Chapter 3

..
Small. Business
Management

05/17/2024 1
3.1 Introduction
 Micro and Small Enterprises (MSE) is one of the
institutions given recognition in the country's
industry development plan.

 MSE is the fact that it serves as vehicles for

employment opportunities both at urban center and
rural areas reinforcing the economic development.

• MSE serves as sources for sustainable job

opportunities not only for developing countries but
also for developed countries.
05/17/2024 2
 Cont’d

These firms can be operated by limited resources,

with fewer requirements of sophisticated
machinery and modern technology.
They can be established easily in urban, semi
urban and rural areas where the infrastructure is
underdeveloped with the objective of using local
raw materials and skills.
In any country they are acting as engine of growth
through poverty and unemployment reductions.

05/17/2024 3
 Definition of Small Businesses

Due to lack of uniform definition of MSE across

the globe, most countries use and implement
based on legal meaning of the sector.
 MSE definition is generally consisted of three
basic criteria. These are:
1. Full timer employed manpower /head count staff/.
2. Total asset, net asset and paid capital
3. Annual turnover and they use these criteria
independently or in combination.

05/17/2024 4
 Definition of MSEs

There are two approaches to define micro and small business

1. Size Approach
some of the criteria used to measure size are: number of employees; volume,
and value of sales turnover, asset size, and volume of deposits, total capital
investment, volume/value of production, and a combination of the stated factors.

2. Economic/Control Approach
Some of the qualitative characteristics /criteria are
The economic/control definition covers:
 Market Share,
 Independence, and
 Personalized Management.

05/17/2024 5
• In general the following points indicate
experience of other countries.

All countries encompass the micro, small and

medium enterprises definition and support
framework.
The definition of the sector is viewed from the
countries’ economic status and level of
growth.
In most countries definition of the sector is
implemented uniformly and it has legal entity.

05/17/2024 6
 Cont’d
 Manpower, total asset, net asset, paid capital
and annual turnover serve as criteria
independently or jointly.
 In some countries like China, USA, South
Africa, MSE are divided in to manufacturing,
construction, transport, wholesale and retail,
and service sectors based on the type of
industry.
 As to EU, most countries use uniform
definition of MSE for all sectors
05/17/2024 7
 The improved definition of MSE from
Ethiopian Context
• In our country two different definitions of MSE
were used so far i.e. the 1998 definition of MSE
development strategy, and definition given by
central statistical agency(CSA).
• Improved definition for the sector was given based
on the gathered experience, by identifying the gaps
of the existing definition of MSE, including the size
of employee and by taking total asset as criteria and
by dividing it in to industry and service sector
• Considering the inflation and
fluctuation/irregularity of currency.
05/17/2024 8
 Cont’d
• Under micro enterprise level, industry sub-
sectors operating with 5 people including the
owner and/or their total asset is not exceeding
Birr 100,000 (one hundred thousand).

• Under micro enterprise level, service sub-

sectors operating with 5 persons including the
owner of the enterprise and/or the values of
total asset is not exceeding Birr 50,000(fifty
thousand).
05/17/2024 9
 Cont’d
 Under small enterprise level, Industrial sub-
sectors operating with 6-30 persons and/or with a
paid up capital of total asset Birr 100,000(one
hundred thousand) and not exceeding Birr 1.5
million.

• Under small enterprises level, Service sub-sectors

operating with 6-30 persons or/and total asset, or
a paid up capital is with Birr 50,001 and not
exceeding Birr 500,000 are defined officially and
used in Ethiopia
05/17/2024 10
 Cont’d
Enterprise Level Sector
Sub-Sectors Man power Total asset

Retail, Transport, < 50,000

Micro Hotel and Tourism,
Service <5 birrs
Recreation,
Information
Technology and
Maintenance
Industry Manufacturing < 100,000
Construction <5 birrs
Mining
Retail, Transport, Hotel < 500,000
Small and Tourism, Recreation,
birrs
Service Information 6-30
Technology and
Maintenance

Industry Manufacturing, 6-30 < 1.5

Construction million
Mining birrs

05/17/2024 11
 Main sectors and sub-sectors that focus area

1. Manufacturing sector 2. Construction

 Textile  Sub-contracting
 Leather  Building materials
 Food  Traditional mining
 Beverage  Cobble stone
 Metal works  Infrastructure sub
 Wood works contract
 Agro-processing  Prestigious goods

05/17/2024 12
 Cont’d
3. Trade 4. service
• Whole sale  Transport service
• Retailer  Café and Restaurants
• Raw materials supply  Store service
 Tourism service
 Canning/packing
 Management service
 Municipality service
 Product design
 Maintenance etc.
05/17/2024 13
 5. Urban Agriculture
 Modern livestock raring
 Bee production
 Poultry
 Modern forest development
 Vegetables and fruits
 Modern irrigation
 Animal food processing

05/17/2024 14
 Forms of Business (A Short Explanation)

There are three basic legal forms of business formation

with some variations available depending on the
entrepreneurs’ needs.
Legal Forms of Business Description

1) Proprietorship Form of business with single owner who has

unlimited liability, controls all decisions, and receives all
profits.
2) Partnership Two or more individuals having unlimited liability who have
pooled resources to own a business
3) Corporation Separate legal entity that is run by stockholders having limited
liability

05/17/2024 15
 Importance( Special Contributions) of Small
Businesses

• Although small business have a number of

challenges to the entrepreneur and have certain
limitations, countries economy cannot do
without them.

• This is because small businesses have special

features that make them superior over large
ones in certain aspects of business activities.

05/17/2024 16
 Importance of MSE
 Providing Job Opportunities

 Introducing Innovation

 Stimulating Economic Competition

 Aiding big business

 Supply function: Most small businesses act as suppliers, and sub-
contractor for large firms.
 The distribution function: Few large manufacturers of in
expensive consumer products find it desirable to own wholesale
and retail outlets.
 Producing Goods and Services
05/17/2024 17
 2.3 Characteristics of Small Scale Business

• Following are the characteristics of small scale

business:
High Labor Intensity
Less Capital Intensive
Use of Local Skills and Knowledge
Flexibility
Entrepreneurial Spirit
Use of Indigenous Raw Materials
Localized Operation
Lesser Gestation Period - earn after a short period of
time
Workplace Culture – No work specialization
05/17/2024 18
 2.4 Objectives of Small Businesses

A. Employment generation
B. Equitable distribution of income
C. Mobilization of resources and entrepreneurial
skill
D. Regional dispersal of industries
E. Provides opportunities for development of
technology
F. Promotes exports
G. Supports the growth of large industries
05/17/2024 19
 2.5 Small Business Failure Factors

• MSEs failure attributing by many factors. These are:

A. External factors
B. Personal (internal) factors
A. External factors
 Business cycles
 Fluctuating
 Interest rate
 Interrupted supplies
 Labor market
 Inflation
 Government regulations
 Unstable financial markets
05/17/2024 20
B. Personal (internal) factors
 Inexperience
 Arrogance
 Mismanagement
Over investment on fixed assets
Poor financial and inventory control
Poor business philosophy
Lack of planning

05/17/2024 21
 2.6 Merits and Demerits of Small Businesses

 Advantages of owning a small business:

i. Independency
ii. Financial Opportunity
iii. Job Security
iv. Community Service
v. To Practice Challenge

05/17/2024 22
 Disadvantages of owning a small business:
Competition
Sales Fluctuation
Increased Responsibilities
Risk of Failure
Employee relations

05/17/2024 23
 l e m s o f
t h e p r o b ?
h a t a r e E t h i o pi a
W i ne s s i n
a l l b u s
sm

05/17/2024 24
2.7 Problems of Ethiopian Small Businesses
1. Backward attitude
2. Rent seeking to provide institutional support
3. Unfamiliarity with efficient technology
4. Low managerial and technical skill
5. Limited access and limited amount of capital
(Lack of seed money)
6. Limited market linkage and networks
7. Interrupted supply of key input
8. Lack of persistency
05/17/2024 25
 Cont’d
8. Unreasonable investment of scarce finances on fixed
assets
9. Perception of MSE themselves as reflection of poverty
and backwardness
10. Inaccurate estimates of cash flow and capital
requirements
11. Waiting government for job and to solve all problems
rather than being innovative
12. Rapidly growing businesses
13. Failure in developing the culture of saving
14. Neglect to plan for the future
15. failing to understand the commitment and hard work
16. Living with one's income/ dependency
05/17/2024 26
 Small Business Success Factors

1.Conducive Environment; PEST

2.Adequate Credit Assistance;
3.Markets and Marketing Support.

05/17/2024 27
Main Supporting Packages for MSEs Development in Ethiopia

oAwareness creation about the sector;

oProvision of legal services, to form legal business
enterprises;
oproviding Technical and business management
training;
oFinancial support based on personal saving
oFacilitate working premises;
oIndustry extinction services and BDS provision;
oBookkeeping and audit services
05/17/2024 28
 Steps in Setting Up Small Businesses

• An entrepreneur needs to take the following steps:

1. Search for Business Idea: The task of promotion begins
with the search for a suitable business idea or opportunity.

 Sources of Business ideas

• Work experience
• Hobbies
• Deliberate search
• Observing the market
• Customers
• Government organizations
• Distribution channels, trade fair and exhibitions and mass
medias
05/17/2024 29
2. Idea Processing/ Screening
• Business ideas/opportunities need to be
screened and assessed for the viability.
Criteria To Screen Business Ideas Include
 Marketability/demand
 Profitability of the idea if implemented
 Availability of raw materials
 Ease of implementation
 Financial feasibility
 Government support and incentives
 Personal goals and competencies of the
05/17/2024
entrepreneur 30
3. Idea selection
• The feasibility report is analyzed to finally choose the most
promising idea.

4. Assemble the necessary input requirements

• Assembles the necessary resources to launch the enterprise like:
Choose partners/collaborators
Collect the required finance
Acquire land and buildings
Plant and machinery
Furniture and fixtures
Patents
Employees

05/17/2024 31
5. Establish the Enterprise
The form of ownership is to be decided upon
and the company formed and registered.
Dealing with various government bodies and
other institutions like:
Financial institutions- for finance
Sales tax, Income tax authorities- for
respective registration
Licensing authority- for obtaining industrial
license

05/17/2024 32
 Cont’d
 Municipal Authorities and Electricity- for requisite
utilities.
Directorate of Industries, Municipal
Authorities etc. for land, factory and shed
etc.
Ordering machineries from suppliers
Recruitment of staff
Arranging supplies of materials
 Arranging for distribution of the product

05/17/2024 33
 The – END !!!

 .

Have a nice Time 4 All OF

05/17/2024
U!! 34