What are the advantages and disadvantages of small business firms?

Many small firms fail when they attempt operate the way large firms do. They are not simply smaller versions of large corporations. Their legal organization, market position, staff capability, managerial style and organization, and financial resources generally differ from bigger companies, which give them some unique advantages over larger-scale competitors. 
 

Photo by freekip.com

 Let see below what are the advantages and disadvantages of small business firms.

 

Advantages of small business firms

Innovative behavior, lower costs, and the filling of isolated market niches are some of the most important of these advantages.

Innovative Behavior

Small firms are often the companies who first offer innovations, new concepts, and new products in the marketplace. Genentech and Apple Computer are recent success stories. In fact, it is estimated that the formation of small high-technology firms doubled in recent years.

Lower Costs

Small firms can often provide a product or service cheaper than large firms. They usually have fewer overhead costs - those not directly related to providing the goods and services - than large firms. Thus, they may be able to earn a profit on a lower price than a large company can offer.

Small businesses have leaner organizations with smaller staffs and fewer support personnel. The lower overhead costs resulting from fewer permanent staff people can provide a distinct advantage to small businesses.

Small businesses tend to hire outside consultants or specialists, such as attorneys and certified public accountant, only during periods when their assistance is needed. As a general rule, all growing organizations add staff personnel faster than line (management) personnel. Larger organizations tend to maintain such specialists on their permanent staffs.

Small businesses also often have the services of a great deal of unpaid labor. Entrepreneurs themselves are usually willing to work long hours on their pet projects, and no one pays them for overtime or holidays. And family members contribute a significant amount of unpaid labor as bookkeepers, laborers, receptionists, delivery personnel, and the like.

Filling of Isolated Niches

Big businesses are excluded from some commercial activities because of their size. High overhead costs force them to set minimum targets at which to direct their competitive efforts. Some large publishers, for example, have identified minimum acceptable sales figures that take into account their overhead costs.

Editorial and production expenses for a certain type of book may not be justified unless the publisher can sell, say 7,000 copies. This situation allows substantial opportunities for smaller publishers with lower overhead costs.

In addition, certain types of businesses lend themselves better to smaller firms. Many services illustrate this point. Finally, economic and organizational factors may dictate that an industry consist essentially of small firms.

Disadvantages of small business firms

Smaller firms have a variety of disadvantages. These include poor management, inadequate financing, and government regulation. While these problems often can be overcome, they should be considered by anyone contemplating a small business venture.

Poor Management

Thousands of small businesses open every year. Thirty percent fail within the first year, and then half within two years. For every 15 small businesses that open their doors, 10 close for voluntary or financial reasons. A great many of these failures can be attributed to poor management. Most people who start small businesses are ill-prepared as managers.

Of all small businesses filing for bankruptcy, more than 7 of 10 were trade, construction, and service firms. Out of all the businesses filing bankruptcy each year, 99 percent are small businesses. According to the Small Business Administration, the typical small business that fails is likely to have fewer than 20 employees and owe between $25,000 and $100,000.

Since poor management is a vague term, it is important to look at the types of management shortcomings that characterize small business. More often, people who start small firms have little, if any, training or education in running a business. They have an idea for a product or service and assume that they will learn about business matters as they carry on business. Bankruptcy is often the result.

A word of caution is in order: Any would-be entrepreneur is well advised to acquire as sound a foundation in basic business principles as possible before initiating any small business venture.

Another cause of failure is that small business people sometimes let their entrepreneurial optimism run wild. Kenneth Eaton, became one of the head of associated Business Consultants, puts it this way:

"An entrepreneur is an optimist by definition, and over-optimism is what does companies in. When things are going well, the average businessman assumes they will continue to go well. When a problem arises, he assumes it will go away quickly by itself. By the time he wakes up to the fact that he really has a problem, it's often too late to do anything about it."

A closely related reason for failure is entrepreneurs not "doing their homework" before starting the small business. They may believe that others will see their product or service as unique or as better than that of the competition, but this should be verified by basic research.

Does a market exist for the proposed product or service? This information can be obtained through published sources, surveys, in-depth interviews, competitive analyses, observation, or a number of other research techniques.

Inadequate Financing

Inadequate financing is generally listed as a leading cause of small business problems. Many businesses start with inadequate capital and soon experience a shortage of funds. They often lack the sources to carry them over rough spots or to expand if they are successful.

Sixty percent of the financing of a typical small business comes from the entrepreneur's personal resources. Friends and relatives contribute an average of 9 percent. Banks, private investors and the Small Business Administration are other sources of funding. Banks are often reluctant to make loans to small businesses because of their higher failure rate, and will require detailed information in order to justify such loans.

Research has shown that under capitalization or too much debt is the primary reason that bankers reject small business loan applications. Lack of collateral is the second most cited reason for rejection.

Venture capitalists are groups of private individuals or business organizations that invest in promising new businesses. Sometimes they lend the business the money; at other times they become part owners of the new or struggling firm. Venture capital has been an important source of funds, particularly for firms offering a creative new concept or product.

The Small Business Administration offers a variety of loans for small business construction, expansion, or conversion; for purchasing machinery, equipment, facilities, supplies, or materials; and for operating funds.

Government Regulation

Like most executives, small business people complain bitterly of excessive government regulation and red tape. Furthermore, the regulation of small companies accounts for a large portion of the government's own paperwork. A Louis Harris survey found that regulatory paperwork was the most common complaint about government among small and medium-sized businesses.

Most small businesses are not equipped to handle the paperwork necessitated by government regulation. Larger firms with substantial staff can usually cope with the blizzard of required forms and reports, but for many small business owners, it is often the force that drives them out to look for salaried positions. Many experts within and outside the government believe that a major effort must be made to reduce the paperwork load for small businesses.