This chapter provides an overview of small businesses, including their importance in the US economy. It defines small businesses as having fewer than 100 employees and independently owned and operated. Small businesses represent over 99% of all employers and have created over half of new jobs. However, they also face risks such as lack of capital, ineffective employees, and failure to innovate that can lead to business closure. The chapter discusses factors for small business success and strategies for minimizing risks.

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CHAPTER 1
Small Business: An Overview

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After reading this chapter,
you should be able to:
• Describe the characteristics of small business.
• Recognize the role of small business in the U.S.
economy.
• Understand the importance of diversity in the
marketplace and the workplace.
• Identify some of the opportunities available to small
business.
• Suggest ways to court success in a small business
venture.
• Name the most common causes of small business
failure.

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Facts About Small Businesses
• Represent more than 99.7% of all employers.
• Employ more than half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Created 64% of net new jobs over the past 15 years
• Represented 97.3% of all identified exporters.
• Produce 13 times more patents per employee than
large firms.
• Create more than 50% of private GDP.
• Employ 40 percent of high-tech workers.
• Are 52 percent home based and 2 percent franchises.
Small
Businesses

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What Is a Small Business
• Independently owned, operated, and
financed
• Has fewer than 100 employees
• Has relatively little impact on its industry
Definition of a
Small Business
Used
in This Course
• Number of employees
• Sales revenue
• Total value of assets
• Value of owners’ equity
How to Define
Small Business

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Figure 1.1: Almost All Established
Firms Are Small Businesses

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Small Business and the SBA
• SBA Size Board’s Factors for Business Size Standards:
• Industry structure analysis
• Degree of competition
• Average firm size
• Startup cost
• Entry barriers, distribution of sales, and employment by
firm size
• Effects of different size standard levels on objectives of SBA
programs
• Comments from the public on notices of proposed
rulemaking

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Table 1.1:
Small Business Size Standards

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Class Exercise
• Using the SBA business size guidelines, which of the
following are small businesses?
• A car assembly plant that employs 7,000 workers
• A local wholesaler with 95 employees
• A local retail store with $1.5M in yearly sales receipts
• A home builder with annual receipts of $2.8M
• A mall developer with a $50M construction contract
• A farmer with annual sales of $3M
• A farmer with annual sales of $500K
• A travel agent with annual sales from $1.2M to $2.5M
• A dry cleaning firm with $175K in annual receipts

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Figure 1.2: Small Business Employment
Share of NAICS Industries
SOURCE: Small Business Administration, Office of Economic Research, “Research Publications— Small Business Share of NAICS Industries,” Research
Summary #218.

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Small Businesses in the U.S. Economy
• Cottage firms and artisan studios
• Agricultural economyEarly 1800s
• Economies of scale: mass production and
assembly line factories lower unit costs
Late 1800s:
Industrial
Revolution
• Paradigm shifts to the marketing concept
• Service sector grows as consumer incomes and
spending increase, favoring small business growth
1950s-1960s

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Recent Growth Trends
Early 1970s
• Large firm profitability decreases as costs rise.
• Entrepreneurs establish small businesses in new industries.
• Other startups begin to outcompete older, larger competitors.
1980s-1990s
to Present
• Downsizing and outsourcing creates opportunities for small
business entrepreneurs.
• The global economic crisis that began in 2007-2010 has led to
disruption of small business financing.

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Recent Growth Trends
• Increased Business Startups
• Small business growth (startups) in last 30 years
• 1970 - 264,000
• 1980 - 532,000
• 1990 - 585,000
• 2000 - 574,000
• 2006 – 670,100
• Increasing Interest at Colleges and Universities
• 1971 – 16 schools offer entrepreneurship courses
• 2010 – 2000 schools offer entrepreneurship courses

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Recent Growth Trends: Forces Driving
Change in 2011
• Gen Y
- Market of 76 million people wanting senior-friendly
products such as supermarkets with lower shelves
• Growth of travel and tourism
-Industry revenue expected to reach nearly $1.4 trillion
• “Mancession”
-Increase in sales of men’s lifestyle products, such as bacon-
flavored toothpicks
Source: http://www.entrepreneur.com/trends/index.html

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The Best Industries for Starting a
Business Right Now
• Candy
• Recession-resistant industry
• Snickers, Tootsie Pops, and 3 Musketeers started during the
Great Depression
• iPhone Apps
• Marketplace predicted to be worth $1 billion someday
• Health-Care Technology
• Employment in field expected to grow by 18 percent between
now and 2016, according to the BLS
Source: http://www.inc.com/ss/best-industries-for-starting-a-business

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Work Force Diversity and
Small Business Ownership
Aging
population
More women
entering the
work force
Increased
birthrate of
minority
groups
Needs and
abilities of
people with
handicaps
Factors Increasing
Work Force Diversity

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Secrets of Small Business Success
Identifying Your Competitive
Advantage
Remaining Flexible and
Innovative
Building Close Relations with
Customers
Small Business
Success Factors

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Innovation’s Role in Small Business
Product
Innovation
Management
Innovation
Service
Innovation
Types of
Innovation
Process
Innovation

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Getting Started on the Right Foot
Market
size and
definition
Getting
accurate
information
Gathering
sufficient
capital
Right Tools to
Succeed
Finding
and
keeping
effective
employees

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Understanding the Risks of Small
Business Ownership
What Is
Business
Failure?
• Voluntary or involuntary
closure with a financial
loss to a creditor
• Involvement in court
action that results in loss
of control of the business
by the entrepreneur

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Understanding the Risks of Small
Business Ownership (cont’d)
Inadequate Management
Insufficient
Capital
Most Common Causes of
Business Failure

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Figure 1.3: The Causes of Business
Failures Are Many and Complex

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Understanding the Risks of Small
Business Ownership (cont’d)
Termination
occurs when a business no
longer exists for any reason
Failure
occurs when a business
closes with a financial loss
to a creditor

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Understanding the Risks of Small
Business Ownership (cont’d)
• Common Mistakes That Invite Business Failure
• Planning: failing to look toward the future
• Understanding what is required: commitment and hard
work
• Trying to do it all: not hiring enough employees or not
using employees effectively
• Financial myopia: inaccurately estimating cash flows and
capital requirements

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Table 1.2: U.S. Business Startups,
Closures, and Bankruptcies
Myth: 90% of all new businesses fail within one year.
Truth: Only about 18% of all businesses are forced to
close their doors with a loss to creditors; the rest
either close voluntarily or are still in business.

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Figure 1.4:
Analysis of Business Closure