Small Business Management

This chapter examines the role of small business within the economy as well as government policy toward the small business sector. It provides an overview of the small business sector while considering the specific nature of management within a small firm and the policy responses available to governments. Small businesses typically make up the majority of firms within most economies. While the concept of a ‘typical’ small business may be difficult to define, most have few, if any, employees and are owned and operated by owner-managers who usually provide all the risk capital associated with the firm. Despite their numbers and relative importance to the economy, the level of attention and general understanding of the small business sector remains low. Academic research into small business management is less developed than for larger organisations. Government policy relating to small business can often be fragmented and problematic due to the lack of adequate understanding of the sector and its needs.

This chapter examines the challenges facing small firms in their early years, and examines how best to screen new venture opportunities. The foundation of a small business is usually a personal decision by the owner-manager or managers who have decided to undertake the challenge and assume the risks associated with launching a new venture. A major factor that appears to motivate the formation of small firms is their owner-manager’s desire to create new opportunities and pursue their dreams. The ability of a new small business to survive its early years is likely to depend on how well prepared the owners are and how well they research their prospective markets. In this chapter we explore the factors likely to adversely impact on new ventures. We also look at the research and screening tasks required to determine the attractiveness of various business opportunities.

Small business owner-managers have been found to have a less sophisticated approach to formal business planning than their counterparts in larger firms. This is generally related to a lower level of systematic data gathering or a low level of statistical analysis. However, owner-managers are strategically aware and realise the consequences of their decisions (Rice, 1983). The lack of formal business planning has been attributed to the high failure rate among small firms particularly among start-ups (Castrogiovanni, 1996).

Large corporations have substantial resources to devote to marketing, and frequently have many levels of marketing management with responsibilities for national and regional operations, or different product lines (Webster, 1992). A feature of the large corporation is its use of formal planning processes to guide its marketing activities (McColl-Kennedy, Yau, & Keil, 1990). By contrast, most small business proprietors find the marketing of their businesses a complex and difficult task. Unlike larger firms, the small business lacks both the resources and the expertise (Carson, Gilmore, & Rocks, 2004).

Small business growth is a goal that would seem desirable for all owner-managers. However, relatively few small business start-ups develop into large firms (e.g. with over 250 employees) (OECD, 2002, 2010). Many disappear along the way, either due to external factors beyond the control of the owner-manager, or more commonly due to internal factors over which they do have control. Perhaps it may come as a surprise to know that the majority of small business owner-managers choose not to grow their businesses (McMahon, 1998). This appears to be as a result of their lack of understanding or skills in how to achieve growth, as well as a conscious decision to restrict expansion and thereby maintain a business of a size that they can easily control (Nightingale & Coad, 2014). In Chap. 4, the three generic strategic options facing the small firm were outlined. These comprise stasis, exit and growth. As was noted, all three strategies are viable and demanding ones for a small business to follow. However, the growth strategy is probably the riskiest and most demanding. This chapter looks at the nature of small business growth and the challenges facing growing small firms.

The classification of firms into micro, small, medium and large is undertaken primarily on the size of their payroll. As the business expands in size the role of the owner-manager becomes more complex and leadership more important. The owner-manager’s ability to develop his or her staff into a team who can operate systems efficiently and effectively is one of the most critical elements in the firm’s long-term success. If the owner-manager is unable to develop an effective team, capable of taking over responsibility for operation of the business, it is problematic that they can ever successfully grow their firm. In this chapter we look at the duties and responsibilities of small business owners when recruiting employees, and the importance of team building to the successful development of a small business. We also examine the need for the owner-manager to view their role as that of a coach and the importance of coaching skills to successful team building.

Operations management is crucial to the success of any small business. It impacts both the firm’s financial and non-financial aspects. Of importance is the control that can be obtained over the firm’s cash flow, stock and other productive assets to achieve the maximum levels of operational efficiency and effectiveness. Each business is likely to be different in how it operates, and the key performance indicators (KPI) that it needs to monitor how it is performing. This chapter examines operations management and how it applies to small businesses. It includes a review of business process analysis, the development and use of meaningful KPIs, operations management systems and techniques.

Technology offers small business owners an opportunity to enhance the productivity of their firm, widen its marketing reach and significantly improve the level of control they have over information and communications within the company. The use of technology, particularly information communications technologies (ICT) by small businesses has grown significantly in recent decades. This is due to the proliferation of high performance, but relatively low-cost ICT and their enabling software. One of the main areas in which this technology use has manifested itself is in the area of online and ‘in-the-cloud’ business software for marketing, accounting, HRM and operations. This chapter examines the use of technology in SMEs such as enterprise resource planning (ERP), customer relationships management (CRM), and knowledge management systems (KMS). It also examines the use of e-commerce, e-business and e-marketing within the small business.

Financing a small business venture requires the owner-manager to determine the amount of capital that will be required to achieve the level of activity and growth within the business over its early years. How large this amount of capital is will depend on the nature of the business, its industry dynamics and the ambitions or goals set for it by the owner-manager. Many small firms are established with relatively small amounts of capital. They also manage to trade successfully for long periods without seeking external funds from banks or venture capital. In this chapter, we examine the financing of a new small business venture.

While many small businesses start up with only bootstrap financing, it is usually necessary for them to expand their operations and invest in both new capital equipment, employees and marketing or advertising activities. The expansion – even modest expansion – of a small firm can place a strain on the firm’s resources and it is possible for a small business to overtrade and find itself in a financial crisis even though sales are increasing. This chapter explores the importance of understanding the working capital cycle and the need to monitor the break-even sales within the firm while understanding the importance of ‘gross’ rather than ‘net’ profit. It should be noted that the purpose of this book is not to cover financial accounting issues in any detail as this would be beyond its scope. Instead this chapter aims to provide an overview of key financial management concepts considered important to the successful operation of the small business.

Franchising has become a highly popular business system throughout the world with many small business owner-managers joining franchise networks. Although the more famous franchise systems such as KFC, McDonalds and Pizza Hut that came to Australia in the 1970s were established in the US there are now many such as Snap Printing, Jim’s Mowing and Eagle Boys Pizza are Australian owned. According to the Franchising Council of Australia (FCA, 2011), 90% of the franchise systems operating in Australia were developed here (FCA, 2016).

Crisis management, turnaround strategies and reengineering are just as important to the small business owner-manager as they are to the managers of large corporations. Unlike their large business counterparts, the small business owner-manager is likely to experience not only loss of profits and shareholder value if things don’t go well, but may lose their entire livelihood, personal assets and reputation. Fortunately, the small business is capable of getting itself out of trouble just as quickly as it may get into difficulties. This chapter examines how small business owner-managers can deal with trouble and overcome difficulties by problem solving. It explores the process of crisis management in the small firm and suggests that reengineering and turnaround strategies are not only the preserve of large firms.

This chapter examines the issue of valuation and the related issues of purchasing and selling a small firm. It highlights the fact that valuation is not a precise science, and there is no established formula for determining how much a business should be worth. It also considers consolidation and harvesting of the wealth from the business. The process of buying, selling and valuing a business can be among the biggest challenges facing the small business owner. In particular, valuation of the business is one of the more complex issues facing the small firm. For many owner-managers the value of their business is not something that they measure in an overall sense. The firm is for them a vehicle for personal and professional growth, a source of income and a place of work or lifestyle choice. However, once the owner seeks to sell their business the issues of how much it is worth comes sharply into focus.