Definition of a small business

Small businesses are not little big businesses. The key differences between small business and big business are found in three defining characteristics. These are:

i.   Independent ownership and operations

• The business in not part of a larger organisation and is not controlled by another business
• Small business owner-managers, alone, are responsible for the leadership and strategic direction of their business.
• Their business does not have access to the networks and operational efficiencies afforded larger businesses. In the past this has limited small business export opportunities, however internet access and sale points, such as eBay, have seen many small businesses enter export markets

ii.  The owner-manager is principal contributor and controller of capital/funds

• Owner-managers and their families are often the only contributors of the capital (funds) needed to establish their business and then to grow their business.  Risk of loss of this capital sees often sees only the bare minimum invests and is why small businesses are often identified by low capital investment
• Limited funds limit the resources available within the small business. It limits the number of employees the business can hire which is why small businesses are often identified by low employee numbers. It limits the advertising and the number of customers a business can service which is why small businesses are often identified by a low market share and low annual revenues
• Most of the money available for business growth comes from the owner-manager  or retained earnings
• Loans are rarely made available to small businesses with fewer than 25 employees. If loans are made, banks often require significant surety, such as the family home and charge higher interest rates.
• As a small business grows, employee numbers increase, generating greater incomes and resources are no longer as scarce however the risk of loss of capital increases as the owner-manager no longer can maintain the same tight control over capital and needs to introduce alternate control methods

iii. The owner-manager is the principal decision maker

• The owner-manager is the only manager in most small businesses and therefore the principal decision maker
• A second manager is not usually hired until the business has between 10 – 15 employees
• As the owner-manager is the only manager, they alone are responsible for management and compliance within their small business. They must be expert in all aspects management and compliance within their industry and operations, finance and taxation, human resources and marketing, unlike the upper management within large businesses who specialise in a single field of management. of their industry and  Small businesses. Nor do you have a management team to advise you

The Statistical Definition of a Small Business?

There is not one standard definition of a small business, in Australia or globally.

Australia uses several different definitions depending on the which government department is seeking the information or applying a particular regulation.

• Australian Tax Office (ATO)
  A business with an annual revenue less than $2 million
• Australian Securities & Investments Commission
  A company with at least 2 of the following characteristics;
  i an annual revenue of less than $25 million
  ii fewer than 50 employees
  iii consolidated gross assets of less than $12.5 million at end of the financial year
• Fair Work Australia
  A business with less than 15 employees
  Australian Bureau of Statistics (ABS)
  A business with less than 20 employees

The USA government and academics considers a small business to be one with less than 500 employees or 1,000 employees if a manufacturer and Europe generally considers a small business to be one with fewer than 50 employees.

Why is the definition important

The intention of a definition of small business it to subdivide businesses into  subsets of business based on unique features (ie the characteristics of a subset). This then allows specific targeting of government policies and research.

Research shows that for research purposes definition of, a business with fewer than 25 are good. After 25 employees obtaining bank finance is easier and research models become less effective. Research shows that definitions of under 20 are best. After 15, businesses begin to employ specialist managers and this affects the owner-manager’s level of control and organisation. Businesses with under 20 employees represent about 97% of all businesses globally. By expanding the definition to 100 employees only increases the representation to 98% but research ceases to have any relevance to the common small business which employees less than 5 people and represents 67% of all businesses.

Using the Australian ABS definition of small business (less than 20 employees) we can see that only 1 % of Australian government tax concessions and grants are given to small businesses (96.5% of all Australian businesses)

This definition works best for academic research purposes as it matches the   Failure to correctly identify and define a small business has resulted in a significant body of work not relevant to the estimated 98% of all businesses globally that employ less than 25 employees.