Small Businesses Term Paper

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management and operational issues that are faced by the Small and Medium Enterprises (SMEs) are being discussed. When we talk about the management and running of a small firm, this fact has to be kept in mind that the operations, management, activities are all very different from those of the large firms. In the small firms the main focus in on maintaining, managing and carrying out the day-to-day or the short-term operational activities. The management activities of the small firms are mainly concerned about the pressures being faced by the external environment and how to predict and control the operational environment in the best possible manner (Sha, 2010).

It has been observed by prior researches and statistics that failure is faced by majority of the SMEs within two years of initiation (LeBrasseur, Zanibbi and Zinger, 2003). According to Storey (2000; also see Burns, 2001) about 50% of the firms stop trading in the first three years of initiation. Storey also suggested that the chances of failing of the smaller firms are a lot more than those of the larger firms (Storey in Burns, 2001). According to Rwigema and Venter (2004: 68) the ratio of failure of small businesses is a lot more than the success of small businesses in many countries. It has been observed through a survey conducted in South Africa that about within three years of starting-up about 70 to 80% of the small businesses fail completely (Rwigema and Venter, 2004). Lack of management skills is the main reason that is given for the failure of most of the ventures (Kuratko and Welsch, 2004; Rwigema and Venter, 2004; Longenecker, Moore and Petty, 2003; Megginson, Byrd and Meginnson, 2003; Storey in Burns, 2001; Sha, 2010).

Moutray (2008) supports this by asserting that "small businesses are eager for a business tax and regulatory environment that allows them to prosper without being overly burdensome, and they worry about maintaining and attracting a quality workforce. The fact that smaller businesses are less able to provide and retain the generous benefits of their larger counterparts makes the competition for talent that much harder" (Moutray, 2008).

Reasons for Failure of Small Businesses

It has been observed by a lot of studies that the small firms can prove to be very beneficial for the economy as well as the large firms. However, the huge problems are faced by these small firms can and do hinder their performances. Also, there is a need to understand the word "failure" and see in what context is it right to use this word. Just because a firm has stopped working doesn't mean that it has failed, there is a possibility that it might have shifted to some other business, or if it was a family business the family might have decided to shut it down etc. (Megginson et al., 2003). According to Jovanovic's model the probability of failure of a small business would be a lot less if the management is working properly. It's the lack of education of management that mostly results in the failure of the small businesses as it results in the failure of various stages of development and after a certain period of time the whole firm faces failure (Hall, 1995).

Some of the most common reasons of failures of firms and businesses have been cited in the research by Argenti's (in Hall, 1995), these are:

There is one-man rule; usually the owner is the one who manages the business. This makes his/her attitude more dominating rather than a leading one for the employees;

The top management isn't as powerful as it should be with regards to their management skills;

The financial structure isn't very strong;

The board doesn't have a lot of involvement in the decisions-making process, usually they go with what the owner says;

There is a lack of management depth as, the owner is the only one managing and dominating the employees because of which he often does as he pleases and when he pleases (Sha, 2010).

The businesses that suffer from these problems that have been mentioned above are most likely going to take up projects which are not appropriate for the firms, use the financial information in a very poor manner and respond to change in an inappropriate manner. According to Argenti (in Hall, 1995) and Megginson et al. (2003), it is possible that one might not always be able to pinpoint the exact reason for the failure of a business. However, most of the times the lack of capital is the first and the foremost reason for a business failure. Without proper finances the businesses won't be able to recruit and keep capable staff, they won't be able to produce a product in an effective manner, reach the target audience properly or perform their activities in an effective manner (Megginson et al., 2003).

The second most common problem or reason of business failure is the lack of managerial skills. Management is a very broad term. It has been noticed that the lack of proper managerial skills, dealing with the employees and problematic situations, proper and effective planning are the major factors that add up to the reasons for the failures of most of the businesses. According to Jennings and Beaver (in Sha, 2010) the ultimate cause of either poor performance or failure of the businesses altogether is lack of proper management.

Soni (2005) also made a list of reasons for failures and wrote that "in a recent interview with John Emmins, the Honorary Chairman of The Federation of Small Businesses (FSB) in the UK the main challenges facing small businesses today were cited as: Firstly, the 'death of distance', whereby with advances in technology such as the worldwide web, small businesses can operate on a global scale but need to be professional and efficient; Secondly, greater competition from larger firms and the public sector; Thirdly, having to contend with laws as they apply to employees and customers. It also appeared that regulatory and legal issues are important challenges facing small businesses using the analogy that the legal issues for small businesses can be like climbing a mountain with sandals and shorts! Small business practitioners may often not understand the law and as a result may end up paying penalties and fines because of this" (Soni, 2005). Some of the other reasons that lead to challenges for small businesses are discussed below:

Burdensome government regulations

In the past there were a certain rules and regulations that only the large organizations and firms had to follow. But now the scenario has changed completely and the large as well as small organizations have to follow the same regulations. In case of the small firms this often becomes very difficult as, certain regulations are so complex that these small firms have difficulty in keeping up with them (SACOB, 1999).

Market Structure

According to Hall (1995) market structure is ignored by many businessmen. The main reason that has been observed for this ignorance of business structure is the lack of education by the business owners, who also manage the business. These owner-managers have been observed to have a very resistant attitude towards accepting or even acknowledging the fact that they need to let the people who know about business manage it. All this resistance and dominating attitude leads to poor allocation of resources, improper work distribution which affects the operational activities as a result of which the business gets affected.

The market segments in which the small firms compete usually have a price-based competition and this competition is mostly very fierce and when these new firms enter into the market the pressure on the existing firms increases a lot. A very important point has been made by Hall (1995) that these small firms have very high barriers to entry as they don't have the benefit of economies of scale.

Age and Size

According to Hall (1995) the Jovanovich model has proved this fact in great detail that the failure and age of the firm have an inverse relationship. This means that the older the firm grows the lesser are the chances of it becoming a failure. When firms enter a market and realize that there product is not performing as they had hoped they still keep on going in the hopes of the scenario to change or until they have exhausted their capital (Hall, 1995). With the passage of time these firms do make space for themselves in the market as they learn from their own experiences as to how they should handle various problems and scenarios (Hall, 1995).

Personal Characteristics

According to Hall (1995) 'human capital' is a very broad term which encompasses or describes all the capabilities possessed by a human being. Through researches it has been found that the age of the business owner has a positive relationship with the probability of survival of a business (Hall, 1995). It was found by Bates (in Hall, 1995) that the ideal age of a person to start a business of his…[continue]

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