DEFINITION OF BASIC CONCEPTS: SMALL BUSINESS AND FINANCE

HOW TO GET THE MOST FROM THIS COURSE

Each study unit will take at least two hours, and it includes the introduction, objectives, main content, self-assessment exercises, conclusion, summary, tutor-marked assignment and references/further reading. Some of these exercises will necessitate contacting some small business owners (entrepreneurs) and organisations that assist these entrepreneurs with finance. This is to enable you obtain more information in practical terms. There are textbooks listed under the reference section for further reading.
They are meant to give you additional information when consulted. You are advised to practice the self-assessment exercises and tutor-marked assignment for an in-depth understanding of the course. The essence of studying the self-assessment exercises and tutor-marked assignment is to achieve the stated learning objectives.

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MODULE 1 OVERVIEW OF SMALL BUSINESS

Unit 1 Definition of Basic Concepts: Small Business and Finance
Unit 2 The Nature and Scope of Small Business
Unit 3 Characteristics of Small Business
Unit 4 History of Small Business

UNIT 1 DEFINITION OF BASIC CONCEPTS: SMALL BUSINESS AND FINANCE

CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Meaning of Small Business
3.1.1 Classification of Small Business
3.2 Definition of Finance
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading

1.0 INTRODUCTION

Small businesses have many definitions. The differences in these definitions are usually as a result of differences in the level of development of a country, differences in the organisation and structure of industries in different countries and other considerations.
There are various criteria used in classifying small businesses; these are employment (number of workers), value of assets, turnover, etc.
Each country tends to adopt whichever parameter or criteria considered suitable, based on their economic policies and the role small businesses are expected to play in the economic growth and development of the country.
Small business has been promoted in various ways by individuals, government, and various local and international agencies. This has been done by financing their activities, through grants and subsidy, making credit facilities available, and so on.
Thus, in this unit, we will discuss the concepts of small business and finance and also examine the various classifications of small businesses.
This is to enable you have a clear understanding of their meanings.

2.0 OBJECTIVES

At the end of this unit, you should be able to:
 explain the term small business
 describe the criteria used in classifying a small business
 define finance.

3.0 MAIN CONTENT

3.1 The Meaning of Small Business

A business is a concern, an enterprise, or organisation set up by an individual, or group of individuals for the purpose of making profits from the operations of the concern. Olagunju (2008:6) defines business as an enterprise that engages in the production of goods/services that provide satisfaction for consumers. Businesses in Nigeria range from micro, small and medium to large ones.
The definition of small business differs from country to country and from industry to industry. Each country tends to derive its own definition based on the role small businesses are expected to perform in the development of the country. Definitions change over a period of time, with respect to price levels, levels of technology, and other considerations.
Small businesses are synonymous with small and medium scale enterprises (SMEs). SMEs are usually referred to as small businesses in developed countries. Generally, a small business is an enterprise or an organisation that is privately owned and operated with a small number of employees and relatively low volume of sales. Olagunju (2008:3) defines small business as those business concerns with a total capital investment of not more than two million (N2, 000,000), with the number of employees not more than 50.
In Nigeria, examples of small businesses are those run by hairdressers, trade men, photographers, etc.
The owner of the business is referred to as an entrepreneur. She/he provides the capital required for the running of the business. She/he is the chief coordinator, controller and organizer of the business.

SELF-ASSESSMENT EXERCISE 1

Explain the meaning of small business.

3.1.1 Classification of Small Business

The methods used to classify small business are- number of employees, annual sales or turnover, value of assets and net profit (balance sheet).
According to a report by UNDP/SMEDAN (2006), classification of small businesses by various countries differs; for instance, in Australia, the Australian Bureau of Statistics defines small businesses as those employing fewer than 20 persons. The Australian Tax Office uses a yardstick of average annual turnover of less than $1million and net assets of less than $3million. By contrast, the export insurance scheme targets small businesses with annual turnover of, not exceeding $10
million.
The classification of small businesses in China is based mainly on sales revenue and total assets. Thus, small businesses have sales revenue not less than RMB 50million. In Canada, small businesses are those with less than 100 employees in manufacturing and less than 50 employees in the service sectors. The United Kingdom classifies businesses according
to number of employees- micro, 0-9; small businesses- 0-49; medium sized businesses-50-249; and large businesses- 250 and above.
In Nigeria, the current classification is based on the number of employees and assets (excluding land and buildings). Some of the classifications of small businesses by various agencies, as noted by Otiti (2007:236) are-
1 The Center for Industrial Research and Development (CIRD) of Obafemi Awolowo University, Ile-Ife- classifies small business as an enterprise with a working capital of not exceeding N250, 000 and with about 50 workers or less, on permanent employment.
2 The Nigerian Industrial Development Bank (NIDB) (now Bank of Industry) classifies small scale enterprise as an enterprise that has investment and working capital not exceeding N750,000; while it defines medium scale enterprises as those operating within the range of N 750,000 to N 3.0 million.
The Nigerian Banker’s Committee (2005) classifies small and medium scale enterprises as those with a maximum assets base of N500million, excluding land and working capital, and with no lower or upper limit, in terms of the numerical strength of staff.

The classifications of small businesses adopted by National Council of Industry are as listed below:

 Micro/Cottage Industry- this is a business with total capital of not more than N1.5million (excluding cost of land, but including
working capital) and a labour size of not more than 10 workers
 Small Scale Industry- this is a business with total capital of not
more than N50million (excluding cost of land but including
working capital) and a labour size of not more than 11-100
workers.
 Medium Scale Industry- this is a business with total capital of not more than N200million (excluding cost of land, but including working capital) and a labour size of not more than 300 workers.
 Large scale industry- this is a business with total capital of over
N200million (excluding cost of land, but including working
capital) and a labor size of over 300 workers.

SELF-ASSESSMENT EXERCISE 2

Identify the criteria used to classify small businesses.

Definition of Finance

Generally, finance is the allocation of funds for your basic needs. In business, finance refers to the process of allocating funds to meet the needs of your business. In this case, finance is referred to as managerial, corporate, or business finance, while for small business, specifically, it is referred to as (Small-Medium Enterprise) SME finance.
Olowe (2008:1) defines finance as the management of money. It is the management of the flow of money through an organisation. These funds come in form of savings, loans, and/or invested capital- to meet business requirements.
Finance is very important to investment. It facilitates investment for the growth of a business. The functional activities of a business such as advertising, production, marketing, purchasing, transportation, etc require the use of funds, without which these business activities will not be possible.
Generally, finance can be sourced from within and outside a country, which are, respectively, referred to as internal and external finance. External finance takes the form of loans given by a country to others countries; it can also be in the form of loans given by international bodies such as World Bank, United Nations Development Programme (UNDP), African Development Bank (ADB) and others. Internal or local finance takes the form of bank loans, retained earnings, equity, etc. Most small businesses rely on sources of finance within the country, due to their small size. Assistance sometimes comes from international bodies, mostly, through the government of the country. In Nigeria, for example, international bodies such as UNDP, ADB, etc have helped in financing the activities of some small businesses through some agencies of government.

SELF-ASSESSMENT EXERCISE 3

Explain the meaning of business finance

CONCLUSION

In this unit, you have learnt the meaning of small businesses and the various ways of classifying small businesses in Nigeria and other countries. You are also aware of the meaning of finance. Small business is a privately owned enterprise. The criteria for classifying small business include the number of employees, turnover, and value of assets, among others. Finance on the other hand is the management of funds or the allocation of funds to meet the needs of a business. For small businesses to thrive, they have to be adequately financed. Finance can be sourced from savings, bank loans, equity, etc.

SUMMARY

In this unit, you are now conversant with the meaning of basic terms such as small business and finance. The criteria for classifying small businesses in Nigeria and other countries have been considered. You are now aware of the reasons for financing small businesses.

TUTOR-MARKED ASSIGNMENT

1. What is the meaning of a small business?
2. Outline the criteria used in classifying small business and discuss
the classification of small business.
3. What does the term finance mean?

REFERENCES/FURTHER READING

Olagunju, Y.A. (2008). Entrepreneurship and Small Scale Business Enterprises Development in Nigeria. Ibadan: University Press Plc. Olowe, R.A. (2008).
Financial Management: Concepts, Financial System and Business Finance. Lagos: Brierly Jones Nigeria Limited. Otiti, O.G. (2007).
Essays on Recent Issues in the Nigerian Financial System. Lagos: CIBN Press Limited. Saini, J.S. & Dhameja, S.K. (Eds.) (1998).
Entrepreneurship and Small
Business. New Delhi: Rawat Publications.
UNDP/SMEDAN (2006). National Policy on Micro, Small, and Medium Enterprises. Abuja.