Owning a small business has its advantages and disadvantages. Each entrepreneur must weigh the pros and the cons carefully and decide whether or not the risk is worth the reward.
- Describe the advantages and disadvantages of starting a small business
- Explain why some business ventures fail
- List important considerations in deciding to start a business
Advantages of Small-Business Ownership
- Independence. Entrepreneurs are their own bosses. They make the decisions. They choose whom to do business with and what work they will do. They decide what hours to work, as well as what to pay and whether to take vacations. For many entrepreneurs the freedom to control their destiny is enough to outweigh the potential risks.
- Financial gain. Entrepreneurship offers a greater possibility of achieving significant financial rewards than working for someone else. Owning your own business removes the income restraint that exists in being someone else’s employee. Many entrepreneurs are inspired by the mega-millionaire entrepreneurs we see today, such as Steve Jobs, Elon Musk, Jeff Bezos, and Mark Zuckerberg.
- Control. It enables one to be involved in the total operation of the business, from concept to design to creation, from sales to business operations to customer response. This ability to be totally immersed in the business is very satisfying to entrepreneurs who are driven by passion and creativity and possess a “vision” of what they aim to achieve. This level of involvement allows the business owner to truly create something of their own.
- Prestige. It offers the status of being the person in charge. Some entrepreneurs are attracted to the idea of being the boss. In addition, though, there is the prestige and pride of ownership. When someone asks, “Who did this?” the entrepreneur can answer, “I did.”
- Equity. It gives an individual the opportunity to build equity, which can be kept, sold, or passed on to the next generation. It’s not uncommon for entrepreneurs to own multiple businesses throughout their life. They establish a company, run it for a while, and later sell it to someone else. The income from this sale can then be used to finance the next venture. If they’re not interested in selling the business, the goal may be to build something that can be passed down to their children to help ensure their financial future. One thing is sure: In order to fully reap the financial benefits of a business venture, you need to be the owner.
- Opportunity. Entrepreneurship creates an opportunity for a person to make a contribution. Most new entrepreneurs help the local economy. A few—through their innovations—contribute to society as a whole.
In addition, small businesses have certain advantages over large businesses. Flexibility, generally lean staffing, and the ability to develop close relationships with customers are among the key benefits of small businesses. The digital communication revolution has significantly lowered the cost of reaching customers, and this has been a boon to small startups and big businesses alike.
Disadvantages of Small-Business Ownership
As the little boy said when he got off his first roller-coaster ride, “I like the ups but not the downs!” Here are some of the downsides to owning a small business:
Time commitment. When someone opens a small business, it’s likely, at least in the beginning, that they will have few employees. This leaves all of the duties and responsibilities to the owner. Small-business owners report working more than eighty hours a week handling everything from purchasing to banking to advertising. This time commitment can place a strain on family and friends and add to the stress of launching a new business venture.
Risk. Even if the business has been structured to minimize the risk and liability to the owner, risk can’t be completely eliminated. For instance, if an individual leaves a secure job to follow an entrepreneurial dream and the business fails, this financial setback can be hard to overcome. Beyond financial risk, entrepreneurs need to consider the risk from product liability, employee disagreements, and regulatory requirements
Uncertainty. Even though the business may be successful at the start, external factors such as downturns in the economy, new competitors entering the marketplace, or shifts in consumer demand may stall the businesses growth. Even entrepreneurs who go through a comprehensive planning process will never be able to anticipate all of the potential changes in the business environment.
Financial commitment. Even the smallest of business ventures requires a certain amount of capital to start. For many people starting small businesses, their initial source of funding is personal savings, investments, or retirement funds. Committing these types of funds to a business venture makes them unavailable for personal or family needs. In most cases where a small business receives start-up funding through a loan, the entrepreneur must secure the loan by pledging personal assets, such as a home. Risking the equity in one’s home is a financial commitment not all entrepreneurs are willing to make.
In spite of the potential disadvantages, most small-business owners are pleased with their decision to start a business. A survey conducted by the Wall Street Journal and Cicco and Associates Inc. indicates that small-business owners and top-level corporate executives agree overwhelmingly that small-business owners “are more satisfied with their work than their corporate executive counterparts.”
Why Some Ventures Fail
The odds are definitely stacked against small business owners and would-be entrepreneurs. According to the Small Business Administration (SBA), “About half of all new establishments survive five years or more and about one-third survive 10 years or more. As one would expect, the probability of survival increases with a firm’s age. Survival rates have changed little over time.”  That’s why it’s so important to understand how and where things go wrong—such information offers valuable lessons on what to avoid. There are six main causes of small business startup failure:
Lack of Planning
Starting a business without planning where you want to go is like starting a car journey with no idea of your final destination or a map to get there; you’re bound to get lost. To avoid this mistake, set a clear goal of where you want to be and how you plan to get there.
Failure to Delegate
Within every business someone needs to focus on the bigger picture and have an overview of everything happening internally and externally around the company. That person should be you, but if your your head is buried in the accounts, you won’t. So delegate and outsource all the tasks that can be done by others, and free yourself to concentrate on the bigger picture.
Unwillingness to Change
As a small business you can’t afford to stand still while your market and the world around you moves forward. Adapt and develop your small business so it’s forward-thinking and innovative, not behind the times.
Forgetting That Cash Is King
A small business needs to monitor its cash flow closely. As soon as it loses track of the money, it’s vulnerable to failure. Plot and analyze your incomings and outgoings to make sure your small business stays on the right financial track. Don’t expect massive profits from the outset, but don’t accept a loss, either.
Lack of Objective Targets
Failing to measure the success of campaigns, products, or services can be disastrous for a small business. Is that PR campaign you’re running really worth the money? Does Twitter really bring traffic to your Web site? Know what to measure, and you’ll know how successful you are.
Failure to Ask the Right Questions
When you’re a small-business start-up, knowing which questions (and whom) to ask is difficult. There are numerous resources, such as the SBA, local economic development agencies, and chambers of commerce, that are great places to start. Part of the process is “knowing what you don’t know,” and such organizations can help you figure that out.
While avoiding these pitfalls won’t guarantee small-business success, knowing what not to do can help you to be proactive and focus on the things you should do.
The entrepreneur’s challenge is to balance decisiveness with caution—to be a person capable of seizing an opportunity but also one who has done enough preparatory work to be well informed and not assume unnecessary risk. Preparatory work includes evaluating the market opportunity, developing the product or service, preparing a good business plan, figuring out how much capital is needed, and making arrangements to obtain that capital.
Economists have analyzed a range of entrepreneurial successes and failures and identified key issues for up-and-coming business owners to consider carefully ahead of time. Taking them into account can reduce risk; ignoring them can contribute to failure. If you’re considering entrepreneurship, ask yourself the following questions to make sure you’re thinking about the key business decisions:
Motivation: What is your incentive for starting a business? Is it money alone? Are you prepared to spend the time and money needed to get your business started? True, many entrepreneurs acquire great wealth. However, money is almost always tight in the start-up and early phases of a new business. Many entrepreneurs don’t even take a salary until they can do so and still leave the firm with a positive cash flow.
Strategy: What products or services will your business provide? What differentiates your business idea and the products or services you will provide from others in the market? Who is your ideal customer? Who is your competition? Is the plan to compete solely on the basis of selling price? Price is important, but most economists agree that it’s extremely risky to compete on price alone. Large firms that produce huge quantities have the advantage in lowering costs. It’s also important to decide how you plan to manage and advertise your business.
Realistic vision: What kind of business do you want, and how much will it cost to get started? Will you need a loan? Is there a realistic vision of the enterprise’s potential? How long will it take to make your product or service available? How long until you start making a profit? Insufficient operating funds are the cause of many business failures. Entrepreneurs often underestimate start-up costs and overestimate sales revenues in their business plans. Some analysts advise adding 50 percent to final cost estimates and reducing sales projections. Only then can the entrepreneur examine cash-flow projections and decide if he or she is ready to launch a new business.
Other Key Decisions and Planning
Experts can help with many decisions on financing, taxes, insurance, location analysis, or supplier relationships. Some bankers and insurance agents will give advice at no charge to encourage a relationship. There are even experts to help with planning itself!
There is no right or wrong way to answer these questions or do the planning. Rather, the answers and approach will be based on each entrepreneur’s judgment. An entrepreneur gathers as much information and advice as possible before making these and other crucial decisions.
Check Your Understanding
Answer the question(s) below to see how well you understand the topics covered above. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.
Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.