Meaning of Small Business

Small businesses are either services or retail operations like grocery stores, medical
stores, tradespeople, bakeries and small manufacturing units. Small businesses are
independently owned organisations that require less capital and less workforce and
less or no machinery. These businesses are ideally suited to operate on a small scale
to serve a local community and to provide profits to the company owners.

Indian government defines small businesses on the basis of the business’s ability to
invest in the plant and machinery. According to the definition provided by the
government website for business, business.gov.in, a small scale business is a
business set up in which the financial commitment towards infrastructure such as
building & equipment, whether made as an owner or on rental or purchase basis,
does not surpass Rs. 1 crore.

Nature of Small Business

The nature of small businesses can be classified as follows:

1. Shoestring Budget

A sole proprietor or a small group of people operate small businesses. These

businesses often run on ‘shoestring budget’ meaning that small businesses function
on a very tight budget.

2. Labour intensive

Small businesses are mostly labour intensive. Various types of small business largely
rely on labour for their functioning. The primary nature of small businesses is more
involvement of physical work rather than intellectual work. The lack of machinery
makes the employees manage their operations manually.
3. Community-based

Small businesses are started with the motive of satisfying the needs and demands of a
local area or community. These businesses demographically target few areas of
concentration and are hence community-based.

4. Indigenous technology

Due to small businesses being community focused and labour oriented they often
thrive upon native methods of operations. In India, there are many businesses in the
rural sector that still use outdated technology. This might give uniqueness to the
products but hinders the development of the business.

“Small enterprises rather than big corporations are driving the Indian economic
recovery. India’s MSME (micro, small and medium enterprises) sector, with 48
million enterprises, contributes 37.5% to the gross domestic product, provides
employment to 111.4 million persons and accounts for more than 40% of India’s
exports.”
– Livemint, 2016.

There are various parameters we can use to determine the size of a business. So when
we want to know if it is a small business or a medium size business, we can use the
following parameters.

• Number of employees working in the firm or organisation

• The amount of capital that is invested in the business
• The output the business generates. This can be in terms of volume (quantity) or
in terms of value (profits)
• Power consumed by the business for its manufacturing activities can also be a
parameter

Roles of Small Businesses in India and Problems of Small Businesses

In every economy, small businesses are a million little integral parts of a lavish car
which help the engine keep running but all that someone can see from the outside are
the four tyres (i.e big corporations) that give the car speed. It is confirmed that 65-
75% of the innovation in India come from the industry of small business. Let us learn
about the vital role small businesses play in our economy and the problems they face.

Role of Small Businesses in India

1. Industrial units

In an economy so enormous as India, 95% of the industrial units in the country

consist of small business and 40% of total industrial output is contributed by these
small industries. Again, small businesses bag around 45% of the total exports from
India.

2. Labour-oriented

Small business provides immense opportunities in the rural and semi-urban areas.
The weight of the unemployment faced by the Indian economy is lifted by these
small businesses. It is one of the most important roles of them. Like any other
economy having a large labour force, the Indian government also encourage the
operations of small businesses to utilise the labour by drafting policies and
establishing low loan interest rates.

3. Human resource

After agriculture, small businesses are the second largest employment provider in the
Indian economy. In comparison to big corporations, small businesses generate the
most number of employment opportunities per unit of capital invested. Therefore,
they are the second largest generators of employment in human resource.

4. Utilisation of local resources

The awareness of needs and demands of the local community make the small
businesses emerge in rural and semi-urban areas. Small business is community-based
and generally focused on fewer areas.

This gives the opportunity to the businesses to utilise the local resources like raw
material, local talent, labour and demographic opportunities. The utilisation and the
mobilisation of the local resources help elevate the economic condition of that
particular area.

5. Flexible and Adaptable

New business opportunity is captured at right time. The strength to adapt and grow in
the face of upcoming changes gives an edge to the small businesses. Also, being the
manufacturer and distributor, small businesses develop a sense of personal touch with
the area of business and their customers. Limited in size and finance, there is little or
no government intervention.

Any business whether small, medium or large has its opportunities and challenges.
Every coin has two sides and every line has a lineage.

Problems of by Small Businesses

1. Finance

The inadequacy of funds to funnel in the operations of a small business prove to be a

major hindrance to the development of the small business. Small businesses lack the
creditworthiness needed in the capital market. Small businesses have a poor
creditworthiness.

The banks and industrial investors need a collateral security, due to most of the small
businesses being operated in the rural and semi-urban area, these businesses lack the
collateral security to get finance for their business.

2. Raw material

For the production purposes, the businesses need raw materials. To get some output,
they need to give some input. The quality of the raw material completely depends
upon the quality of input. But due to a tight budget, these businesses are unable to get
a good quality raw material for their production.

Bargaining power is non-existent because of the small quantity of purchase. Another

issue linked here is the shortage of storage facility, because of the shortage of storage
facility the production needs to be quick and the sale good. This puts a heavy strain
on these small businesses to sell their stock as quickly as possible.
3. Managerial skills

The operations of small businesses are carried out by a limited number of employees.
This means that a single person usually manages the operations. The pressure on this
manger is immense to satisfy the demands of production. Also, the manager might
lack managerial skills required to operate a unit.

4. Skilled labour

Due to a shortage of funds, small businesses are unable to hire the proper candidate
for the job. Also, they are not in a position to give high wages to the employees. This
results in the drop in productivity per employee and rate of labour are high. This
proves to be a major obstruction in the operations of productions.

5. Marketing

Marketing is one of the most important links to sell whatever the business plan to or
has produced. Without marketing these businesses will not be able to achieve their
goal of sales they planned. Direct marketing is not possible due to the lack of
necessary infrastructure.

The shortage of finance does not let the business hire a good middleman. These
middlemen exploit these businesses by paying low prices and delaying payments.

“Small businesses already play a pivotal role in India’s economy.But if the country is
to fulfil its ambition of becoming a global manufacturing hub, the sector must grow
rapidly.” -Amarendra Sinha, Special Secretary and Development Commissioner at
India’s Ministry of Micro, Small and Medium Enterprises, on how the sector can lead
the manufacturing charge.

Advantages of Small-Business Ownership

• Independence. Entrepreneurs are their own bosses. They make the decisions.
They choose whom to do business with and what work they will do. They
decide what hours to work, as well as what to pay and whether to take
vacations. For many entrepreneurs the freedom to control their destiny is
enough to outweigh the potential risks.
 • Financial gain. Entrepreneurship offers a greater possibility of achieving
significant financial rewards than working for someone else. Owning your
own business removes the income restraint that exists in being someone
else’s employee. Many entrepreneurs are inspired by the mega-millionaire
entrepreneurs we see today, such as Steve Jobs, Elon Musk, Jeff Bezos, and
Mark Zuckerberg.
• Control. It enables one to be involved in the total operation of the business,
from concept to design to creation, from sales to business operations
to customer response. This ability to be totally immersed in the business is
very satisfying to entrepreneurs who are driven by passion and creativity and
possess a “vision” of what they aim to achieve. This level of involvement
allows the business owner to truly create something of their own.
• Prestige. It offers the status of being the person in charge. Some
entrepreneurs are attracted to the idea of being the boss. In addition, though,
there is the prestige and pride of ownership. When someone asks, “Who did
this?” the entrepreneur can answer, “I did.”
• Equity. It gives an individual the opportunity to build equity, which can be
kept, sold, or passed on to the next generation. It’s not uncommon for
entrepreneurs to own multiple businesses throughout their life. They establish
a company, run it for a while, and later sell it to someone else. The income
from this sale can then be used to finance the next venture. If they’re not
interested in selling the business, the goal may be to build something that can
be passed down to their children to help ensure their financial future. One
thing is sure: In order to fully reap the financial benefits of a business
venture, you need to be the owner.
• Opportunity. Entrepreneurship creates an opportunity for a person to make a
contribution. Most new entrepreneurs help the local economy. A few—
through their innovations—contribute to society as a whole.

In addition, small businesses have certain advantages over large businesses.

Flexibility, generally lean staffing, and the ability to develop close relationships
with customers are among the key benefits of small businesses. The digital
communication revolution has significantly lowered the cost of reaching
customers, and this has been a boon to small startups and big businesses alike.

Disadvantages of Small-Business Ownership

As the little boy said when he got off his first roller-coaster ride, “I like the ups but
not the downs!” Here are some of the downsides to owning a small business:
Time commitment. When someone opens a small business, it’s likely, at least in
the beginning, that they will have few employees. This leaves all of the duties and
responsibilities to the owner. Small-business owners report working more than
eighty hours a week handling everything from purchasing to banking to
advertising. This time commitment can place a strain on family and friends and
add to the stress of launching a new business venture.

Risk. Even if the business has been structured to minimize the risk and liability to
the owner, risk can’t be completely eliminated. For instance, if an individual leaves
a secure job to follow an entrepreneurial dream and the business fails, this financial
setback can be hard to overcome. Beyond financial risk, entrepreneurs need to
consider the risk from product liability, employee disagreements, and regulatory
requirements

Uncertainty. Even though the business may be successful at the start, external
factors such as downturns in the economy, new competitors entering the
marketplace, or shifts in consumer demand may stall the businesses growth. Even
entrepreneurs who go through a comprehensive planning process will never be able
to anticipate all of the potential changes in the business environment.

Financial commitment. Even the smallest of business ventures requires a certain

amount of capital to start. For many people starting small businesses, their initial
source of funding is personal savings, investments, or retirement funds.
Committing these types of funds to a business venture makes them unavailable for
personal or family needs. In most cases where a small business receives start-up
funding through a loan, the entrepreneur must secure the loan by pledging personal
assets, such as a home. Risking the equity in one’s home is a financial commitment
not all entrepreneurs are willing to make.

Government Assistance to Small Industries and Small Business Units and the

Future
The contribution of small industries and businesses to the Indian economy is simply
immeasurable. They not only create wealth and employment but are also a big factor
in social development. In fact, so great is their importance that we have a special
ministry dedicated to Micro, Small and Medium Industries. So let us learn how our
government assists and develops these small industries.
Government Assistance

The Indian government has been supporting and developing small unit sectors. India
is focusing on rural industries and cottage industries. According to layman’s
language, a small business is a project or venture that requires a small budget or is
run by small group of people.

Both central and state government have been emphasizing more on self-employment
opportunities in rural sectors by providing help and support in financing in terms of
loans, training in terms of programs, infrastructure, raw materials and technology.

The core purpose of the government is to utilise the local manpower and locally
available resources. Which are further transformed into action by local departments,
agencies, corporations, etc. The support of small industries include:

Institutional Support

1. National Bank for Agriculture and Rural Development (NABARD)

NABARD established by the government in 1982 to give action and to promote the
rural industries. It has adopted multi-purpose strategies in promoting in rural business
in India. It supports small industries, rural artisans, rural industries, cottage industries
along with agriculture. Also, it sets up training and counselling plus it gives
development programmes for rural entrepreneurs.

2. A Rural Small Business Development Centre (RSBDC)

RSBDC is a government centre sponsored by NABARD for micro, small and
medium businesses which is set up by world organization. The primary purpose of
RSBDC is to work for socially and financially disadvantaged people and groups.
RSBDC does many programmes on skill up gradation, entrepreneurship, awareness,
counselling and training.

These programmes motivate various unemployed youth and young women learn
different trades and introduce them to other good benefits from it.
3. National Small Industries Corporation (NSIC)
NSIC was set up in 1995 by the government to popularize and support small
businesses focusing on commercial aspects. The important functions of NSIC are:

• Supply imported goods and machine on hire purchase agreement.

• Procurement of supply imported indigenous raw materials.
• Developing small business by importing their products.
Supervising services.
• Awareness on technical up gradation.
Also, a new scheme called performance and credit rating for small units have been
started by NSIC, this ensures that the more their credit rating, the more their financial
assistance for their investment and capital requirement.

4. Small Industries Development Bank of India (SIDBI)

It is a top government bank to provide direct and indirect financial support under
various schemes to meet credit requirements of various small businesses.

5. The National Commission for Enterprises in the Unorganised Sector

(NCEUS)
NCEUS was formed in the September 2004 by the government with objectives:

• Measures to improve the productivity of small industries in the informal sector.

• Generation of employment in the rural sector.
• Creating links between small sector and finance, infrastructure, raw materials
and technology.
• To create public and private partnerships for engagement in imparting skills for
the informal sector.
• Providing micro-finance for the informal sector.
• Providing social security for the informal sector.
• To introduce competition of small scale in a global environment.
6. Rural and Women Entrepreneurship Development (RWED)
This is a government organisation that focuses to raise the business environment for
women and to support women’s business initiatives. It provides manual for training
in entrepreneurship and renders advisory services.

7. World Association for Small and Medium Enterprises (WASME)

WASME is an international body that is nongovernmental organisation of micro,
small and medium business units in India which establish an international committee
and focus on rural development and apply action plan model for sustained growth of
rural industries.

8. Scheme of Funds for Re-generation of Traditional Industries

From 2005, the government established a fund to support these traditional small
industries and to facilitate higher productivity and to enhance their growth and
development.

Incentives

The government of India focuses more on the economic and industrial development
of backward, hilly and tribal areas of India. Committees have been established to
attest and support the growth of small-scale industries and business units and to
suggest schemes that are needed.

The programs and schemes vary from state to state. Together they form a package of
benefits and incentives to attract industries in the backward areas. Small industries
receive various benefits from the government of India such as Land, Power, Water,
Sales Tax, Octroi, Raw materials, Finance, Industrial estates and Tax holiday. Even
though enough importance is given to backward areas and small industries, there is
still an imbalance in their economic growth.

Future

World Trade Organisation facilitates the trades of the present era and there are many
reforms as per global expectations. The WTO system contributes to development. On
the other hand, developing countries need flexibility in the time they take to
implement the system’s agreements.
India is diligent in the framework of World Trade Organisation as it is one of the
founder members. Because of it, Indian economy is integrated with the global market
and small business can explore capabilities and establish new markets. Indian
businesses have to reform over time to keep up with the world’s standard.

With the entrepreneurial spirit, small industries have to adapt to the changing needs
of the market driven economy. The government should explore new strategies that
encourage partnership between small and large industries.

CLASSIFICATION OF ENTREPRENEURS:

Innovative Entrepreneurs: Innovative entrepreneurs are the forbearers of change

in the business. They are full of creative ideas and offer innovate products to the
society. It is because of these innovative entrepreneurs that many important
changes occur in our society. They experiment and conduct permutations and
combinations of ideas to yield new products and services. Thanks to these
innovative entrepreneurs, our society is more networked now; we started off
networking by transfer of letters through a messenger (stories even speak of
pigeons as messengers), then came formal postage system, then communication
evolved to telephonic conversation, mobile, internet, email, and video
conferencing. The innovations in networking have been tremendous and are still
happening which is bringing the world closer every day. One need not invent but
add incremental values (like ringtones, camera, mobile television, mobile radio in
mobiles), or change the utility of the same thing (like using mobile for net surfing).

Imitative Entrepreneurs: Imitative entrepreneurs adapt a successful innovation.

They are risk aversive and so they do not try out new ideas or products, but if a
new idea is accepted by the market, they imitate the new idea and hence join in the
competition.

Fabian Entrepreneurs: Fabian entrepreneurs are highly cautious and sceptic in

their approach. They are not readily interested in introducing any change in their
organization and when they do so it is because unless they the change they would
be out of the market.

Drone Entrepreneurs: Drone entrepreneurs are not open to creativity and change.
They do not like changing the working of organizations with the changing times.
They prefer facing losses to introducing changes in their present processes,
equipments and policies. In the present competitive world, these entrepreneurs are
simply kicked out of the business for not being able to adapt themselves to the
changing dynamics of business.

http://dcmsme.gov.in/howtosetup/getstart.htm

https://smallb.sidbi.in/%20/policies-regulations/guidelines-procedures-starting-
new-business-india

Importance of Environmental Scanning

Environmental Scanning is an important business tool in any
entrepreneurship. When an entrepreneur is coming up with new ideas, plans
or innovation of any kind he must first understand if the environment is
suitable for this. It helps him develop his creative ideas into actual products
that can be offered in the market. So scanning the environment will help him
gauge the acceptance of the product, and the opportunities and threats he
may face.

1] SWOT Analysis

The close study of the internal and external environment of an

organization will reveal some very valuable information, i.e. the
strengths, weaknesses, opportunities, and threats of a company. Let us
take a brief look.

• Strength: After analysis the internal environment of a company, we

will be able to identify the strengths that give the company a
competitive advantage. The entrepreneur can use this information
to maximise these strengths and earn more profits.
• Weakness: Study of the internal environment also point out the
weaknesses of the company. For the growth and stability of the
company, these identified weaknesses must be corrected without
delay.
• Opportunity: Analysis of the external environment helps with the
identification of possible opportunities. The entrepreneur can
prepare to capitalize on these.
• Threats: Analysis of the external environment will also help in the
identification of any business threats from competitors or any other
factors. The company can come up with a strategy to diffuse such
threats or minimize their impact.
2] Best Use of Resources

Environmental scanning helps us conduct a thorough analysis and hence

leads to the optimum utilization of resources for the business.

Whether it is capital resources, human resources or other factors of

production, their best use and utilization is very important for any
business.

Environmental scanning will help us avoid any wastages and allow for
the most effective and economical use of these resources.

3] Survival and Growth of the Business

It is a very competitive world and for any business to survive and thrive
it is a difficult task. But if the business employs all the techniques of
environmental scanning it can gain a significant advantage.

It will allow the firm to prepare for future threats and opportunities
while at the same time eliminating their weaknesses and improving on
their strengths.
4] Planning for Long Term

A business must have a plan for both short term and long term. The
planning of long-term objectives can only occur after proper analysis
and environmental scanning meaning. This will help the entrepreneur
plan the necessary business strategy.

5] Helps in Decision Making

Decision making is the choice of the best alternative done by

management. Environmental scanning allows the firm to make the best
decision keeping in mind the success and growth of the business. They
point out all the threats and weaknesses. And they also identify the
strengths of the firm.

Market and Demand Analysis

In most cases, the first step in project analysis is to estimate the potential size of the
market for the product proposed to be manufactured (or service planned to b
offered) and get an idea about the market share that is likely to be captured. Put
differently, market and demand analysis is concerned with two broad issues:

1) What is the likely aggregate demand for the product/service?

2) What share of the market will the proposed project enjoy?

Given the importance of market and demand analysis, it should be carried-out in an

orderly and systematic manner:

1) Situational analysis and specification of objectives

2) Collection of secondary information
3) Conduct of market survey
4) Characterization of the market
5) Demand forecasting
6) Market planning
Situational Analysis and Specification of Objectives: In order to get a “feel” of the relationship
between the product and its market, the project may informally talk to customers,
competitors, middlemen, and others in the industry. Wherever possible, h may look
at the experience of the company to learn about the performances and purchasing
power of customers, actions and strategies of competitors and practices of the
middlemen.

If such a situational analysis generates enough data to measure the market and get a
reliable handle over projected demand and revenues, a formal study need not be
carried- out, particularly when cost and time considerations so suggest.

Collection of Secondary Information: Secondary

information is the information that has
been gathered in some other context and is already available. Primary information,
on the other hand, represents information that is collected for the first time to meet
the specific purpose on hand. Secondary information provides the base and the
starting point for the market analysis.