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 (eg. mining, agriculture etc), or less than 20 people in other sectors (eg. 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 (eg. 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 (ie. 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 (eg. 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 (ie. 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.



NOTES

  1. In the old days, working from home with less than 5 people in the business (known as a micro-business) was seen as the Clayton business (ie. the business when you are not running a business). But things have changed since then. Now there is nothing wrong with running a business from home. It is the norm for the 21st century and beyond.

    In Australia, there are now 88 per cent of all small businesses operating as a micro-business and approximately 62 per cent of all small businesses work from or at home. And the figures are growing every year. In the UK, with an estimated working population of at least 27 million in 2002, as many as 1.5 million people (or 5.5 per cent of the working population) are already said to be working from home and is expected to double by 2010. The figures are based on official estimates.

    Why do people find microbusinesses so attractive? Microbusinesses have come about because of parents who have family commitments (at predictable times and something that can be managed) and displaced workers who want to be financially independent and in need of a more stable income source, or who live far away from a business and want to avoid high transport costs or other reasons. It can also provide people with the extra freedom to do almost whatever they want to do while providing very specific services for small businesses with greater cost reduction demands. Microbusinesses also provide the opportunity to meet the changing needs of customers within very specific niche markets not adequately addressed by small and big businesses.

    Also some young people may not earn high enough marks at school to get into a well-paid job they prefer. Or some employers may use psychometric tests to measure the candidate's behavioural style in the workplace relative to the competencies required for the job and then select prospective employees most suited to the job. This often requires people to have experience to pass the test in order to show competencies in areas such as approchability, patience, perseverance, the ability to work under pressure, and problem solving. Therefore, some young people may choose to set up a microbusiness to help them earn some money while gather the necessary experiences. But because of the costs to set up a business, many young people may choose to work from home.

    However working from home does not necessarily suit everyone. You must be able to concentrate on your work for long periods of time without distraction, you must be comfortable working on your own or with a few people for a long time, and you have to know when to separate work from your personal life. That's why people turn one room in the house into an office in order to help them focus on work.

    Generally people who tend to be most stressed working from home are those who:

    1. Are not self-motivated to work from home and hence need someone else to give them that "get up and go" feeling.

    2. Need to thrive on constantly developing and maintaining good working and personal relationships with many people (ie. the socialites).

    3. Find it difficult to concentrate on their work and make business decisions because of various distractions (or interruptions) in their personal side of life (eg. looking after babies or very young children at home).

    Also, if you are employed by someone else and have been given permission to do your work from the comforts of your own home, there is a risk your employer will think working from home equates to greater productivity and hence he/she might give you more work to do. If you find yourself in this situation, you will probably not benefit from working at home unless you can be your own employer and/or you can find ways to automate your work without your employer ever finding out and hence you can reduce your working hours with a corresponding increase in your personal hours.

    ## SPECIAL UPDATE ##
    September 2003
    According to recent statistics, 92 per cent of NSW microbusinesses are family-owned. Approximately one-third of microbusiness owners were aged in their 40s and another one-third were aged in their 50s. Approximately half of all microbusinesses were run by women. Two-thirds of microbusinesses start from scratch while about 60 per cent of owners had previously been employed in the same industry. As for the reason why owners began their microbusiness, the number 1 reason was to be their own boss (41 per cent).

    Can microbusinesses survive? Yes with 42 per cent of microbusinesses still operating after 15 years. And approximately 40 per cent of owners expect to expand their microbusiness in the next two years.

    Interestingly the recent growth in microbusiness in NSW was seen by some observers as a result of families in Sydney wanting a "seachange". As NSW Small Business Minister David Campbell said:

    'A lot of people are buying themselves a job outside of Sydney. People may have received a redundancy, so they've got some money, or people have sold property in Sydney and gone to regional NSW with a bit of cash to spend.' (Horan, Matthew. Women make a firm choice: The Sunday Telegraph. 21 September 2003, p.97.)

  2. Bureau of Industry Economics. Australian Industry Trends. May 1993, Issue No.18. pp.100-101. Actually, everyone is an entrepreneur because we all want to run our own lives. We only describe ourselves as running a business when running our lives also leads to making money.

    So perhaps a business exists if the hobby or idea you've created can make you money.

  3. Aulich 1996, p.9. The committee was headed by well-known McDonald's boss Charlie Bell and included auspicious members such as Industry Department head Greg Taylor. The report was fully endorsed by Labor's Shadow Minister for Small Business, Senator Peter Cook.

    In the October 2002 edition of My Business, the article titled IT in business on page 67 stated:

    'If you're an Australian small-to-medium-sized enterprise (SME), then you probably deserve a lot more respect than you might be receiving....

    'In fact, last year SMEs accounted for more than 90 per cent of all businesses in Australia and nearly half of all information technology spending in 2001.'

 
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