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The importance of entrepreneurship in small businesses:

Most people are familiar with the names of large businesses such as Marks & Spencer and Heinz.
Although some may not realize many of today's famous large companies were initially very
small. They were started by either one person or a small group of people. This case study
demonstrates the vital role performed by small businesses and is sponsored by The Network for
Teaching Entrepreneurship (NFTE). www.nfte.co.uk

NFTE is an international nonprofit organization introducing young people to the world of

business and entrepreneurship. It teaches them how to develop and operate their own legitimate
small business. This is done by involvement in a practical "hands-on" entrepreneurship, teaching
curriculum supported with quality materials and resources for both teachers and students. NFTE
has been particularly successful in motivating under-achieving young people to develop business
skills through experiential learning.

The importance and benefits of small businesses today

Many businesses start as one person's idea. The creator is often an entrepreneur who spots a gap
in the market or a commercial opportunity. S/he turns the idea into a marketable product or
service. There are four main types of business: manufacturing, wholesale, retail and service.
Some characteristics found in successful entrepreneurs, show they are:

prepared to take risks

driven by achievement

not put off by failure

self motivated

Determined to stay ahead of the competition.

Today's small business sector creates many of the new ideas and innovations future generations
will take for granted e.g. ingenious website designs, clockwork radios.
Small businesses
Small businesses are vital to the success of the economy. Not only as they provide the success
stories of the future, but also because they meet local needs (e.g. hairdresser, financial consultant,
emergency plumber). They serve the requirements of larger businesses e.g. for photography
services, printed stationery, catering and routine maintenance. Of course, you don't have to set up
your own enterprise to be enterprising. Being entrepreneurial simply means developing the right

skills, attitudes and initiatives to make an innovative contribution to an organization. This case
study gives you some idea of what is involved and how exciting it can be.
Most UK businesses today are small. Two thirds are owned and run by one person. Nearly 90%
employ less than 6 people. They are also an important source of employment. Just over 2.5
million UK workers are self-employed; one in eight of all workers. It is from these small
companies that tomorrow's big names will probably arise.
Small businesses survive and prosper for many different reasons:

Developing personal relationships - small businesses are well placed to build personal
relationships with customers, employees, and suppliers. With a small business you know
who you are dealing with; you can 'put a face' to the person you are in contact with. Personto-person interaction is as important as ever in building strong relationships.

Responding flexibly to problems and challenges - in a small business there is little

hierarchy or chain of command. Large businesses may have set ways of operating and
establish procedures that are hard to change. Small businesses are often far more flexible. It
can also reach a quick decision on whether or not it can do what is required.

Inventiveness and innovation - small businesses are well positioned to introduce and
develop new ideas. This is due to their owners not having to report or seek approval from
anyone else. For example, when Anita Roddick set up The Body Shop, she developed a
range of environmentally friendly cosmetics in unsophisticated packaging. This would have
been frowned on in a conventional cosmetics company.

Low overheads - due to the small scale of operation, small businesses have lower
overhead costs. They operate in small premises with low heating and lighting costs, and
limited rent and rates to pay. Low costs result in lower prices for consumers.

Catering for limited or niche markets -large firms with high overheads must produce high
levels of output to spread costs. By contrast, small firms are able to make a profit on much
lower salesfigures. They can therefore sell into much smaller markets: e.g. a local window
cleaner serving a few hundred houses, a specialist jewellery maker with personal clients.
The main reason many people choose to set up a small business, is because it gives them
independence. They also reap the rewards for themselves; these are two powerful incentives.
Challenges of a small business
Small businesses do have some disadvantages. Running an enterprise on your own involves hard
work and making most decisions on your own. Initially there is little time for holidays and
considerable risks involved. Also, as the business is small, it is harder to find the economies of
scale from which big firms are able to benefit. For example, because small businesses tend to
buy relatively small quantities of raw materials and other supplies, they receive lower discounts
than larger firms. The small firm cannot afford to employ a range of specialists and also find it
more costly to raise finance.

Setting up and running a business is something to be tackled by people who are energetic and
enthusiastic. These people like hard work, enjoy challenges, are adaptable and are not put off by
failure. Perhaps you are like that! Starting up on your own is a big step. It is vital to carry out
careful research and think things through thoroughly, rather than rushing into it.
Planning is one of the most important steps at the start. Not only is the plan useful to the person
setting up the business; it is also very important to anyone wanting to invest in it, or lend the
business money. It needs to be based on detailed research e.g. market research. Market research
is the process of systematically gathering and recording information about the market for a
product or service. This can be carried out by using questionnaires, or bringing together people in
small groups to discuss their views on the goods or services being offered. Alternatively, market
research can draw on information already published e.g. surveys. One purpose of market
research is to identify and provide evidence of market opportunities and challenges. It helps
someone starting a new business to get to know the environment they will be trading and
competing in.
Other key ingredients of the business plan include:
details of the business idea
where the business will be run from the expected sales
Costs of running the business.
Types of ownership
One of the first decisions to be made in starting a business is how the business will be owned.
The main choices are between setting up:
on your own (as a sole trader)
with a small number of partners (partnership)
as a private company, with shareholders (limited company).
The advantage of sole ownership is that you make all the decisions and take all the profits.
However, the sole trader has a lot of responsibility and will need to work extremely hard.
Forming a partnership makes it possible to share the workload, but profits have to be shared and
there may be disagreements between partners. Forming a private company makes it possible to
raise extra capital for the business by selling shares, but setting up a company requires time and
paperwork. Also, shareholders take a share of the profits. When Michael Marks started trading he
was a sole trader. Later he took on a partner, Tom Spencer. When the business expanded
nationally, it became a public company, with its shares traded on the Stock Exchange.

Funding and the importance of profit

New businesses need money to:
get started: e.g. buy fixtures and fittings, machinery and equipment, often referred to as
'initial one-off costs'

pay the costs of operating the business e.g. wages, rent, rates, heating and lighting.

Startup finance includes:

the owner's (or owners') own funds (including share capital in the case of a private
bank loans, or loans from individuals
a bank overdraft
a mortgageto buy property
trade credit, where suppliers offer a set period (usually between one and three months) to
pay for supplies
hire purchaseand leasing agreements, under which firms rent items such as photocopiers
and vehicles.
Sources of finance need to be matched to the time period of the finance e.g. mortgages can be for
up to 25 years whereas overdrafts and trade credit are for much shorter periods. Entrepreneurs
must always make sure that they have enough cash coming into the business to pay back money
they have borrowed both in the short and long term.
An effective marketing plan usually covers 4 key elements known as the 4 Ps:
Place and
Making a profit is always important in running a business. Without profits, a business is not able
to expand, and cannot take on more employees, or make contributions to the community.
Eventually it will cease to exist. Michael Marks made a profit from selling small items at a penny
each, therefore he was able to expand. He would have worked out what is called gross profit by
deducting the overall cost of all of the stock he bought from the income he generated from sales.
So his gross profit was: Gross Profit = Sales - Cost of Sales
However, the gross profit is not the final profit. It is simply the profit from trading before all the
operating costs of running the business have been taken away. To get a figure for net profit we
must deduct these operating costs from gross profit. Examples of operating costs would include
the cost of lighting, heating, salaries, and advertising, rents and business rates.
Net Profit = Gross profit Operating Costs
Promoting a business
New businesses have to be promoted. Promotion is a cost to the business, but without promotion
most people will not know of its existence. The best form of promotion is recommendation from
a satisfied customer. Other forms include local newspaper and cinema advertising, flyers through
people's doors and signs in a shop window. To promote your business effectively you need to be
continually aware of your customers' needs, your market place and your competitors' activities.
These factors are all important in maintaining, developing and expanding your business.

In the modern world people can no longer expect large enterprises to guarantee them jobs for
life. Individuals are increasingly expected to seek out their own opportunities, actively create
value and behave ethically, rather than faithfully follow rules and routines set by others. In
particular, today's young people need to learn to be enterprising, both when working for others
and when setting up their own businesses. Being enterprising involves taking responsibility for
decision making, becoming increasingly self-reliant, pioneering, adventurous, daring, dynamic,
progressive, opportunist, ambitious and holding your values, as well as being able to initiate
ideas and see them through into action.

The Advantages and Disadvantages of Small Scale Production

There are many kinds of merits and demerits of the small scale production, such as:

(a) Advantages of Small Scale Production:

The following are the merits of small scale production:

1. Close Supervision: The small producer can himself supervise the minutest details
of the business. Nobody is allowed to spoil machinery or waste materials. The
masters eye is everywhere. There can be no fraud or idleness. He will exercise
utmost economy to achieve the aim of maximum profits.

2. Nature of Demand: The small producer has an advantage over the large
producer, when the demand is either small or is constantly changing. He has thus a
sphere of his own where he has an advantage over the large scale producer.

3. More Employment: In the face of large scale unemployment existing in the

country, the development of cottage and small scale industries is of great help to
create more employment opportunities. Small scale production is more labourintensive i.e., there is more use of labour than machinery. Thus, many unemployed
persons are employed in the newly developed small scale industries.

4. Need of small Capital: The small scale production can be started with small
capital. Where there is shortage of capital, the small scale industries are of great
advantage for the development of industries.

5. Direct Relation between the Workers and the Employers:

In small scale production less workers are employed. Therefore, a close relationship exists
between the employer and the workers. Because of this close relationship, the employer can look
after the well-being of his employees and employees, too, consider their work as their own and
the work goes on smoothly without any disputes between the two parties.

6. Direct Relation between the Customers and the Producers: The small scale
producers generally cater to the local demand. Hence, they remain in touch with
their customers. A small producer personally knows his customers. Therefore, he
can produce goods according to the taste and fashion of each individual customer.

7. Easy Management: The management of small business is easy and economical.

Simple accounts and a few persons can manage the job well.

8. Freedom of Work: There is complete freedom of work in a small business

organisation. Workers are more or less self-sufficient. They are not dependent on
the capitalists and carry on their jobs freely.

9. External Economies: The small scale production secures all kinds of external
economies, which are available to large units also. These economies are: better
transport, electricity, and communication facilities; banking and insurance services;
technical workers, etc.

10. No Evils of Large Scale Production: The small scale production cannot fall victim
to the evils of the large scale production i.e., evils of the factory system,
overcrowding, etc.

11. Other Advantages: In the small scale production, there are some important
advantages over the large scale production:


Whenever demand changes, the supply can be adjusted accordingly.


There are fewer possibilities of strike and lockouts and no moral degradation of the
workers is feared.


There are no dangers of monopolistic institutions.

(b) Disadvantages of Small Scale Production:

The following are the demerits of small scale production:

1. High Cost of Production: The cost of production per unit increases because there
is a high cost of labour, a very little scope for division of labour and lesser use of

2. Wastage of By-products: In the small scale production, it is not possible to make

economic use of the by-products, as in the large scale production. By-products of
the small producers generally go waste.

3. Less Use of Machines: In the small scale production, there is less scope for the
use of machines. As a result, these firms cannot take advantages of the use of the

4. Lack of Division of Labour: In the small scale industries, the size of production is
small, and there is lack of division of labour and less profits to the entrepreneurs.

5. Difficulty in Getting Loans: It cannot enjoy the financial economies. Funds are
either not available and if available, they have to pay higher rate of interest.

6. Difficult to Face Economic Crisis: Because of the limited resources and financial
weakness, the small scale producers cannot face economic crisis. The producers do
not have the capacity to bear losses for long. In fact, under a small economic crisis,
many small factories are closed down.

7. Costly Raw Materials: In the small scale production, raw materials are purchased
in small quantities which are available to the small producer at higher prices.

8. Lack of Standardised Goods: The quality of goods is not standardised or upto the
mark in the small scale production. It is difficult to sell goods because of their low
standard and inferior quality.

9. Old Techniques: In the small scale industries, the production is undertaken with
the help of old techniques or old and obsolete machines. It is not within their
capacity to bear the risk of installing new machinery.

10. Lack of Research: The small scale industries have limited means at their
disposal. They cannot spend much on research in the field of science and
technology. In this way, the small scale industries are a hurdle in the way of
technical research and, industrial development.

11. Difficult to Face Competition with Large Scale Producers: If some large scale
producers enter the market, the small producers find it difficult to compete with
them. The small producers perish at the hands of the large scale producers.

Top 5 Problems You Face While Starting a Small Business in India

When country is facing economic downturn it is always a good idea to start a small business on
your own. You dont have to look out for other jobs in private as well as government sector.
Instead of being dependent on others you could start your own business. In fact, many people in
India have already started to move towards small businesses rather than running after private
jobs or sarkari naukri. However, starting a home based business might be a great option but its
not that easy to get started. Usually in India youll face many difficulties when youre planning
to start a small business on your own but here are the top 5 problems that you need to consider
before launching your new business.

1. Getting a Loan to Start a Business

Any business small or big needs a capital to start. If youre in India and coming from a middle
class background then it is quite obvious that youll be unable to amass sufficient cash to start a
small business.

Hence, youve to look towards banks or other firms that can grant you some loan to start your
business. Although therere thousands of banks which ready to lend you cash.
But the problem is theyre reluctant to give to people who dont have strong financial

For example, if you want loan for Rs 500,000/- then youve to show your tax returns and many
other documents. And its not necessary that you pay taxes because were here talking about
people who come from modest background. Hence getting a loan to start a small business in
India is the biggest problem especially for people from middle class.

2. Affordable Office Space at Right Location

Even if youre able to get a loan for starting a small business but the next challenge is finding an
office space at right location and at affordable price. As you know location is very important in
the success of a business. But the cost of office space isrising so high that it has become
impossible for small business owner to rent them. Only big companies could afford the rent for
their offices. Youll really have a hard time in finding an appropriate location at right price.
Therere certain businesses that you cant compromise on their location. Like real estate
agencywhere location of your office matters a lot. Similarly, convenient stores and others.
Especially in urban centers it is even more difficult.

3. Targeted, Wide & Low-Priced Platforms to Reach Out Customers

Now the next challenge you might face is reaching out to customers. If youre starting a small
business then people in your area, town or city should know about it. In order to advertise your
business locally, youve to go through all sorts of thing. Youve to totally depend upon offline
medium for advertising because in India still internet penetration is very low. Online
advertising is quite expensive and beyond the reach of many small business owners. Thus, in the
competition to expand your business you need to innovate new advertising techniques. But in
India its restricted to big corporations only. Big corporations dominate all the major advertising
platforms like TV, Radio, Online etc.

4. Cost of Daily Operations Labor, Electricity, Logistics

Fourth problem that youre going to face is the cost of daily operations. After youve being able
to get an office space and reached out to customers you must be prepared to incur daily costs of
running the business. Labor is not so cheap because youve to pay them adequately. Then things
like electricity are also a great issue. Especially if your business consumes a lot of it. Next is
logistics, raw material needed to run your business is also very costly. Therefore youve to
prepare for heavy cost to pay for daily operations of your small business.

5. High Rates of Income Tax

Now if youre able to manage all four of above mentioned difficulties then it would be
impossible to escape the tax in India. If you know tax rates in India are very high compared to
other developed countries. If your business is generating at least Rs 1,00,000/- to Rs 2,00,000/per month then youve to pay 30% of your income in taxes. It is quite a high rate compared to
elsewhere in the world. Thus, high tax rates in India makes starting a small business very
difficult. The main reason for such high tax rates is that India is still a socialist country.

Is There a Way Out?

After reading above 5 problems you might be discouraged to start a small business in India.
However, you dont have to lose your heart because theres a way out. It is not necessary that
youve to start a small business that is very conventional. You can think something out of box
that others arent doing. You shouldnt ape others rather look around you for inspiration.

Internet Based Business

One such a small business that you can start is Internet based business. Online business is quite
different than other offline small business. Its new in India and people are very interested in it.
Internet business has many advantages over an offline business. It really doesnt matter, you
come from upper class background or from a lower middle class. Anyone of you can start it to
make money, more than a conventional small business. Herere some of the advantages
of Internet based business.

Start Up Cost

Capital that you need to start in an Internet based business is negligible compared to starting
other traditional small businesses. You dont require any office space or furniture, stationery
because you can do it from your home. Although its not absolutely without investment but the
cost of startup here is minimal, so you dont have to depend on any type of business loan.
Theres no issue of hiring people because just one or two people are enough. Moreover, you get
wide range of customers from offline to online. The investment to start this business is so low
that even if you fail the loss would be so small. Hence theres nothing wrong in giving a try.

Growth of Internet in India

Moreover, online business is going to expand in this country because daily more Indians are
joining Internet. As the economy grows you get an opportunity to expand your business. You
dont have to bother about advertising your business because on Internet everything spreads like
a fire. Thus internet is going to grow in India and so is your online business.

Future of Online Business in India

The best part of online business in India is it has long term future. In coming days, it is going to
grow. Although many of the people in India are not very much familiar with Internet but in future
they will be as technology become accessible to everyone.


Online business may be easy to start because initial investment is very low. However, its not
easy to run because youve to work hard. So never take it lightly. Moreover, you cant run away
from paying taxes like other small businesses. Finally, I will conclude by saying starting a home
based business in India is not that easy because youve to face various problems from financial to
logistics. However, theres a way out in the form of Internet based business. It is new in India
and holds a great future. Anyone irrespective of their social background can start it. But you
cant take it lightly as it can be intellectually more difficult than traditional small businesses if
not financially.