This essay comprises of three different sections. The first section will concentrate on the definition of a small firm in the UK. It will then move on to the determinants for the growth of a small firm and finally, it will focus on the problems faced by small firms and the policies that have been designed to overcome these problems. There has been no explicit definition for the term small firm. In order to aid the general understanding of a small firm, the Bolton Committee of 1971 derived two different definitions. The first definition is termed as the economical definition. This relates to firms being small if they meet three criteria.
They must have a reasonably small share of their market place, they should be managed by the owner or co-owners of the firm in an informal manner and not through the normal formality that involves a management structure; and they should be independent and not configuring as a part of a large enterprise (Storey, 1994). The second definition is the statistical definition. This comprises of the number of employees in the firm. “Definitions from the Bolton Report of 1971 are regarded by many to be of dubious value to a sector that has changed in complexion, composition, contribution and structure over 32 years” (Beaver, G & Prince, C. 2004). This is one of the criticisms that has been pointed out after the definition was obtained from the Bolton Committee. It has been argued that there is no single definition of a small firm and the Bolton Committee’s definition did not help the issue that committees and researchers face in giving a small firm a definition. In order to aid the problems that were created as a result of the definition derived from the Bolton Committee, small and medium enterprise (SME) was established to clarify the understanding of a small firm.
They concentrate on three main elements; micro enterprises which contains 0-9 employees, small enterprises, 10-99 employees and the medium enterprises which has 100-499 employees (Sloman & Sutcliffe, 2004). The SME has helped in establishing the figures that are represented in each category. It has also brought about the difference between the above mentioned enterprises. Growth in a small firm is influenced by three main factors. These determinants are the firm’s owner, the firm itself and the firm’s strategy. The firm’s owner is the first point of contact for the firm.
The owner is the founder of the firm. Starting a firm is not always the easier thing to do however the firm’s owner needs to be self-motivated. He/she needs to also have an understanding of what is required to make the firm strong and should also be able to solve problems that may arise during the existence of the firm. All founders have to start from the basics even if their career history shows that they are of managerial placing (Storey, 1994). The firm’s owner should have a sufficient level of managerial skills. If these skills are not present, experienced personnel needs to be employed into the firm.
The owner should also have an awareness of the technology of production. The career history of the firm owner affects the firm’s performance. If the owner is not adequately educated, he/she may not be able to run the firm properly which would result in the firm performing badly in the business market. The older the owner, the more experienced and skilled he/she is. This simply means that they have the ability of dealing with problems professionally and they can also generate solutions for these problems. Older owners are more devoted to their work.
They are also highly motivated to work harder which results in the firm’s growth in a positive manner. The motivation of the firm’s owner is the key objective in relation to determining the growth of the firm. Moving on to the next reason behind the growth, the firm itself. This concentrates on the sector the firm will be based on. This sector needs to be established i. e. will the firm be dealing with agriculture, importing and exporting and so on. Another area that needs to be viewed in relation to the firm is how old the firm is. As a younger firm, they have the ability of achieving bigger growth than the older firms.
This demonstrates the need for the firm to grow quickly in order for them to achieve minimum efficient scale (MES) (Storey, 1994). The location of the firm is another key factor which needs to be considered in relation to its growth. This helps in influencing the general performance by the firm. The size of the firm is also important. The final determinant behind the growth of a small firm is the firm’s strategy. Like every good firm, there has to be a business strategy. A good business strategy should contain training of the employees both future employees, managerial staffs and general training to existing members of the firm.
These trainings help in enhancing the basic necessity that is required from the employee by the firm and their general knowledge of the ever-changing technology. In a firm that concentrates on computing, for example, the firm’s strategy should mainly focus on a regular training scheme which should be provided to all members of the firm which will then be inputted to the firm’s overall performance. Storey (1994) defined strategic planning as the plans of a firm which could take different forms.
This could be written down; long term plans being chosen and the general aims and goals of the firm being identified. Under the strategy of the firm, there also has to be the product of innovation. This concentrates on new products being introduced into the market by the small firm which have the tendency of growing faster than other firms that fail to introduce new products. The strategy also deals with the usage of professional managers. The firm’s owner can possess a managerial skill but the influence of a new character to the firm helps in the growth of the firm.
This new character introduces new skills and also helps broaden the knowledge of the firm. All these factors need to be addressed in relation to a small firm’s growth. Not only do they affect the growth of the firm, but they also help in determining the strength of the firm and the ability of the firm surviving in the competitive market. Problems that are faced by the small firms alternate from different pointers. They face low-turnover. This is the fundamental issue that firms suffer irrespective of the size of the firm. They also have a high reliance on bank loans.
Being that the firm is of a small size, their finances are low. They do not have sufficient capital to help them fund the firm which results in the firm applying for loans from banks. If a bank refuses to offer the loan to the firm, the firm faces loss of profit in different ways one of which can be the firm losing contracts from their customers as they are unable to provide the services that are required from them and also they are unable to provide wages to their work force which can result in the labour, being provided, withdrawn from the firm.
If the firm’s owner dies, there is no continuity of the firm. If the firm is owned by more than one individual the business can still stands but most of the small firms in the UK are owned by an individual. Policies have been created to help small firms with the problems they face. In relation to the over-reliance of small firms on banks, a scheme has been devised to help with this problem. This scheme is called the Small Firms Loan Guarantee Scheme (SFLG).
This scheme helps small firms by assuring loans from banks and other institutions. They only aided at firms that had long-term business proposals that would generate capital which the firm could be sustained with. “Between 1981 and 2005, this had undertaken over 100,000 guarantees involving ? 4bn worth of lending” (Griffiths & Wall, 2007:65). This policy, amongst a host of others, does not only relate to the capital that can be given to a small firm but they also play a vital role in encouraging individuals to invest in small firms.
The scheme that is behind the motivation of individuals is called the Venture Capital Trust (VCT) which was initiated by the Finance Act 1995. Another policy that was created was the Training and Enterprise Councils (TECS). Their main responsibility is to provide trainings to small firms and the labour market in general. In conclusion, it can be argued that all types of firms (not just small firms) face problems but the government has been able to give a helping hand in resolving these problems.
The government do not only provide policies but they have also designed laws and regulations that can be used to govern firms of all sizes. The UK, in particular, has brought about awareness to the ever growing small firms that have been established and also the awareness of the benefits thereafter. “The government has aided small firms by creating the right economic, fiscal and regulatory framework within which innovation and entrepreneurship can flourish” (Beaver, G & Prince, C. , 2004)