Chapter 3

CHAPTER THREE
SMALL BUSINESS AND ITS

FORMATION
3.1. Definitions of Micro and Small Enterprise/Small
Business (MSEs)
 At present in most countries, a combination of the

number of workers and invested capital are used as a
yardstick for a meaningful classification of firms .
 World wide, individual countries apply their own
definitions and criteria in defining categories of small-
scale enterprise.
 The definition set by most developed countries:
 e.g. USA- 1-10 employees; and/or maximum capital of
about US Dollar 50,000.
In Ethiopian context, a standard definition to both micro
and small enterprise has been set by the Ministry of Trade
and Industry study on August, 1997.
Micro enterprises:
Service rendering firms: <6 workforces; paid up capital of
≤50,000 birr
Mfg firms: <6 workforces; maximum of 100,000 birr
Small enterprises:
Service rendering firms: 6-30 workforces and with paid
up capital of 50,001-500,000 birr
Mfg firms: 6-30 employees, 100,001 to 1.5 million birr
for manufacturing firms.
Generally, there are two approaches to define a small business
enterprise: Size criteria and Economic/control criteria
Size Criteria
The following criteria are commonly used to measure the size of
businesses.
 Sales volume
 Number of employees
 Insurance in force
 Volume of deposits
Economic/Control Criteria
• Market share – shouldn't able to influence the prices of the goods
sold at a significant level
• Independence- independent to control over the business
• Personalized management- it is the owner who actively participate in
all aspects of the firms management
Cont….
 Technology: - Small business is generally
labor intensive and only few are technology
intensive.
 Geographical Area of Operation: - The area
of operation of a small firm is often local.
Generally, small business is a business that is

privately owned and operated, with a small
number of employees and relatively low
volume of sales.
Classification of Micro and Small Enterprises
3.2. Forms of Business
 There are three basic legal forms of business formation

with some variations available depending on the
entrepreneurs’ needs.
Legal Forms of Business Description
1) Proprietorship Form of business with single owner who has

unlimited liability, controls all decisions, and receives all
profits.
2) Partnership Two or more individuals having unlimited liability who have
pooled resources to own a business
 Corporation Separate legal entity that is run by stockholders having limited
liability
The comparison for the three basic legal forms
3.3. Role/Importance of MSEs in Developing countris
Large Employment Opportunities:

Economical Use of Capital:
Balanced Regional Development/ Removing Regional Imbalance/:
Equitable Distribution of Wealth and Decentralization of Economic Power
Unregulated Growth of Large
Dispersal over Wide Areas
Higher Standard of Living
Mobilization of Locals Resources/Symbols of National Identity
Innovative and Productive /Simple Technology
Less Dependence on Foreign Capital/ Export Promotion
Promotion of Self Employment
Protection of Environment
Shorter Gestation Period: the time-lag between the execution of the investment project
and the start of flow of consumable goods is relatively short.
Facilitate Development of Large Scale Enterprises
Individual Tastes, Fashions, and Personalized Services
More Employment Creation Capacity
3.4. Setting up Small Scale Business
 Setting up of a small new enterprise is a very challenging
as well as a rewarding task.
 The entrepreneurial process of launching a new venture
can be divided into three key stages of:
3.5. Factors that support the success of small business
Conducive Environment;
Political Climate
The Economic Environment
Technology
Socio-Cultural Environment
Adequate Credit Assistance;
Markets and Marketing Support.
3.6. SMALL BUSINESS FAILURE FACTORS
External and Internal causes.
1. External causes:
 Intense competition
 Change in demand
 Sometimes legal decisions
 Natural calamities /disasters
2. Internal causes:
 Inefficient management and control system
 Insufficient resources
 Fraud and cheating
3.7. Priority Sectors and Sub-Sectors for MSEs Engagement In Ethiopia
1.Manufacturing Sector- This is the one which comprises textile and garment;
leather and leather products; food processing and beverage; metal works and
engineering wood works including furniture and ornaments service; and agro-
processing.
2.Construction Sectors- This is the one which comprises sub-contracting; building
materials; traditional mining works; cobble stone; infrastructure sub-contract; and
prestigious goods
3.Trade Sectors- This is the one which comprises whole sale of domestic products;
retail sale of domestic products and raw materials supply.
4.Service Sectors- This is the one which comprises small and rural transport service;
café and restaurants; store service; tourism service; canning/packing service;
management service; municipality service; project engineering service; product
design & development service; maintenance service; beauty salon; and electronics
software development; decoration and internet café.
5.Agriculture Sector (Urban Agriculture) - This is the one which comprises modern
livestock raring; bee production; poultry; modern forest development; vegetables
and fruits; modern irrigation; and animal food processing.
3.8. Main Supporting Packages for MSEs Development in Ethiopia
Awareness creation about the sector;

Provision of legal services, to form legal business
enterprises;
Providing Technical and business management
training;
Financial support based on personal saving, 20/80 (the
beneficiaries are save 20% and the MFIs provide Loan
80% of the projects);
Facilitate working premises;
Industry extinction services and BDS provision;
Bookkeeping and audit services.
3.9. Problems in Ethiopia small business
 Limited investment
 Lack of access to credit and training
 No business planning
 Mobile working arrangement
 Limited knowledge about resource utilization
 Crude range of products
 Limited value addition
 Limited investment… Abebe et al., (2009)
1. Define Business plan(1pt)
2. Discuss the legal formation of Small business
(2pts)
3. list and discuss the yardsticks to define Small
business enterprise (2pts)

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CHAPTER THREE

SMALL BUSINESS AND ITS

 At present in most countries, a combination of the

Generally, small business is a business that is

 There are three basic legal forms of business formation

1) Proprietorship Form of business with single owner who has

Large Employment Opportunities:

Awareness creation about the sector;

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