Table of Contents Contents 1. Introduction 1.1 Objectives of this report 2. Important considerations when starting a Small Business 3.

Factors Help to Develop a Small Business 4. Why Small Businesses Survive 5. Conclusion 6. Reference and Bibliography Page No. 02 02 03 06 08 12 13-14

1. 1. Introduction Small businesses can be a vehicle for both Schumpeterian entrepreneurs introducing new products and processes that change the industry and for people who simply run and own a business for a living (Wennekers and Thurik, 1999). Small businesses were an important source of creating employment facility and generating income during the early decades of first century. During that time, Schumpeter (1912) proposed his theory of entrepreneurs which propelled the importance of entrepreneurs as an essential factor of economic growth. Mehralizadeh (1999), ACS and Audretsch (1990) and Carlsson (1992) expressed the essence of manufacturing industries as driver of economic growth. Alvarez (1999) stressed that keeping pace with globalization; small businesses are taking opportunity to expand globally. At present, all the policy makers in both developed and developing countries realize the small businesses are a must for the ultimate development of the economy in national and regional levels (Nieman, Hough and Nieuwenhuizen, 2003). In this paper, some important considerations when starting a Small Business and the factors help to develop a small business are explained and also the reasons that why small businesses survive are identified.

1.1 Objectives of this report The objectives of this report are to analyze the important considerations when starting a Small Business explain the factors help to develop a small business identify the reasons that why small businesses survive

2. Important considerations when starting a Small Business While starting a small business, an entrepreneur has to judge certain initial factors and also has

to think about the ultimate sustenance of the business successfully. Here are some factors important for the inception of a small businessMarket research Before starting the origination of small business, market research must be done. Through this the entrepreneurs will be able to identify current market situation, competitive structure, customer tendency etc. Hall (1995) said that many researchers often neglect market structure as a reason of failure although it is an important factor to be considered. The market segment is very competitive when small businesses compete on the basis of price. In this case, threat of new entrance is high and this threat creates pressure on the existing firms. Hall (1995) pointed out an essential fact that for lacking economies of scale, threat of new entrants is finally not so high in small businesses because per unit production cost is high. Research done by Hall (1995) found that there exists a strong correlation between the threat of new entrance and the overcrowding in the segments of market.

Competitive advantages and competition Walle (1998) found that by entering into the competition, an organization tries to achieve competitive advantage which is the building block of becoming success. According to OSMEP (2007 a), now-a-days, SMEs are also facing competition in terms of quality, operation, management, knowledge, investment strategy etc and all these factors play important role for improving quality level of the products. Lind (2009 b) stated that due to globalization, developing countries are counteracting competition from other countries, trade is expanding although trade barriers generally favor developed countries. Research done by OSMEP (2007 a) found that the competition is rising from the transnational firms because of having extensive technical knowhow and the increase in competition from foreign firms because of FTA. Many SMEs find it difficult to comply with the rules and regulations fixed up by the international organizations such as WTO, on the other hand, face barriers to trade due to possess poor quality(Lind, 2009 b). For example, World Bank research (2009) found that many countries like China, Vietnam and Indonesia manufacture similar products as those produced by Thailand focusing on low-cost structure, low-value addition, and labor intensive products.

Economic situation of the country The success of the business mostly depends on the economic situation of the country. If anyone wants to start up a business in Bangladesh, she or he must have knowledge about the economic situation of this country. Economy of Bangladesh is now on the dilemma stage. Highly rapid liberalization has put severe stress over existing firms because neither they can compete with other firms internationally nor they can increase their efficiency through the reduction of imported tariffs and withdrawal of quantitative restrictions. Although both equity and growth are governments main concern, the prioritized motto is to increase GDP from 5.5% to 8-10 % in a pro-poor manner (Bangladesh Bank Report, 2009). In order to achieve this goal, manufacturing sector has given much priority. In the context of the scenery of the industry of Bangladesh, apart from the small number of large factories such as The chemical and Pharmaceuticals industry, large fertilizer factories etc. most businesses are categorized under either small or medium businesses. The exact number of SMEs is still unknown in Bangladesh. A survey, done by BSCIC (Bangladesh Small and Cottage Industries Corporation) under the ministry of industries, attempted to find the number of small and cottage industries around the country. The survey result found that there is around six millions micro, small and medium enterprises (MSMEs).

Assessing and Mitigating Risk Risk can be defined as the uncertainty of future happenings. These happenings can be related to earnings, competitive advantage, brand value or other relevant factors. Risk can be operational or financial. Operational risk originates from firms internal activity whereas financial risk originates from external sources such as use of excess burden. No business organization is out of risk. On the other hand, there exists a strong positive correlation between risk and return. A proverb goes-No risk, no gain. Sources of Finance Lack of proper sources of financial support often leads to the shutdown of the business organization and entrepreneurs often try to collect monetary resources from their personal sources (APO 2001 and Sleuwaegen and Goedhuys 2002). Because internal sources are not sufficient for proper functioning, entrepreneurs often try to collect financial resources from outside the organization. Here are some sources of fund small businesses can adopt to fulfill its need properly. Self-financing through cash, equity loans on his or her home etc. Loans provided by friends or relatives. Private foundations grant Personal savings Private stock issue Formation of partnerships. Angel investors Banks SME finance which include collateral-based and mortgage based instruments and also venture capital which provides much more independence in case of originating a business organization. Geographical Factors Geographical locations have profound impact on the success of the business. Macpherson and Holt (2006) stated that geographical location can affect the growth of a business greatly. Some of the important geographical factors are availability of industrial sites, infrastructure, distribution and transport logistics, subcontractors, access to raw materials and skilled labor etc. (Sleuwaegen and Goedhuys, 2002). For example, APO (2001) stated the fact that SMEs located outside the Dhaka region face severe information problem. Because they have less knowledge regarding the tax status, tax return, policy change, marketing opportunity and production possibility. Management capacity Management capacity is one of the building blocks of any business to be succeeded. In accordance with Tannock et al., (2001), managers at SMEs are less efficient thereby choosing inefficient production technology and do not utilize proper accounting system (APO, 2001). Normally, SMEs do not spend enough on training program because of financial constraints and it is really difficult to take the employees out of production (Thassanabanjong et al., 2009). Training is very much effective because it increases employee productivity and reduces turnover (Thassanabanjong et al., 2009). For example, as Tannock et al., (2001) and Hofstede, (2005) said that managers at SMEs often do not properly pay heed to the employees who really understand the process of production.

3. Factors Help to Develop a Small Business

A small business although does not need to be regulated under legal act extensively, but to be succeeded, it must have a congenial environment in which it will work. Again, a small business must have the capability to be adapted to the changing environment. Failure to adapt to the changing environment often brings the shutdown of the small business. A small business can be started with small capital and also on a part time basis. This type of business can be well suited to internet marketing based on specific niche. However, there are certain factors necessary to develop a small business and drive it towards success. These factors are-

Economic growth Growth of the economy is the primary determinants of to forecast the success of small business. In a poor country, a small business cannot develop much and hence, cannot be successful. Cheah and Cheah (2005) stated in this regard that economic crisis in Asia has constrained the development of SMEs in this region because SMEs play an important role in the Asian countries. Cheah and Cheah (2005) further stressed that the impact of economic depression is vulnerable to the growth of small businesses because of their limited resources such as knowledge, management capacity, skill etc. For instance, economic downturn in the USA has contributed to the shutdown of many small enterprises of which resources were very minimum. Governmental policies Research done by Harvie and Lee (2005 b) found that there must have congenial governmental policies which will help small businesses flourish greatly. In spite of increasing governmental policies supporting and promoting small businesses, there are still lacking of governmental legislation, administrative laws and proper access to governmental agencies (Harvie, 2005). For example, to promote small businesses, government of Bangladesh has adopted proper policies namely SME rule 1999 and practical implication of that. Since that, the small businesses are growing rapidly in Bangladesh. Access to finance Small businesses need proper funds to be operated properly and also to be expanded. Nichter and Goldmark (2009) uncover that there exists biasness regarding policies towards the large enterprises and because of lack of access to fund, small businesses cannot grow properly. According to Harvie (2005); APO, (2001); Leopairote, (1997), small firms suffer from insufficient collateral, high transaction costs and incapability to deal with extensive formal administration. In addition to that, SMEs in developing countries did not accept formal bank loans (Nichter and Goldmark, 2009; World Bank, 2009) because of risk of default, poor profitability and inability to manage extensive physical resources (Harvie, 2005). According to World Bank (2009), to cope up with these constraints, Thai government has introduced SME bank which will support small and medium enterprises and this bank is actually government supported bank. For instance, in Bangladesh, to support SMEs, there is government run organization namely BASIC.

Geographical location Macpherson and Holt (2006) stated that geographical location has enormous impact on the growth of firms. Sleuwaegen and Goedhuys, (2002) exemplified the main determinants of exact location as availability of industrial sites, infrastructure, distribution and transport logistics, subcontractors etc. On the other hand, Macpherson and Holt (2006) concluded that choosing a location nearby a university or science park will provide benefit to the small firms through additional resource endowment. For instance, congenial environment in Sylhet in Bangladesh helps promote cottage industries there.

Management competence Research done by Macpherson and Holt (2007) and Barratt-Pugh (2005) found that the management of a small firm must be competent in order to be efficient. Thassanabanjong et al., (2009); Tannock et al., (2001) stressed the important fact that SMEs are spending less on the training program and thereby it creates difficulty to take up the employees out of the manufacturing process. Again, training is a critical factor for the success of SMEs because it provides efficiency (Thassanabanjong et al., 2009). Technology OSMEP (2007 a) research discovered that SMEs, in general, spend less on R & D and consequently, face inefficiency while operating and SMEs are mainly followers of the innovator in terms of technology instead of being innovator. The World Bank (2009) research on SMEs suggests that spending on technology improvement program will bring effectiveness and efficiency in SMEs and they will be capable of meeting the challenge brought by globalization. Courseault Trumbach et al., (2006) went one step further. According to their research, all government agencies should come forward to assist SMEs to be operated properly.

4. Why Small Businesses Survive The success of small business depends on many factors. Despite the immense competitive pressure brought by globalization, small enterprises are still in effect. There are certain reasons regarding this. Small businesses survive in the long run because of some important advantages over other businesses. Kuratko and Hodgetts (1995) suggested reasons of which the ten are most common. These are given below-

Figure: Reasons of the success of Small Business (Source: Kuratko and Hodgetts, 1995) According to Kuratko and Hodgetts (1995), there are some factors that assist for business success. These are provided as followsExistence of a business opportunity The critical success factor of a small business is the existence of a business opportunity. This business opportunity can be identified as congenial business environment, existence of governmental agencies that will help flourish the small businesses etc. For example, in Bangladesh, it is easier to establish a small business rather than a large enterprise because of the enormous opportunity of the growth of small business and lack of any legal rules and regulations. Management Ability According to Kuratko and Welsch (2004), Rwigema and Venter (2004), lack of management ability in case of SMEs stands for the failure of many SMEs. Hence, management ability is an important factor in this context. Managers of a small business can give his or her full effort for a single goal and can be successful in this regard. Adequate Capital And Credit Kuratko and Hodgetts (1995) suggested that adequacy of capital and credit help small enterprises flourish by leaps and bounds. Access to finance is, thereby, a must for SMEs. For example, Ndwandwe (1998) stated that South African Banks continue to express preoccupation with avoiding risk when small enterprises apply for the loan. Existence of Modern Business Methods According to Kuratko and Hodgetts (1995) firms should utilize modern business related technology, advanced equipment etc. Tax Advantage A small firm does not need to give tax on the income earned by the business. For this tax advantage opportunity, a small firm can grow easily and survive in the long run which is not so available for large business organizations because they have to pay a large amount for tax purpose. For example, tax rate for large organization or company in Bangladesh is 27.5% from which a small organization is relieved. High Achievement Drive The entrepreneurs of small enterprises usually are driven by high achievement. Due to this skill, they work hard with their highest diligence. Again, in a small business, there is no bureaucracy. This structure helps entrepreneurs provide their best effort. Since the entrepreneur is the single owner of the organization, she or he tries to give her or his best effort to be succeeded. Human Relations Skill Since a small enterprise possesses a simple organizational structure, not so huge number of employees, the entrepreneurs of a small enterprise is generally skilled at human relations. For example, in a small business, the entrepreneurs remain the owner and they can easily handle the employees and manage all the operations within the organization and also outside the organization. Need of Small Capital

The amount of capital needed to support a small business is the minimum and entrepreneurs can often manage this amount from their own personal sources. They do not need to go for bank loan as the large enterprises do. The need of small capital helps flourish a small business grows by leaps and bounds in the very long run. Quick Decision Taking In case of a small business, there is only one owner or entrepreneur. Due to this reason, while taking any decision, the owner does not need to go for extensive decision making process as the owners of a large business do. For instance, to make any decision, owner of a small enterprise does not need to take permission with anybody and also does not need to discuss with others, as a result decision can be taken overnight and implemented accordingly within a short time period. Single Control In a small business, there is only one owner to control and operate the whole organization. He or she alone can take decision, make any organizational policy, easily change that policy, and implement that policy without bureaucracy. This single control helps a small business to grow rapidly and sustain in the long run which is very uncommon in a large enterprise. Because in a large enterprise, there are many hierarchies and to make any decision and to make or change any policy, the bill regarding these has to be passed by all the people lie in this hierarchies which is a time consuming process. For example, owner of a small business can easily extend the line of business or change any line of business or even shut down the business and create a new one with a new organizational structure without effecting any legal act and rules and regulations.

5. Conclusion Small businesses are considered the engine of economic growth in both developed and developing countries, as they: Provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units. Before starting the business entrepreneur should analyze some important considerations such as market research, competitive advantages, economic situation of the country, geographical factors, sources of finance, and management capacity. A small business can be started at a very low cost and on a part-time basis. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity. In addition there are some factors that help to develop a small business. These factors are economic growth of the country, government policies, access to finance, geographical location, technology etc. Survival of a small business depends on its business success. This paper identified some reasons of the success of the small business that lead to survive the small business. Kuratko and Hodgetts (1995) believe that business opportunity, management ability, adequate capital and credit and existence of modern business methods are most important reasons of the success of the small business.

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