Characteristics of Small Business Definition

A literature review of 23 papers, which have been published from 1958 to 2002, revealed an inconsistency regarding both characterization and definition of small business. The current article objective is to suggest some guidelines that can help reduce the level of ambiguity. The method to reach that objective is through the analysis of five significant parameters that have been used by different scholars to define small business. Each of these parameters is being characterized and analyze in order to clarify the existing status and for suggesting the less ambiguous alternative for using that parameter.

First, the business must be independent: For that matter, a subsidiary or a branch can’t be considering as independent business.

Second, the business is not dominant in the industry it’s operating in: Part of ‘Monopolistic Competition’ definition can be used to characterize the parameter - There are many sellers and they believe that their actions will not materially affect their competitors.

Third, firm size (number of employees): This parameter is obviously the most popular among scholars for defining small business; nonetheless its use varies dramatically. If you’re in U.S. then an employer of up to 500 employees will still be consider as small business, contrary to U.S. in Europe most countries use the limit of 50 employees to define business as small. Taking into account that across the world ninety percent of the operating businesses are employing less then 20 employees, it seems that 50 employees is a more suitable limit. Moreover, business with more than 50 employees is employing operational and managerial techniques, which become more and more similar to those of large businesses. Characterize the upper limit brings us half way; in order for us to go all the way, lower limit should be characterize as well. A rule of thumb in that regard is that business with less then five-to-ten employees don’t even have the minimum operational and managerial structure, which can be treated as small business, any business with less then five employees is inadequate for any analysis, and should be named micro-business.

Fourth, firm age: The use of firm age by scholars meant to characterize the minimal period of time needed for a business in order to form some operational and managerial backbone, otherwise, there was a risk that data collected for statistical analysis wont be suitable. Biggadike (1979), supported by Miller and Camp (1985), conclude that a new venture needs in average eight years for achieving profitability. The barrier of eight years should be analyzed depending on several factors, such as the industry that the firm operates in or the initial capital raise for starting the new venture. Moreover, Biggadike based his definition on the basis of the period needed to generate profitability, which is only one among numerous measures of performance. Taking all into account, a conservative estimation will be that business can be still considering as new if the period from establishment is two-to-five years.

Fifth, annual revenue: What can be considering as acceptable annual revenue for small business? In order to be able to characterize this parameter, a preliminary step of defining the industry that the business relates to must be taken. There is a substantial difference regarding the revenue in different industries. For example - Annual sales of five million dollars generate by a car dealer must be treated entirely different then when this same revenue produces by any type of consulting firm. The source of revenue is of great importance; revenue from selling goods can’t be treated as revenue from selling knowledge or labor. Subject to that remark, and for the vast majority of small businesses that operates in either manufacturing or trade (retail, wholesale) industries, annual revenue of ten million dollars can be used as proximity for characterize the upper limit. This annual revenue correlate with the upper limit of 50 employees used as characteristic for firm size.