WHAT ARE SMALL BUSINESSES?

Shalom Solomon 9th October, 2021

Small business is a term that you might have come across in fiscal reports, government or international articles and the likes.

While there are businesses that are clearly small in all ramifications, it still makes one wonder, what qualifies a business to be called small.

Photo Credit: Pixabay

What are Small Businesses?

A small business sometimes called small scale enterprise is a business marked by a small number of employees, slow inflow and outflow of finance, raw materials and finished products. Most sole-proprietorship or businesses owned and run by one person fall under the category of small businesses.

What qualifies a business to be called a small business?

There is a bit of disparity when it comes to the criteria for determining what small businesses are.

In Nigeria, the CBN defines small businesses based on dual criteria.

1. The company's workforce must fall between 11-100 employees.

2. The company asset should be between 5 Million Naira to 500 million Naira.

In general, the criteria for defining small businesses is dependent on:

The industry the business operates in: A 500 employee business in the automobile industry will be considered a small business while a 500 employee company for a clothing company will be considered a large-scale enterprise.

The location of the business: the policies of a countryâ€™s government can determine if a company can be classified as a small business or not.

Different government agencies rely on different sets of criteria when classifying small businesses. The economic strength of a country also plays a role in setting the criteria and determining what makes a small business.

The type of the business: the type of business same as the industry a business is located can also be used as a criteria to judge if a company is a small business or not.

So, while businesses that are owned by one person and have a small number of staff like the fast food seller in your neighborhood or your favourite tailor with maybe five workers are obviously small businesses, the line begins to get blurred when the numbers get higher.

Criteria for Small Businesses

Number of employees: the number of workers a company has, is used by several government agencies to classify businesses. Basically, for all industries, businesses with a workforce of under 500 employees all fall under small businesses. This number criteria may vary depending on the government agency or country the business is located in.

The Central Bank of Nigeria for instance defines staff strength for small businesses to be between 11 â€“ 200. While in Somalia, a small business is one that has more than 30 employees but less than 250 employees.

The Companyâ€™s Asset Base: the assets of a company is used by some agencies both government and non-governmental, as a standard to measure if a business can be considered small or not. In Nigeria, businesses with an asset base between N5 million and N500 million are still considered small businesses.

Annual Turnover: in countries like Nigeria and India, government agencies define small businesses based on their annual turnover.

Other criteria used to define small businesses include:

Revenue generated, the industrial sector the business belongs to, balance sheet total, ownership structure, and so on.

Although small businesses are characterized by low employed manpower, low annual turnover and limited flow of finance, they constitute a large percentage of the gross domestic product (GDP) of most countries.

As such, it is fair to say that the services and products of small businesses form the back bone of the industrial sector.

Not only that, small businesses help to reduce the unemployement level of a country, as they are employers of labour and as such help to build the economy of their country.

Thanks for reading ; -)