About small business

What you need to know

What is the definition for "small business"?

There is no precise definition for the term small business.

Officially, the Australian Federal Government has defined small business in the 1990s as employing less than 100 people in the manufacturing sector (e.g. mining, agriculture etc), or less than 20 people in other sectors (e.g. retail, finance, tourism etc).

And now the term microbusinesses has been introduced to define those people who run a business from home (1). The number of people working from home are usually less than 5 and most commonly one or two.

In the most general sense, most people will tend to agree that a small business and a microbusiness is where one or two people:

  • independently own and operate a local business;
  • provide the capital to run the business; and
  • have firm control of the business and make all the decisions.

Perhaps the most critical factor in defining business is the act of making money. If you are not making money within your small business, microbusiness or large business, you are not in business.

The advantages and disadvantages of small business

The advantages of running a small business:

  1. Personal sense of achievement
  2. Freedom to make own decisions
  3. Greater flexibility in working hours
  4. Job creation
  5. Wealth creation

The disadvantages of running a small business:

  1. More hours spent running a business in the early stages
  2. Potentially fewer people to talk to on your problems
  3. Many internal and external risks to face
  4. Family life may be disrupted

Australian trends

In Australia, people want to focus on the advantages of small business (showing the optimistic nature of Australians). As a result, the trend towards self-employment is increasing. It appears as if the next great Australian dream for the new millenium is not just owning your own home, but becoming your own boss as well.

Support for this trend is revealed by the fact that in the 12 month period between September 1985 to 1986, the average number of people working in Australian small business was 2.23 million. For the period 1991-92, this figure became 2.6 million. And in 1996, the figure is closer to around 3 million. (2)

According to an official report published in November 1996 by the Small Business Deregulation Task Force, employment in Australian small business over the past decade has grown at an average annual rate of 3.6 per cent. This is five times the growth of big business. The growth rate is expected to continue well into the 21st century. (3)

The high failure rates of small businesses

Despite the glowing figures on the growth rate and number of small businesses operating in Australia, many hurdles litter the unwary new business operator. The statistics to support this can be seen from the number of businesses that fail. About 40% of all businesses in Australia in 1995 fail in the first year. Another 40% will fail after 3 years.

Some of the reasons for the high failure rate among small businesses includes such things as:

  • Insufficient or poorly managed finances;
  • Spending too much money on the business, especially on things you don't need;
  • Personal reasons such as a business partnership breakup or family commitments;
  • Failure to keep proper and well-organised financial records/books (e.g. keeping the cashbooks up-to-date, regularly reconciling the business bank account, filling regular forms to the taxation office etc);
  • Not keeping your list of people who owe you money (i.e. debtors) to a minimum;
  • Not paying off creditors as quickly as possible or at least informing them of your business progress through regular monthly or quarterly written reports;
  • Not comparing sales in the same month last year and/or to the previous month in the current year and so not learning why there might be discrepancies in the figures;
  • Failure to listen and learn from customer feedbacks and changes in the environment to ensure your product, your business, your staff and yourself are prepared and updated; and
  • Increasing complexity of the Australian taxation law and Government "red tape".

Another reason why businesses fail or find it difficult to get established and operate smoothly, especially in the first year, is because selling a service or product takes considerably more effort to achieve when no client base exists for the business. Only effective networking with your customers through good communication will help solve the problem (e.g. person-to-person talking and meeting with people, and/or through good advertising).

The first year will also bring out greater responsibility from the business operator to meet the public demand for your product or service in a timely manner. So get the help as you need it and be prepared to handle this situation when it occurs.

Of all the reasons given, insufficient or poorly managed finances has been the number one problem for many business operators who go bust.

Bankruptcy statistics prepared by the Attorney-General's Department lend support to this troublesome issue. According to the Bureau of Industry of Economics' publication entitled, Australian Trends May 1993, page 102:

"Prevailing economic conditions were cited by 40.2 per cent of business-related bankrupts as the major cause of their bankruptcy in 1991-92.... Other major reasons for business-related bankrupcies in 1991-92 were lack of business ability and lack of sufficient initial working capital.

In other words, the more inexperienced you are in running a business (i.e. you have never owned or run a business at any point in your life), the more likely you are to experience a business failure.

You can be successful in small business!

However, running a small business is not all doom and gloom. A success rate of around 86% for small businesses is not uncommon for those who go through a rigorous training and support program. Why? Because well-trained business professionals have learned one of the most important keys to starting and maintaining a successful small business: a business plan.

As many business experts say, "Planning is your greatest weapon against failure".

With a good business plan at hand, not only can you make it absolutely clear in your own mind about how your business will work and what's the likelihood of being successful in the marketplace, but also use it as your greatest source of evidence when obtaining the necessary finance from a bank manager to help you run your business.

This is where this free information topic comes into the picture. With this free information, you will now have the essential knowledge to help you write a business plan for yourself, and hopefully commence a success business of your own.