Report on Key Issues in Small Business Enterprises

| Key issues in small business enterprises| Personal Reflective Report| | Zdravko Mihaylov| BA (HONS) Business Enterprise Development2012| | Introduction Small business enterprises are important for the modern market economy in terms of innovation, employment and flexibility. They are the backbone of our economy. Around 98. 6% of all businesses are considered small (Goodman, 2006) and every large business was at some point small. Small business enterprises are very different to large business enterprises.They operate in different circumstances, such as having different management techniques, facing different financial constraints and production choices, and bearing different relative regulatory burdens. This report’s aim is to identify some of the key issues facing small business enterprises today, addressed in the Enterprise Finance unit, in order to give better view of the challenges presented in their survival and growth. Small business enterprises are often at a competitiv e disadvantage to large business enterprises.They may have difficulty achieving economies of scale, where large enterprises have already been well established, they often have difficulty in acquiring sources of finance and they may have problems with government policy and regulation, which are often designed to assist specifically large enterprises (Holmes et al, 2003). Other factors that may bring to small enterprise failure include: poor credit management, poor stock management, poor pricing practice, excessive profit distribution, excessive investment in long term assets and others (Holmes et al, 2003:142).They are very dependent on the founding owners and have higher business risk. Evaluation In summary, two broad forms of business failure can be identified. The first involves the start-up of the business, bankruptcy, liquidation, voluntary wind-up/closure. The second form is where the business continues to operate, but the return on capital, time and effort contributed by owner s is bellow the desired. Small business enterprises have difficulty competing with already established large enterprises.New enterprises rarely have the financial backing to set up a large-scale operation to take immediate advantage of scale economies. Except the challenges brought by the lack of history and reputation, a development of a price cutting war may become a great threat to small enterprises, as they may not have the financial capacity to withstand such competition. Some of the scale economies not available to small enterprises are listed in Figure 1. 1 in the Appendices. A way of overcoming those issues is adopting strategies to overcome some of the disadvantages or to target small niche markets in which to operate.Small business enterprises suffer from chronic undercapitalisation as they often have limited access to the capital and money markets (Tamari, 1980). Two main â€Å"gaps† can be identifies as responsible for that: Knowledge gap – lack of awarenes s of appropriate sources of finance and their relative merits resulting in restricted use of debt; Supply gap – unavailability of funds or exceeding cost of debt. Another barrier is the required higher rate of return on funds invested or lent due to the higher risk in small business enterprises (Storet, 1994).Problems can even arrive from the owners’ inclination of not wanting to share control of the business with investors. Other frequent cause of small business failure is the lack of liquidity or little financial planning and control. Two critical periods of financial needs are identified within the business life cycle: the start up and the rapid expansion. To overcome this problem and avoid overtrading1, a long-term finance source is needed. Different financial stress factors have also been identified by Hutchinson and Ray (1986) in each stage of the lifecycle, which can be seen on Figure 1. in Appendices. Another major challenge for small enterprises is the burden of complying with government regulations. Part of the burden problem can be attributed to poorly designed legislations. Two disadvantages are seen by this, listed in Figure 1. 2 in the Appendices. While a lot of studies show that small enterprises face a greater relative compliance burden than large enterprises, some consider that many of them ‘are so flawed that we must view their findings with scepticism’ (Brock and Evans, 1986: pp. 134-5).When looking at the small firm survival over a period of time, a key variable is net profit. It is defined by subtracting all operational costs from gross profits and the costs of closing down a business. For staying in business over a period of time, it is required that net profit should not fall below zero. In case of being positive, the firm might have some prospect for growth, while in case of being zero, it is just breaking even. If it stays negative for a period of years, it invites failure and exit from the market.Thus one mi ght express that for staying in business, net profit should be non-negative. Small business enterprises usually have centralized control by the owner, thus his managing skills are critical for the survival of the business. Perry and Pendelton (1983) estimated that 90% of the business failures are associated with management inexperience and/or incompetence. It has been identified that managerial roles relate to the lifecycle of a business enterprise (Holmes et al, 2003:150), so different managerial skills are required for each lifecycle stage.In other words, if owners do not have the necessary managerial skill for each stage, the business might be at a great risk. Conclusion The objective of this project was to determine the key issues facing small business enterprises today, discussed in the Enterprise Finance unit, and to draw the knowledge gained. Firstly, the report begins with analysis of the disadvantages of barrier of entry, Overtrading1 – when a business expands withou t a solid financial foundation financial and government regulation issues of small enterprises.The report continues with examination of the survival over a period of time and the role of the owner-manager in small business enterprises. The issues listed in this report cannot be generalised for all small business enterprises, as each one has a unique structure, resources and capabilities. Further research may be required in this area before any decisive conclusions can be drawn. Bibliography Brock, W. A. , & Evans, D. S. (1986). The Economies of Small Businesses: Their Role and Regulation in the US Economy. Holmes and Meier: New York. Goodman, G. (2006).Five Challenges Every Small Business Owner Faces. From http://ezinearticles. com/? Five-Challenges-Every-Small-Business-Owner-Faces&id=158921 Holmes et al. (2003). Small Enterprise Finance. John Wiley & Sons Australia Ltd: Sydney Perry, C. , & Pendelton. W. (1983). Successful Small Business Management. Pitman Publishing: Sydney. Store y, D. J. (1994). Understanding the small business Sector. Routledge: London. Tamari, M. (1980). The financial structure of the small firm. American Journal of Small Businesses, 4:4 20-34. Appendices ————————————————-Figure 1. 1 Scale economies of large enterprises, not available to small enterprises | Longer production runs based on larger and more technologically advanced plant and machineryQuantity discounts on input purchasesEmploying specialistsMore widespread advertisingAccess to more forms of finance on better terms and conditionsMore sophisticated information gatheringLower unit costs in complying with government regulations and reporting obligations| (Adopted from Holmes et al. , 2003, pp. 52-53) ————————————————- Figure 1. 2 Government regulation disadva ntages |A greater relative cost burden in complying with many forms of government regulation, because of the substantial fixed costs involvedGovernment policy measures being designed to assist large enterprises more than small enterprises| (Adopted from Holmes et al. , 2003, pp. 54) ————————————————- Figure 1. 3 A view of the financial lifecycle of a smaller growth enterprise Stage| Finance used| Predominant financial stress factor| Inception| Owner’s resources| Undercapitalisation| Growth 1 (Take-off)| Owners’ resources plus retained profits, trade credit,