Despite the benefits of being a large business, small businesses can be very successful too, and thrive for several important reasons.
Small businesses employ no additional workers or hire only very few people, and generate low sales revenue compared to other firms in the economy. According to The European Union definition, a small business hires up to 50 employees, earns up to EUR€10,000,000 in sales revenue and has capital employed up to EUR€10,000,000.
The truth is that all of the world’s largest companies like Google, Amazon or Apple have started off as very small firms. In fact, most of the business organizations that exist in the world are micro businesses and very small businesses such as sole traders.
Small firms offer many benefits for the dynamism of an economy such as induction of new ideas or creation of new products. Governments tend to support small companies in many ways offering various assistance to entrepreneurs.
Advantages of small businesses
Advantages of being a small company include:
- Family-like corporate culture. Small businesses are often family-owned businesses where the business culture is rather informal, employees are well-motivated and family members perform multiple roles. It is easier to get to know each worker and many employees prefer to work for a smaller, more ‘human-friendly’ business. There is often no divorce between ownership and control meaning that the business owners make important decisions that lead to less opportunities for conflicting business objectives.
- Better cost control. Small businesses can be managed and controlled by their owners who may not want to expand since they could face higher unit costs as their organizations grow too much. Small scale operations can mean that a firm does not encounter diseconomies of scale due to problems of control, coordination and communication. Another reason why small firms are easier to manage is that they are not geographically spread, but operate locally.
- Less financial risk. Owners of small businesses can usually manage and control their finances since the costs of running a small firm are not that large, e.g. lack of Research and Development (R&D) costs, huge marketing spending or recruitment and training fees. Because small firms do not intend to grow very that much, they do not require extra borrowing costs for expansion or maintaining large-scale production, therefore the financial risks are lower.
- Government aid available. Small businesses often receive financial support in the form of grants and subsidies offered by the government to help them start up and develop. Funds for training may also be available for small businesses that provide employment opportunities in the local community.
- Local monopoly power. Small businesses may enjoy being the only firm in a particular business location, e.g. a local BBQ restaurant, franchised gas station or small convenience store located in a small town or village. Some businesses, such as a local hair and SPA salon or private language school, can gain access to smaller markets with less competition. It is unlikely that those places will attract the attention of large firms due to very limited size of the market. Therefore, small businesses may be more willing to locate in remote areas as they have an opportunity to own large market share.
- More personalized services. Small businesses offer personalized services to customers as they are more likely to have the time to devote to an individual customer. For example, staff at a small local convenience store or coffee shop can get to know its customers’ preferences better as workers are not pressurized by high sales targets.
- Better flexibility. Small businesses tend to be more flexible. They are often able to adapt quickly to meet changing customer needs and wants. For example, if a female sole trader runs a beauty salon that is rather unsuccessful, then the business might be changed to something completely different, such as a children’s toy shop.
Disadvantages of small businesses
Disadvantages of being a small company include:
- Limited finance. Small firms tend to have limited access to capital as many different sources of finance are simply not available to them because of legal formalities such as: debentures, sale of shares to the general public on the stock exchange or accessing long-term bank loans. It makes raising large capital much more difficult.
- Poorly managed. The owners (shareholders) have to carry a large burden of daily responsibilities. It is because small businesses cannot afford to employ specialist professional managers who are responsible for each of the four business function.
- Poor market standing. Small businesses have lower brand recognition. Customers’ lack of familiarity with the brand does not allow small firms to sell to a wider market. Many firms are not established enough to have strong global brand recognition. Smaller firms also tend to be less trusted due lack of positive brand reputation. And without strong branding, they simply cannot benefit from customer loyalty as not many customers are likely to remain loyal to the business, its products and its brands without the perceived trust.
- Few opportunities for economies of scale. Small businesses cannot benefit from the cost reductions associated with large-scale production. Most of the smaller firms are not able to offer customers lower prices or greater discounts because of lack of economies of scale, therefore cannot benefit from better profitability. Actually, smaller firms may need to follow prices set by other large firms on the market.
- Less choices for customers. Small businesses cannot offer value-added services to their customers as they do not possess ample resources to provide a wider range of services, e.g. longer opening hours or interest-free credit instalments. Smaller firms such as a local bookstore or music retailer do not provide as many product choices compared to Amazon.com, the world’s largest online retailer that sells a huge range of books, toys, music and DVDs.
- Riskier. Small businesses are not well-diversified into several markets, products and countries, so risks are not spread. In addition, small firms are less likely to be able to afford to spend lots of resources on Research and Development (R&D) into new products and processes. Because of lack of diversification, there are greater risks of negative impact of unpredictable changes in the external business environment.
The official definitions for micro businesses, small businesses and large businesses are easily discoverable from the trade and industry department in your own country. If you would like to find out more about classification of businesses by size of the company, you can check the following story I had written a while ago called Classification by Size of the Business: Micro Companies, Small Companies and Large Companies.
