Small Businesses Essay
Small businesses benefit both the economy, by creating new jobs and industries, and consumers, by providing innovative specialized goods and services to fill specialized market niches. Over 90 percent of businesses are considered small businesses, which create vast new industries, encourage entrepreneurship, and revitalize economically depressed areas by creating many new jobs in the local area. The individuals owning and operating a small business can benefit greatly as well, through careful planning and proper management. Small businesses create the largest portion of new jobs in the country. In fact, 99.7% of all employers are small businesses. (sba.gov/aboutsba/sbastats.html) Members of the workforce that have a lower chance of finding a job, such as women, minorities, and welfare recipients, find employment easier in small businesses. Low-income areas can attract small businesses due to the lower cost of operation, and can grow economically as a result of the new jobs, improving the quality of life of the area.
Together, these uplifted areas contribute to the national economy. Small businesses generate 47 percent of the nation’s sales and over half of the GDP. The three ways that a small business can form are sole proprietorships, partnerships, and corporations. Most small businesses are sole proprietorships. The individual owner gains unlimited control and flexibility over the business, as well as all the profits, but also gains unlimited financial liability and financing limitations. Sole proprietorships are most commonly small or temporary businesses, due to the limited finances and ease of formation and dissolution. However, the owner must take on all managerial and operational tasks, which can lead to disaster if the owner lacks sufficient knowledge and training in the areas key to a business’s success. Another type of small business organization is the partnership. Partnerships benefit from the combined finances and skills of each partner. Splitting the debts among each owner provides a financial safety net, but financial and legal liability is still unlimited. It also can provide more security to investors, who may choose to provide only funding and accept only limited financial responsibility.
The biggest drawback to a partnership is its binding nature. Leaving requires finding a buyer for the portions left. Interpersonal conflicts, therefore, can cripple the business easily if the members cannot cooperate and reach agreements on important business decisions. Many enterpreneurs enjoy the freedom of complete control more than the greater potential for profits and ease of startup, making this a less popular form of small business. The third type, the corporation, is formed as a legal organization with liabilities and assets seperate from its owners. This organizational type offers several advantages over the other two. The investors are stockholders, each owning a small share of the company. This insures that each investor has a low financial liability limited to what was already invested. It also offers many legal advantages, as legal action may only be taken against the corporation as an individual, not against the stockholders. Corporations often possess employees with highly specialized skills that can help ensure proper management and planning, which are often pitfalls in smaller organizations. Corporations typically have expanded access to funding from outside investors in the form of stock sales. Unfortunately this heirarchy also has numerous disadvantages, one being double taxation.
A corporation must pay federal, state, and local income taxes on its profits in addition to taxes placed on the individual stockholder. Government regulation is much stricter than it is with the other two forms as well. No matter how a business is organized, there are several key steps to ensuring a successful start up as well as ensuring financial stability during the first few months of operation. The first step is coming up with an suitable business idea. This should be one that the owner both enjoys doing, and can satisfy a need in the marketplace. Success depends mostly on customers, so making sure a market exists for a particular business is key. Most succeful entrepreneurs operate in rapidly changing industries in which customer’s do not have highly specific needs. One way to help determine whether a particular idea is practical is to list one’s own abilities and interests, as well as businesses that utilize these abilities. Further research these ideas with newspapers and magazines helps determine possible future needs for the goods and services the business offers, as well as looking for ways that current goods and services may be improved upon. The next step is to continue narrowing down the list by profit potential until reaching a decision, and then to research further that particular industry until the decision is final.
Creating a new business isn’t the only method of successful enterpreneurship. Many entrepreneurs choose to buy existing businesses, which offers advantages such as an established customer base and suppliers, a product or service that is known to the marketplace, and all necessary permits and licenses have been secured. Businesses for sale can be located by contacting the local Chamber of Commerce, as well as through other professional organizations. Franchises are another alternative, offering a degree of security at the expense of some degree of control. Franchisors often have strict guidelines for operation that must be met. Poor planning is a major problem for most new ventures. Good planning includes setting clearly established goals, as well as a schedule for meeting the goals, projections of profits and expenses, and some way to measure success. Procedures and regulations that the business will adhere to should be clearly defined, and the plan must be open to revision. Poor planning includes the opposite: nebulous schedules and lack of finances can incur expenses upon the investors. One way to ensure good planning is to create a well established business plan.
A good business plan should begin with an executive summary, which should go over the basics of the business plan in a captivating manner. It should be followed by an introduction explaining the product, the company, the managerial team, and anything else particuarly important in discribing the business. This should be followed by a marketing strategy. A marketing strategy should provide information about a particular product market and ways it can be taken advantage of. It should include demographics determining a specific market for a product, describe current trends in the marketplace, graphs and charts displaying market penetration, as well as information concerning potential sales revenue. This should be followed by a financing section that specifies production costs, operating expenses, expected profit, as well as any other costs mentioned elsewhere in the business plan. It is important for this section to be accurate but motivating, and it should cover all potential expenses, otherwise credibility may be lost with potential investors.
Finally, a resume of principles details the management team behind the business in depth. After a compelling business plan, the next step should be to acquire adequate funding to cover start up costs for a business. This can be the downfall of many new businesses, and careful planning should be made in order to make sure all expenses are covered. Most businesses are not successful during the first few months of operation as they struggle with start up costs and an unestablished customer base, so ensuring sufficient funding is essential. There are several ways to acquire funding for a new business, the first being the entrepreneur’s own personal finances. This can be from personal savings or through the use of credit cards. Usually additional funding is needed, and many entrepreneurs turn to the Small Business Administration for help. The SBA offers microloans of $25,000 or less to be used to buy equipment or cover operating expenses, as well as regulating SBICs, or Small Business Investment Companies.
These companies use their own capitol in addition to government loans to fund a new business. Another source is through angel organizations, which match entrepreneurs with potential investors willing to exchange money and advice for a share in the company.(Boone, Kurtz 171) One way to trim back costs is through the use of business incubators. Business incubators offer low cost shared business facilities to small start-up ventures. (Boone, Kurtz 172) Another method is through large corporations. These corporations can offer loans with various payment options, as well as forming mutually beneficial partnerships that can provide small businesses with advice and specialized assistance. Poor management can also bring down a new venture. Many small businesses only employee very few, if any, additional employees, which my leave a large burden on a new venture’s owner if he is also a manager. It is hard for any one individual to be experienced in all necessary areas to run a business, and many are untrained to handle the problems that arise. This can be circumvented by careful study and training, or through hiring employees that possess the necessary skills.
There are advisors that can help with the various areas that the entrepreneur may be lacking in, as well as many articles in magazines or on the internet. The Small Business Administration offers training programs to assist entrepreneurs in developing the skills necessary to run a business, and many institutes of higher learning will offer courses as well. The final problem is government regulation and red tape. While small businesses have less regulation imposed upon them, they are often ill equipped to deal with government intervention. The required paperwork for any business can be staggering in both cost and effort.
Large firms have access to more resources as well as specialists to deal with the various regulations while small firms often have neither the funds or knowledge required to cope with the tedious paperwork and taxes required. There are resources available on the internet to assist small businesses by listing regulations that must be adhered to as well as making paperwork faster and easier to deal with as well as specialists trained in various fields that may be hired or contracted. Success and failure are inevitable to any entrepreneur, but careful planning and a positive attitude can help ensure that failures aren’t catastrophic and can help lead to every entrepreneur’s dream: a well thought out idea that benefits both society and the individual.