effective product large number of ion possible.
• Unutilized natural resources can be brought under productive use.
• Easy supply of needed goods \ services is facilitated.

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 Advantages of Small Business
1. More personal contacts with customers, suppliers, and
employees
2. Better interpersonal relationships
3. More efficiency in many respects
4. A source of innovation, including flexibility of action
5. A controlling factor over business’ tendency toward
monopoly
6. Greater community life
7. Development of business leaders
8. Low capital to start with
9. Minimum legal formalities
10. Better understanding about market requirement due to small
size
11. Monitor employees’ activities directly or very closely
12. Quick decision-making due to single-handed management 10
 Disadvantages of Small Business
1. Inadequate management ability caused by lack of training
and development
2. Insufficient financing
3. High competition
4. Lack of coordination between producing and selling
5. Lack of proper record-keeping
6. Poor or ineffective marketing practices with almost no
research
7. Sole risk of the whole business
8. Poor or no economies of scale
9. Less skilled workers due to poor compensation packages
10. Market size is small
11. Difficult to use modern technology
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 Causes of Small Business Failure
1. Under/overpricing of goods or services
2. Lack of expertise
3. Poor product/ marketing strategy
4. Over-optimism about market size
5. Underestimating the start-up time
6. Lack of start-up and working capital
7. High start-up costs
8. Wrong location
9. Wrong selection of workers
10. Poor administration
11. Poor accounts management
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 Bangladesh Small and Cottage Industries Corporation (BSCIC)
• Bangladesh Small and Cottage Industries Corporation (BSCIC) is the prime mover
organization entrusted with the responsibility of development of small and
cottage industries (SCI) in Bangladesh. It is an autonomous corporation under the
Ministry of Industries and was established by an Act of the parliament in 1957.
• BSCIC Provides
– Pre-investment counselling
– Post-investment extension services
– Technical information
– Design and prototype of handicrafts
– Industrial profiles and fact sheets
– Marketing information
– Infrastructural facilities
– Skill development training
– Entrepreunership developement training
– In-plant advisory services
– Credit facilities etc.
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Managing Small Business

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 Production Management in Small Business
• Not all the small concerns require production
management. Some businesses involve only in
merchandising or trading and some other involve in
service businesses. Excluding these types there are
some other businesses that involve production. To
handle the production smoothly a sophisticated
advance planning is necessary.

• Production management mainly comprises with what

to produce, how much or many units to produce, when
to produce, and how to produce. Production of certain
products might occur loss for the business if this is not
planned properly.

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 Features of Production Management
in Small Business
 In most small businesses, production and office work
are done under the same roof.
 Small firms produce a little quantity only to satisfy
the local needs.
 Factory time is not scheduled and mostly depends on
the orders collected and on the whim of the owner.
 The procurement of small business is small and here
hand to mouth policy is maintained.
 Most small firms do not use latest and up-to-date
technology due to shortage of funds.
 There is little maintenance of machinery in small
businesses.
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 Production Problems in Small Business
 Little or no cost advantage: As a small business operates in a small
locality, its purchase is small. Thus, it cannot enjoy economies of scale
during purchase. As a result, the excess purchase price affects the final
product with a higher price that causes a small volume of sales.
 No quality control: Because of varying production systems and lack of
standard of quality of products, the quality deteriorates in small
businesses.
 Inability to adapt latest technology: Technology is always changing
and old ones are replaced with new ones. Technology replacement is
highly costly which usually cannot be made by small firms. Thus, a
small firm sticks to the older technology.
 Lack of efficient labor: Efficient and trained work force is always a
striking problem for a small business.
 Storage problem: Storage of raw materials has all time been a
problem for small concerns due to shortage of space of the business.
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 Features of Personnel Management
in Small Businesses
1. Direct relationship between owner and worker.
2. No training is arranged for employees. They get it simply
on the job.
3. Wage is paid according to the length of work done by the
employees or the number of units produced by each
worker.
4. No service rule/ code is established in small businesses.
As a result, systematic approach cannot be followed.
5. Employees are recruited mostly on the basis of personal
contact and personal liking. 18
 Problems of Personnel Management
in Small Business
1. Lack of skilled and efficient laborers or workers.
2. Workers do not stay for a long time in the job and they always
look for better opportunity.
3. Job dissatisfaction prevails among the workers due to lower
pay and absence of basic facilities like medical allowance,
transportation allowance, entertainment allowance,
retirement package, insurance guarantee etc.
4. Workers are not provided with good training by the employers.
Owners always possess a negative attitude toward educating
the workers by offering training programs in the technical,
human, and organizing skills. Consequently, the workers fail to
improve gradually.
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 Remedies to Personnel Management
Problems in Small Business
The owners can arrange different types of training programs to
increase the skill of the workers.
Higher wage can be given to those workers who produce more and
who get the scheduled job done in time.
Profit sharing scheme can be introduced. For example, one-fourth of
the net profit can be reserved for the workers, which will most
probably increase the workers’ skills and motivation to work. Financial
measures, especially for the workers and lower level staff, have always
been very much effective in boosting up the work progress and worker
interest in jobs.
Total activity and the authority of lower level can be distributed and
delegated to the workers. It will help the firm in that the owner will
have fewer loads on his/ her shoulder and the workers will feel more
responsible for their jobs. It will also boost workers’ inner psychology in
that they are part of decision-making of the firm.
If the firm has an upward trend in profit, it can establish service rules
and offer some facilities and fringe benefits to the workers.
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 Marketing Management Practices
in Small Business
The small business should have a sound management for its marketing. To evaluate
the marketing performance, some studies should be conducted. For example:
1. Sales study analysis
2. Marketing cost study analysis
• Grossly, the marketing cost should be between 48% and 52%. If cost is more, it should
be reduced; or the firm will not enjoy competitive pricing. To keep the marketing costs
down, the entrepreneurs must regularly watch out for the advertising and other
promotional costs.
• Two other analyses should be done. For example:
1. Marketing audit, and
2. Profitability analysis
• Marketing audit should be done regularly which should check whether there is any
deviation from the planned marketing program and whether the inter-departmental
activities support marketing function. In case of profitability analysis, the owner must
check which particular product has excess marketing cost in proportion to sales and
profit; and the worst running product should be given special care so that the sales
and the cost ratio can be maintained at an optimum level.

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 Objectives of Office Management
in Small Businesses
1. To collect important and relevant information of the
business and file them in a record book
2. To find out the ways to get the jobs done at lower costs
3. To co-ordinate different departmental functions such as
production, inventory, procurement, finance,
marketing, sales, physical distribution, advertising,
public relations, and the like
4. To ensure discipline of the office such as on-time arrival,
work process, work progress, working hours etc
5. To ensure security of the office equipment and the
safety of workers within the office and factory premises.
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 Problems of Office Management
in Small Business
Lack of expertise
Poor and backdated information
Sometimes workers’ or laborers’ unrest and
dissatisfaction due to poor pay made to them
Usually no official time is maintained
Most small businesses cannot ensure safety and
security of workers and office equipment
Proper filing system is not followed, and
Poor co-ordination among departmental functions
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 Principles of Office Management
in Small Businesses
 Principle of responsibility
 Principle of privacy
 Principle of security of properties
 Principle of cleanliness
 Principle of record keeping- both manual and
computerized
 Principle of usage of high-tech communication systems
 Principle of safety of workers, and
 Principle of co-ordination

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 Solutions to Office Management Problems
in Small Business
 Skilled and experienced personnel should be hired to improve
expertise
 Information should be collected periodically
 Workers should be paid a standard pay with a minimum of
facilities
 Office time should be maintained
 Office should be clean and emergencies like fire extinguisher,
hose pipes, security guard, electronic security devices including
CCTV camera etc should be used to maintain the safety of the
office as well as the workers
 Both computerized and manual record keeping and filing system
should be used, and
 Every department’s operations must be coordinated with the
others on a weekly, monthly, or quarterly basis
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 Leadership and Management
in Small Business
A small business needs different amount of leadership and management at different
stages in its life-cycle. The following matrix can help understand the need for amount
of leadership and management requirements in small firms:

High Considerable leadership Considerable leadership

Amount of and less management and less management
change needed required (start-up required (most big
business) businesses)
(due to
environmental
instability, rapid Considerable management
Little management or
growth etc.) Low but little leadership
leadership required (very
small business) required (many successful
corporations)

Low High
Complexity of operation (due to size, technology,
product assortments, geographic dispersion)

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 …Leadership and Management
in Small Business
• The vertical axis shows how much change the company needs
at present. This change can be either caused by external
factors such as competitors, customers, or the economic
circumstances on one hand; or it can be self-imposed as the
founders/ owners may want to change from running a ‘low-
growth business’ to a ‘high-growth business’ on the other. The
horizontal axis is the complexity of the business. It can be
complex because of the size of the business, the number of
products or services offered, or the number of locations in
which the business is operating.
• The top-left box in the figure is the typical profile of a start-up
business. Here, business is relatively simple, but changes occur
very quickly. Handling changes requires leadership skill.
Besides, due to simplicity of business management skill is
required in little amount.
• If the business grows very slowly and stands still very simple, it
does not require significant amount of both leadership and
management as shown in the bottom-left corner of the figure.
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 …Leadership and Management
in Small Business
• More complex businesses which operate in relatively stable
environment can usually prosper with lots of management
and very little leadership. This is shown in bottom-right box of
the figure. However, the company might want to achieve rapid
growth in a very complex operational environment. To achieve
this, the business needs leadership and management in depth-
which is shown in the top-right box of the figure.
• Today’s smart companies must learn how to find and recruit
people with both leadership and management potential.
Unfortunately, many small firms can’t afford leaders and
managers at the same time. So, they search for the skills
combined in an individual- which is, very often, difficult to find
out.

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 Financial Management in Small Business
• Financial management is the planning, directing,
monitoring, organizing, and controlling of the
monetary resources of an organization.
• Financial management means the efficient and
effective management of money (funds) in such
a manner as to accomplish the objectives of the
organization.
• It includes how to raise the capital, how to
allocate it i.e. capital budgeting. Not only about
long term budgeting but also how to allocate the
short term resources like current assets.
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 Need for Financial Planning
• Financing an enterprise- whether large or small- is
critical for success in business. The financial planning of
a small (or large) enterprise deals with the future of
present decision in terms of financial aspects of the
enterprise. In short, financial planning is a financial
forecast made for the enterprise for a specific future
period of time.
• In a financial plan/ forecast, the entrepreneur should
clearly answer the following three questions:
1. How much money is needed?
2. Where will the money come from?
3. When does the money need to be available?

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 Financial Needs in a Small Firm
There are two ways of classifying the financial needs of
an enterprise:
1. On the basis of extent of performance:
(a) Fixed capital (land, building, machinery, equipment,
furniture etc.)
(b) Working capital (raw material, finished goods)
2. On the basis of period of use:
(a) Long-term capital (owner’s equity, term loan)
(b) Short-term capital (short-term deposit, borrowings
from friends)

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 What Balance of Debt to Equity is Right?
• A company’s balance gearing continuously change depending on the growth
opportunities it sees ahead, the current cost of money, and the availability of equity
and debt capital. At certain times, it is very hard to raise capital from shareholders,
for example, when the general stock market is depressed or if the business profit
performance is below the mark. In that case, banks and other financial institutions
are the only hope and last resort.
• Bankers would generally favor 1:1 relationship between borrowed capital and
shared capital. But the nature of risk associated with the business is a more critical
factor to consider for the entrepreneur. If the entrepreneur considers a funding
matrix before moving for bank money, it would help him/ her a lot ensure balanced
debt-equity ratio for the business.
High Gambling Moderate return
Business risk with little risk
Low O.K. Unsatisfactory
return
Debt (high risk) Equity (low risk)
Capital structure

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 …What Balance of Debt to Equity is Right?
• If a business is viewed very risky, financing the business
almost with borrowed capital from bank is tantamount
(equivalent) to gambling. Debt has to be repaid whatever
the business performance is. So, it follows that in any risky
and volatile market place, the entrepreneur would stand a
good chance of being caught out just any day.
• Conversely, if the business risk is low, the chance is that the
profit is relatively low too. High profits and low risks always
attract a flood of competitors, resulting in reduction of
profits to such a level that ultimately reflects the riskiness of
the chosen business sector.
• With the funding matrix in mind, the small business owner
can begin to work toward a balance of debt and equity that
is appropriate for his/ her own business.
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 How Can the Entrepreneur Minimize the Need
for Extra Cash?
1. Send bills out promptly: It should be always made sure that there is a system
of getting the bills at the very start of the business. The entrepreneur should
maintain a hit-list of debtors- those who owe money must be chased up for
payment. It is a good idea to list the debtors by age of the debt as this shows
who owes how much and for how long.
2. Check credit ratings: Before taking on a new or big customer, have them
checked out. If they are ‘Blue chips’ the entrepreneur may be able to get up to
80% of the cash owed immediately. Simultaneously, he/ she can offer discount
for cast and charge interest on overdue amounts.
3. Keep stock levels down: One should guess what will sell and stock accordingly.
Too many ventures spend all their cash on opening stock; only to find that they
are left with products that won’t sell and have no cash to buy those that will.

4. Take credit: Successful entrepreneurs try to take credit. So, if their customers
take a month to pay the bill, they aim at taking a month’s credit from their
suppliers.
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 Why Borrowing is Attractive?
• When a business has high proportion of outside money to inside
money, this is called high gearing. High gearing has considerable
advantages and attractions to a business that wants to make high
return on shareholder’s capital. Let’s consider the following
example:
• A business is assumed to need $60000 capital to generate $10000
operation profits. Four different capital structures are considered
such as no gearing, average gearing, high gearing, and very high
gearing. As the business is borrowing money, the capital (loan)
has to be serviced at an interest rate of 12%.
• The following table shows the different gearing structures for the
firm:
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Capital No Gearing Avg. Gearing High Gearing Very High
Structure Gearing
Share capital 60000 30000 20000 15000
Loan capital -------- 30000 40000 45000
Total capital 60000 60000 60000 60000

Profits:
Operating 10000 10000 10000 10000
profit
Less: interest -------- 3600 4800 5400
on loan (12%)
Net profit 10000 6400 5200 4600

Return on 10000/ 60000 6400/ 30000 5200/ 20000 4600/ 15000

share capital = 16.6% = 21.3% = 26% = 30.7%

Times interest N/A 10000/ 30000 10000/ 4800 10000/ 5400

earned = 2.3 = 2.1 = 1.8
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 …Why Borrowing is Attractive?
• From the table, it can be seen that ROSC grows from 16.6% to
30.7% by virtue of the changed gearing. If the interest on loan
were lower, the ROSC would be even greater by high gearing.
Oppositely, if the interest on loan were higher, the ROSC would
be lower. So, in times of low interest businesses tend to go for
increased borrowing rather than increasing more equity, this is,
money from shareholders.
• However, there is a problem. If the operating profit is below
$10000, the ROSC would be lower and the business will be in
trouble. Very often, in small businesses, a drop in sales by 20%
means profits have been halved or even eliminated. If the profits
were halved in this above example, the business would not be
able to meet the interest payment on loan. That would make the
business insolvent and it would drop out of the market.
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 Problem 1: Break-even point
What is the break-even production if fixed cost is Tk. 10000, variable cost is
Tk. 4 per unit and selling price is Tk. 6 per unit?

Fixed cost
Break-even point = -----------------------------------------------------
Unit selling price – unit variable cost

10000
Break-even point = -----------------------------------------------------
6–4

= 5000 units

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 Problem 2: Break-even profit-point
How many units are to be sold if profit target is Tk. 1500, where fixed cost is Tk. 10000,
variable cost is Tk. 4 / unit and selling price is Tk. 6 / unit?

Fixed cost + Targeted profit

Break-even profit- point = -----------------------------------------------------
Unit selling price – Unit variable cost

10000 + 1500
Break-even profit-point = -----------------------------------------------------
6–4

= 5750 units

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 Problem 3: BEPP with new selling price
A business decides to make a profit of Tk. 4000 against the fixed cost of Tk. 10000,
variable cost per unit Tk. 3, and unit selling price Tk. 5. To retain the profit
objective of Tk. 4000, the business calculates that it has to sell 7000 units- which is
not possible. But it understands that a sale of 6500 units is achievable. If it sells
6500 units, it will not be able to retain that profit. What would be the new selling
price to make the same level of profit?

Fixed cost + Targeted profit

Break-even profit- point = -----------------------------------------------------
Unit selling price – Unit variable cost

10000 + 4000
Break-even profit-point = -----------------------------------------------------
5–3

= 7000 units

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But the target is not possible to achieve. The achievable target sale is 6500 units.

Let,
Per unit profit point is X

Fixed cost + Targeted profit

X = -----------------------------------------------------
Achievable unit sales

10000 + 4000
X = -----------------------------------------------------
6500

= 2.15 (approximate)

Earlier, the per unit profit was Tk. 2 (Tk. 5 – Tk. 3). But, now the new selling price should be

(variable cost + per unit profit point) = (Tk. 3 + Tk. 2.15)

= Tk. 5.15

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