Diodos

That small business owners encounter various problems in the operation of their businesses is a truism that has been well documented. Though similar problems are encountered in both developed and developing economies, the intensity and degree of importance of each problem may vary between countries and between industrial sectors in each country. In general, however, lack of own capital and sufficient access to credit,

skilled and professional manpower, market demand, and raw materials are the major problems encountered by small businesses. Other difficulties include those arising from government regulations and laws, dominance of larger firms and lack of managerial expertise.

Lack of Finance

Capital shortage is generally recognised as a major problem of small businesses. This arises from the relatively poor financial background of most small business founders. They normally depend on their personal savings as well as gifts and loans from friends and relatives for initial investment capital or working capital required in day-to-day operations. They often experience difficulties obtaining loans from banks either for investment in capital or equipment or for working capital. Banks generally find them unattractive in view of their lack of adequate security collateral, inadequate or no financial track records and experience in management, high risks of default and the disproportionately high administrative costs and problems associated with lending to them relative to the sums involved. Thus when banks offer loans to small businesses, higher interest rates than those charged to large firms are invariably charged.

Though shortage of capital is a major problem of most small businesses, the fact that this is in some cases an illusion has been raised (Schatz, 1964). Harper (1984) observed that small retail businesses in Kenya often have substantial resources uneconomically employed in stock items that have very low sales. Akeredolu-Ale (1975) had also observed that many Nigerian entrepreneurs are consumption rather than growth oriented. Hence, much profit goes out of the enterprise instead of being ploughed back. Studies have also shown that reasons why banks decline requests of loans from small businesses include the fact that they depend excessively on outside finance for expansion, inviability of their proposed scheme, insufficient information on their business performance, unacceptable security and trading difficulties (Robbie, 1986). Some of these factors had also been identified by Schatz (1977) in respect of Nigerian businesses. Although capital shortage is a critical problem, its crippling effects are sometimes avoidable. This is borne out by the fact noted by Harper (1984) that a large number of

small businesses do succeed by employing the capital which is at their disposal, in the most profitable way. And these firms would make more economic use of further resources if available to them.

Lack o f Demand

Whereas most large firms supply both the national and international markets, small businesses' markets are usually limited geographically. Small businesses often cannot diversify markets, being limited by their inability to afford promotion of their products through advertising in the mass media. Hence they rely mainly on their traditional personal links with few major customers in their local environment. In some instances, especially in developing countries, lack of access to modem business infrastructure or hardware such as telephone and telex, further limit efficient personal contacts with customers. Small businesses' products demand is also limited by lack of product development and diversification relative to the larger firms. They are thereby disadvantaged in maintaining their proportionate share of the market. Thus lack of marketing skills and initiative limit the small business owner-manager's ability to promote his products or services.

Small businesses are further disadvantaged by their size to exploit the benefits of economies of scale. They lack the capital and the skills to undertake modern large-scale production technology. They are therefore unable to have large-scale consumers as customers. Furthermore, they lack the resources and skills required to operate efficiently in the modem formal sector. They lack market information and understanding of formal tendering procedures in order to gain access to government procurement markets.

Lack of demand is probably the problem most small business owners will mention after the shortage of capital. Nevertheless, "...inadequate demand arising from inadequate access, disadvantages of scale and the lack of skill and initiative in marketing, is often a more genuine problem than shortage of capital" (Harper, 1984, p.31). In addition, evidence shows that the business environment of small businesses is quite turbulent, subject to seasonal, cyclical, spatial and sectoral fluctuations of substantial magnitude (Markusen and Tietz, 1985). Small businesses consequently experience damaging setbacks in market environments as a result of problems created by general economic uncertainty

such as inflation, government policies and recession. Factors such as technological change, unfair competition from dominant large firms or product 'pirates', as well as changes in business behaviour of major customers or suppliers, also constitute major marketing problems to small businesses.

Lack of Skilled and Professional Manpower

Various studies have shown that small businesses are disadvantaged in attracting, well-qualified and experienced skilled workers, or retaining them for long in their employment. Though in many instances, these workers acquired their first training basically through on-the-job employment in small businesses, they leave after a few years for larger firms. They are induced by higher wages, a wide range of fringe benefits and opportunities for career advancement offered by the larger firms. Evidence available also broadly support the view that highly qualified professionals are reluctant to work for small firms (Stanworth and Curran, 1986). This is because small firms are unable to match the rewards and career opportunities offered by the larger firms or offer the kind of experience that will enhance the professionals' future employment opportunities. Thus small businesses tend to have younger, less-qualified and less-experienced employees. However, ineffective personnel management practices as well as organisational uncertainty and instability further contribute to lack or high turnover of well-qualified and experienced employees in small businesses.

Shortages of Materials

Shortages of raw materials are also a frequent problem of small businesses. This problem results partially from their lack of working capital as well as suppliers' unwillingness to extend credit facilities to them. Unlike large firms, it is difficult for small businesses to secure supplies of materials or services without payment in advance or trade discounts. This adds to the costs of the small firm and will invariably cause them cash flow problems (Cross, 1983). The small business may as a result become dependent on one

high-priced, unreliable or low-quality suppliers who grant them some supposedly favourable sales conditions.

Dependence on one or a few suppliers may also cause the small business to suffer shortages of materials. For example, the raw material of the small firm that is a by-product of a major supplier may disappear, if the supplier adopts a new production process, or moves away to a new location so that transport costs make it uneconomical to continue supplies. Too-rapid style changes or lack of innovation by the major supplier may also render the small firms' stock obsolete or outmoded (Markusen and Tietz, 1985).

Shortages of raw materials also arise as a result of inadequate access to foreign exchange for imports in developing countries. Faced with competing demands for scarce foreign exchange, governments in many developing countries, particularly in Africa, employ rationing systems for imports. Direct allocations of import licences are usually made to large-scale firms.

"....Small firms which are excluded from direct access to import licences are subject to both higher prices of imported inputs and greater uncertainty of supply. Even where foreign exchange allocations are potentially available to small firms, they remain at a disadvantage relative to larger enteiprises due to their limited administrative resources and their consequent inability to undertake the protracted bureaucratic procedures required to obtain an import licence." (Page and Steel, 1984, p. 28).

Unfortunately, government's efforts to ensure small firms have better access to scarce inputs, by providing rations from government bulk purchases to them, have not been very fruitful. As observed by Harper (1984, p. 51),

" a few of the more powerful businesses, with better 'connections' in the right places, purchase the limited supply that is available and then sell it illegally to large businesses, or at very high prices to the small businesses for whose benefit the system was originally designed."

Thus small businesses have to contend with perennial shortages of both local and imported raw materials. However, small businesses have some advantages over larger firm in obtaining materials which are available from scattered sources. They are more able to purchase and use them in the limited quantities they need without excessive transport costs (Harper. 1984).

Government Laws and Regulations

Some government regulations and laws intended to protect society in general, tend to have negative effects on the performances and growth of small businesses. Some legislation even discriminates against small businesses since their peculiar characteristics are not often taken into consideration when such legislation is formulated. For example, the tax system in most countries discriminate against small, labour-intensive firms and favour large, capital-intensive firms with respect to capital accumulation. The small-scale business sector is at a disadvantage when it comes to negotiating for exceptions from any form of regulation, permission to operate in a particular place or any other privilege or right which is under the control of a large-scale central authority (Harper, 1984, p. 32). Small businesses are therefore confronted with a battery of statutory obligations, especially in respect of taxation, employment, environmental control and health, which they often find difficult to understand, much less complying effectively with them.

Apart from the obvious constraints complex legal requirements impose on their operations, compliance by small businesses is further complicated or hampered by burdensome paperwork and red tape. As observed by Bannock (1981) also Beesley and Wilson (1982), since their management resources consist essentially of one person - the owner, small businesses are placed at a considerable disadvantage relative to larger firms with respect to any given commitment requiring managerial attention. Therefore administrative burdens imposed by statutory duties and obligations distract small business owners from concentrating effectively on running their businesses. Furthermore, compliance involve extra business costs including additional costs for legal, tax and accounting services. Thus government requirements further threaten the survival of small businesses.

Inability to comply with various statutory requirements often force many small businesses in developing countries to operate in the informal sector or outside the law. But where advantages can be gained from paying less than official minimum wages, producing illegal products, operating unsafe working conditions or infringing environmental regulations, the small business can often take these advantages without being noticed by government agencies, and without the difficulties of negotiating or 'buying' exemption

from the law (Harper, 1984, p. 33). Their transgressions are often less noticeable. In addition, the administrative burden and costs involved in effective control of the many thousands of small firms will normally exceed the economic capacities of most government agencies.

Competition From Larger Firms

The small firm must often also contend with the market power of much larger firms as competitors, suppliers and customers. Though traditional economic analysis and some studies have shown that a small firm faces a competitive market of many other similarly small firms, Markusen and Tietz (1985), however, observed that this is not always the case. Many of the small firms they studied operated in markets dominated by large firms or that the small firms depended on a few major suppliers or customers. The existence of both large and small firms in a single market often result in the larger firms dominating the market and subsequently endangering the continued existence of the smaller firms. The larger firms do take advantage of their greater access to capital, technology and managerial expertise, in particular marketing skills, to outmatch small firms, hence their highly disproportionate share of the market. Some small businesses however develop dynamic marketing strategies to promote their growth and survival.

In the same vein, larger customers take advantage of their market power to exploit the smaller firms dependent on them. When the small firm has no alternative customers or when numerous other small firms are competing for limited contracts, large firms take advantage of such circumstances to wring concessions over price, delivery and other sales conditions. They also tend to have the major say or unilaterally fix the terms of the contract. Furthermore, large firms attempt to, and succeed, in passing on a larger proportion of their costs and responsibilities for risk-taking and employment on to small firms (Anthony, 1983; Goss, 1991). They use the small firms as market 'cushions' against market instabilities, terminating contracts quickly and easily if market conditions demand, thereby the problems of spare capacity or laying off workers remain firmly with the small contractor (Goss, 1991). And to improve their own cash liquidity, especially when interest rates are high, large firms may delay payments to the small subcontractors. Or as was

reportedly the practise in Japan, they may reduce the cash element in the payment of their debts, and simultaneously and unilaterally lengthen the period over which they receive work from their subcontractors (Anthony, 1983).

Small businesses also suffer discrimination from their large firm suppliers. They suffer shortages because the bigger competing firms are supplied first during booms (Markusen and Tietz, 1985). Larger firms with multiple outlets also get lower prices than can be justified by economies in processing and transport of the larger orders they are able to place (Bannock, 1981). Furthermore, small businesses tend to suffer from abrupt changes in the business behaviour of the larger firms - changes in location, demand or supply may cause the small business to go out of business altogether.

Lack o f Equipment

The outlay required for capital equipment is often difficult for many small businesses to find. Many overcome this problem by buying cheaply second-hand equipment from another small firm that has gone into liquidation (Bannock, 1981, p. 41). Alternatively, second-hand equipment has to be sought and bought at auctions or from used-machinery dealers. While access to old or new equipment is not usually a major problem to small businesses in developed countries, the vast majority of small manufacturing businesses in the poorer countries lack the cash as well as adequate access to information on suitable equipment or contacts with especially overseas dealers or manufacturers. The second-hand equipment market is usually very limited in most developing countries. Foreign exchange limitations and import restrictions further frustrate their ability to import. Spare parts probably cause more problems than original equipment itself, even if it has been possible for a small enterprise to import suitable equipment (Harper, 1984). However, ingenious and enterprising small businesses in developing countries have being taking advantage of a dearth of imported equipment and spares to create local substitutes and variants of imported machinery using locally available resources. They also modify imported machinery to suit local needs.

Lack of Managerial Expertise

Various studies have shown that small business owner-managers manifest a distinctive managerial style which tend to be autocratic, impulsive, egocentric and essentially unpredictable. They employ personal rather than bureaucratic controls in their business activities. Such managerial style creates a highly uncertain organisational environment. Furthermore, many of them are usually not very well educated or trained in managerial skills. This is best displayed in their financial mismanagement and lack of a business plan and marketing strategies. Thus the personal characteristics of small business owner-managers, coupled with their managerial incompetence contribute to a large extent to their other problem.

Being mostly family-owned concerns, many small business owner-managers normally feel their authority may be threatened by the presence of qualified professionals. They also fear succession by their family members may be jeopardised by outsiders. Hence managerial deficiencies of small businesses are further exacerbated by their unwillingness to employ qualified 'outsiders' or by circumstances restraining their active utilisation of their expertise or intervention in apparently family decisions. Managerial incompetence of small business owner-managers will be discussed in greater detail latter.

Summary

It is a truism that all businesses, whatever their size, encounter some problems in their day-to-day operations. That is, large firms also experience difficulties and are not isolated from problems in management, finance, marketing and personnel relations or in respect of government requirements. But the intensity of these problems and their critical effects on enterprise effectiveness and growth do vary between countries, industrial sectors as well as with the age, size and other characteristics of firms. However, existence of problems does not essentially imply failure, though growth, profitability and efficiency may be hampered. The critical factor is how problems are perceived and handled. This, to a large extent, depends on the level of managerial resources available in the business. The efficiency of a business is therefore a factor of the managerial skills, knowledge and

attitudes of its managers and owners. It is however generally held that small firms are more likely to fail at a higher rate than larger firms. Identified causes of small business failures will further highlight those critical problems that need to be urgently addressed in order to curb their failures.