Cataloging the problems and growth patterns of small businesses in a systematic way that is useful to entrepreneurs seems, at first glance, a hopeless task. Small businesses differ widely in size and capacity for growth. They are characterized by independence of action, differing organizational structures, and varied management styles. However, it becomes obvious that they experience common difficulties arising at similar stages in their development on closer inspection. These comparison points can be organized into a framework that increases our understanding of the nature, characteristics, and problems of businesses ranging from a corner dry cleaning establishment with two or three minimum-wage employees to a $20-million-a-year computer software company experiencing a 40% annual rate of growth. For owners and managers of small businesses, such an understanding can help assess current challenges, for example, the need to upgrade an existing computer system or hire and train second-level managers to maintain planned growth.
Developing a Small Business Framework
Numerous researchers over the years have developed models for examining businesses. Each uses business size as one dimension and company maturity or growth stage as a second dimension. While useful in many respects, these frameworks are inappropriate for small businesses. As great as start-ups can be for macroeconomic development, they can also be chaotic for various reasons.
- The risk for start-ups is extreme, and the total cost can be exorbitant. Founders put in more time, energy, emotion, and capital than they ever thought would be required. And, since most fail, the total cumulative cost to launch start-ups that succeed is enormously underestimated.
- Start-ups disturb the price structure. While trying to get a position in the economy and before they know what it takes to capitalize on business growth, a classic start-up exercise is to enter the market with low prices. This sounds like honest opposition and good for customers. However, established corporations do know what they must charge to sustain their business. Even after a start-up runs out of investment and leaves the marketplace, damage to the price structure remains.
Small businesses that lasted the financial crisis and aftermath did so by establishing exactly what it takes to run their business in the leanest and meanest terms. One of the consequences of this trial by fire is that these firms have emerged in better shape than after significant economic bookkeeping downturns. Here are six reasons:
- Fewer start-ups. There has been less price structure disruption since 2008.
- The banking industry has confirmed an unparalleled lack of business loan demand which is ironic because interest rates have never been lower.
- Stronger balance sheets. Reduced debt plus methodical retailing, inventory, and supply chain practices that prevent inventory creep improve important financial ratios.
- More gross profit. Rigorous expense control relieves pressure on gross profit from flat sales and pricing pressure.
- Enhanced capital and cash. All of the above practices contribute to profitability, which is more likely to be retained in the current environment. Retained incomes push capital and cash in the direction of sustained operations and long-term success.
- More creditworthy. Firms that grow beyond organic funding will be more worthy of credit and preferred terms and rates.
Signs that your Start-Up is Maturing into a Small Business:
- Customer needs do not appear to be evolving rapidly.
- Consolidation by leading competitors is reducing economic intensity.
- Disruptive innovations and new applicants are gaining share gradually and top out at relatively low levels.
- Marketplace shares of leading contenders have hardened and are changing gradually, if at all.
- The price, brand, and channel stratagem has replaced product innovation as key value drivers.
- Cash flows progressively turn positive and return to investors rather than investment in the market.
Small businesses play an important role in any civilization. When they are first recognized, they represent the ways corporate owners test their business ideas in a market. Small businesses that create jobs for labor, in addition to the owner, offer even more economic stability. Providing a steady source of income for business owners and employees is just one reason they are important.
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