Small Business Operations - Case Study Example

 Challenges of Setting up Small Business Enterprises and Distinct Skills Required in Successful Management of Micro Business Ventures. Small Business operations have played a crucial role in the world economy since ancient history and provide the foundation for developing businesses in to large-scale operations. Most companies, which are corporate giants today, can trace their history back to being initiated as a small business enterprise. Good examples of such small business successes that have grown in to corporate multinationals are Heinz, Motorola, eBay or even Wal-Mart. Despite the importance of small business enterprises to the economy, almost 80% of small businesses fail during its first 5 years (Allen 2000). Main factors contributing to such failure lies in lack of business skills and competencies (Venter , Eden & King 2004) resulting in poor business planning, financial and human resource management as well as inability to strategise according to changing business environment. It is common for a successful business professional employed in corporate organisations to consider the option of starting an own business. However, these individuals who are successful in such corporate settings tend to fail miserably at being entrepreneurs. It is therefore imperative that small business entrepreneurs are aware of what specific skills and competencies would they need to possess in order to start and manage a small business enterprise successfully. Small businesses are usually classified as those businesses, which employ less than 10 staff, and self-employment too falls in to the category. As per statistics of The Small Business Administration- USA, “about 25.5 million small businesses employ more than half the U.S. work force” (Gibb 1994). Micro business enterprises have facilitates the creating of over 14 million new jobs in the past decade and providing an additional 10-million self-employment opportunities. With over 250,000 new micro businesses being added to the economy, micro businesses and self-employed businesses are the primary source of employment growth in the economy (Mass 1989). While starting up a small business enterprise offers the promise of being ones own boss and having your own time schedules, entrepreneurs soon realise these are myths, which is far from reality. Starting up and successfully developing a small business is a challenging task, which requires a combination of entrepreneurial as well as managerial skills coupled with high level of robustness and dedication needed to provide the level of effort needed by such a venture. Planning is an essential element of the business process and when considering the importance of business planning, the most essential plan for any new venture is the Business Proposal Plan. This document is crucial in outlining the concept of the business model, the industry and market potential, the targeted markets, the product or service being offered and the anticipated market share. The plan also considers the costs associates, the budget plans and profitability forecasts. An effective business plan also assesses business risks and includes contingency plans. While a Business Plan proposal is essential in communicating the business idea to other potential investors and business partners, it also provides the road map for the new venture, guiding its direction as well as providing a basis for measuring performance and evaluating deviances. While the content and complexity will vary depending on the considered venture, some essential information pertaining to the new venture, which is common to any business will form the basic structure of a business plan. Thus, a Business Plan should include the following information pertaining to the new venture to facilitate investment decisions and business alliances. Executive Summary – providing a clear and concise description of the proposed business and indications of profitability and return on investments. Business Description – including an overview of the business, an industry overview and a business potential analysis. The business potential analysis should provide both optimistic and pessimistic assessments so that the project is not over or under “sold”. Market Analysis covering market structure, competitor analysis, identified target markets, market share and growth targets. Marketing Plan, which outlines the new venture’s product offer, pricing strategy, distribution planning and promotional support aspects. Operations Plan, which outlines the operations process, involved, operation location details and highlighting any anticipated operational issues. Management information should provide the intended organisational structure, the positions and responsibilities, ownership structure and investment plan as well as human resource management (HRM) aspects of the new business. Under the HRM aspects, manpower carder, job descriptions and HR policies such as remuneration policies should be discussed. Financial Analysis section of the business plan is a key area of importance when potential investors appraise the new venture for funding decisions. It is important to provide clean and accurate information, which should not mislead any investors with over enthusiastic forecasting. This section of the plan should provide Forecasted Financial Statements, Pro Forma Balance Sheets, Forecasted Income Statement and Cash Flow Statement as well as a Breakeven Analysis . Critical Risks are an important aspect needing to be outlined in a business plan where potential risks are identified and contingency plans are proposed. Such critical risks will vary from venture to venture but may include risks such as government interventions, disruptions to supplier arrangements or buyer agreements. Risk of new competition as well as retaliations from existing rivals should also be considered. Milestone Schedule is an important part of the business plan, which serves as a benchmark for evaluating performance and time frames involved in executing the venture. Such evaluations of organisational performances are often neglected by small business enterprises, which is one key reason for failed ventures (Business Plan Evaluation for Small Business 2001) . While the importance of different sections varies depending on the type of business venture under review, the most important information are contained in the Market Analysis, Marketing Plan and the Financial Plan. The market analysis is essential element of the plan as it provides the basis for the company’s operation. It is the market, which will provide the business with a reason for its existence, and understanding the scope and structure of the market in terms of core need being fulfilled, consumers being targeted, size of market and the strength of competition can be facilitated by this section of the plan. The second most important information in the business plan is the Marketing Plan, which outlines the product offer, pricing strategies, distribution strategies and the promotional strategies. These information should essentially be pre planned even in the case of a small business. Most small business enterprises commit the mistake of not considering the marketing aspects of the operation as an important aspect but instead focus on process aspects. But, as any venture, regardless of its size depends on the success of its marketing efforts to ensure long-term success and growth, its is imperative that the Business Plan outlines the marketing strategies including the product, price, place and promotional decisions. The third and most important information for prospective business partners and investors would be the financial plans of the venture. These should be drawn based on realistic assumptions with regards to sales expectations and cost factors. Cash flow forecasts and break-even analysis are key elements within this information category. Break Even analysis provides an idea of the minimum volumes needing to be generated to stay without incurring losses while cash flow forecasts are important to assess the venture liquidity as well as possible need of funding alternatives as short term loans if negative cash flows are present during initial start up period. While the rewards of starting an own business in the form of small business enterprise is compelling, problems associated with the start up is challenging for the entrepreneurs. “Starting A Business Is Difficult, Time Consuming And Expensive” (Avoiding Common Small Business Start-Up Problems 2004). New ventures need massive amount of effort and time, which has to be directed to numerous decision-making and actions. It is important that potential entrepreneurs are aware of key problems associate with start up of small businesses so that they are better prepared in battling these issues out. The most crucial problem for many small business start-ups happens to be the financing of the venture. Most potential entrepreneurs fail at embryo stage itself in formulating an effective business plan that is capable of expressing the viability and profitability of the potential business to prospective investors. Even if they surmount this stage, it is difficult for small business ventures to locate investment capital. Thus, most tend to rely on their personal savings and personal credit, which place the business in jeopardy where liquidity and cash flow management is concerned. Another aspect is the high cost of financing associated with outsourced capital from either venture capital funds or banking institutions. In countries where government subsidies for small business financing facilities are lacking, cost of such loan capital can be too much of a burden for small businesses, which are at its start up phase. Second problem associated with small business start-ups is the difficulty in locating suitable and high caliber manpower. While manpower is one of the key elements which will make a difference between success and failure of a venture, small business enterprises does not offer the prestige or job security which a larger corporate organisation may offer to potential employees. Thus, even if small businesses are willing to pay competitive remunerations, a potential employee may prefer a lower playing job in a much larger establishment with greater reputation. Thirdly, the lack of established brand awareness is another problem. Small businesses fail in attracting the potential customers due to lack of exposure and brand recognition. Competing with much larger firms with strong brand images, most small businesses ventures do not succeed in gaining the forecasted market shares. In most cases, to compete effectively against such strong brands, small businesses have to use niche-marketing strategies and increase customer focus. Most customers are not willing to try out products or services offered by newly established small enterprises. Thus, small businesses have to preserver at its initial stage to break through to the market. While other challenging factors contribute to the operational difficulties encountered by small businesses, “there is significant evidence that the failure of micro businesses lies in managerial incompetence - a lack of managerial skills” (A Framework - Management of Competencies 1994). Due to some of the distinct characteristics of small business ventures, the management skills needed for small business owners differ significantly from those skills needed in corporate business environment. In small business operations, the owner has to fulfil multiple job functions and perform both entrepreneurial and managerial functions. Balancing these two roles would be the most challenging aspect as entrepreneurs by nature are different from people who display high competencies in managerial aspects. Entrepreneurs are more apt to be visionary, far reaching and inspiring, focusing on long time horizons and in creative strategic thinking. Thus, in large businesses and corporate organisations, senior managers and owners are able to focus on these entrepreneurial functions while managerial functions are carried out by functional managers. However in the case of small business, planning, implementing, monitoring and evaluating functions associated with operations such as production, marketing, logistics, administration, human resource management and finance handling are to be also handled singularly by the entrepreneur. Thus, a small business owner’s main skill should be the ability to multi task effectively. Some other key skills required by small business owners include ability to manage self conduct, ability to manage self development, teamwork skills, delegation, balancing the responsibilities of different and multiple roles expected to be performed, financial planning, administrative skills, communication, planning and monitoring skills (Venter, Van Eeden & King 2004). Self-conduct and self-development skills are personal skills which needs to be present in a small business owner wishing to be successful. Self conduct skills include ability to meet self imposed deadlines and targets, ability to manage the stress associated with handling many multiple roles and responsibilities as well as the financial difficulties ever present in small business ventures. Self-development is also a key skill for success for small business owners. It is unlikely that a person is capable and knowledgeable in all functional areas, which the small businesses demand to be performed by the owner/operator. Thus, those who possess good self-development skills tend to expand their knowledge on different functional areas through hands on studies, experiments and reading as well as attending short courses and management seminars. Competencies such as computer and Internet skills are essential even for small businesses and entrepreneurs with self-development skills will most likely get themselves familiarised with such knowledge and know-how. Team skills are also crucial for a small business owner, especially when the business is expanding and the staffs have to be increased. Delegation and training of staff to take on some of the responsibilities off from the owner/operator is a key skill, which most small business owner’s lack. Most small business owners tend to believe that the others would not be able to do the job up to the same standards and tend to be ineffective in areas of delegation. Managing human resource is another skill needed for small business owners, who must learn to train and develop staff as well as implementing evaluation and rewarding policies. While managers in large companies will have established methods and time at disposal to handle such HRM needs, small business owners should make use of the closer environment and personal touch which is present in small businesses to build a strong team of employees (Kyambalesa 1994). Small business owners should focus on developing their “soft” interpersonal skills as dealing with many parties becomes a prerequisite for these entrepreneurs (Newton 2001). “Accounting, cash flow, and marketing were critical needed management skills and lack of them were the major causes of failure. Weaknesses in these areas were found to impact on all other areas of the business” (A Framework - Management of Competencies, Skills for Small Business 1994) In conclusion, it can be noted that while starting up a small business venture is a compelling option for prospective entrepreneurs, the challenges and problems associated with small business management are unique and distinct from those issues present in large corporate setting. It is important that small business owners recognise the distinct skills required for managing a small business and endeavour to develop these skills, in order to be successful in their ventures. As micro enterprises form a significant portion of any economy and contribute to the employment of over half the work force, governments and other bodies should assist small business entrepreneurs in surmounting critical problems associated with financing. Guidelines and expert advice in the form of handbooks and short seminars will also create awareness of the pitfalls associated with starting up and developing small businesses. As consumers, the general public can also support the efforts of small business enterprises and give them an opportunity to succeed by choosing to patronise such businesses. References Allen P. (2000). Why are most small businesses destined to self-destruct? Business Journal 14, (44) March. Gibb, A.A. (1994). Do We Really Teach Small Business the Way We Should? Journal of Small Business & Entrepreneurship. 11. No 2. January/March pp 11-28 Kyambalesa, H. (1994). Success in managing small business. London: Avebury. Venter, E., Van Eeden, S. & King, T. (2004). An investigation in to the managerial Competencies required for small business success. University of Port Elizabeth. Retrieved Feb 27, 2006 from http://www.sbaer.uca.edu/research/icsb/2004/Papers%20pdf/008.pdf#search='Skills%20required%20for%20small%20business%20management' Framework - Management of Competencies, Skills, and Standards for Small Business Owner/Operator/Entrepreneur for the Sector Councils Steering Committee. 1994. Retrieved February 27, 2005 from http://www.councils.org/1small_business/guideline/exec_summary_e.cfm Newton, K. (2001). Management skills for small business. Retrieved February 26, 2006 from http://strategis.ic.gc.ca/epic/internet/insbrp-rppe.nsf/vwapj/executivesummary_e.pdf/$FILE/search='Skills%20required%20for%20small%20business%20management' Mass, H. (1989). Hand Book for Small Business. US Small Business Administration. Retrieved February 27, 2006 from http://www.sba.gov/library/pubs/search='Skills%20required%20for%20small%20business%20management Business Plan Evaluation for small business. (2001) Retrieved February 28, 2006 from http://www.saumag.edu/assessment/Spring2001AssessmentReports/Management/SmallBusinessAssessmentActivityWiseTim.htm Top 10 reasons why small business fail. All Business. Retrieved February 26, 2006 from http://www.allbusiness.com/articles/StartingBusiness/1440-25-36.html Avoiding Common Small Business Start-Up Problems. (2004). Digital Federal Credit Union. Retrieved February 27, 2006 from https://www.dcu.org/business_services/library/fw0058.html Read More