Small businesses are one of the first organizational entities that sink during a recession. The strength and innovative ability of a nation lies in the ability of smaller businesses to maintain profit margins and find new ways of adapting to poor market conditions. Research helps highlight how the legal form, management, and market exposure of such small businesses contributes to their success in overcoming recession related challenges.
The advantages of having small businesses within the market cannot be underestimated. They significantly contribute to employment, income generation, exporting of products/services, stimulators of competition and sources of innovation (Anderson & Tell, 2009). Without the success of small business states and nations would not have those innovative cushions that can recoup quickly and take advantage of market trends.
In many cases such businesses suffer from poor financial capital as well as ineffective management that lacks clear strategic vision. In order maximize performances small firms must accurately match their business strategies to the business environment to produce more revenue (Tang et. al., 2010). This can be accomplished by ensuring that products and services are being sold in a manner that further contributes to proper international hedging when local market conditions suffer from recession.
Successful businesses are seen as having a number of important positive factors. According to Hudson, et. al (2001) these factors can include cash flow, market share, overhead costs, performance, inventory control, marketing, efficiency, profitability, and cost controls. Through these multiple factors businesses are more able to adjust and steer course to new challenges.
Unfortunately, small firms do not have the financial capital or cushion to adjust appropriately to large market fluctuations which put them under considerable risk. For example, large firms have stronger bargaining power with suppliers and customers and can compete on both broad-based strategies and their reputation (Chen & Hambrick, 1995). Small firms have limited capacity to adjust the market conditions so they must rely on their own resources.
Research conducted by Izabella Steinerowska-Streb, from the University of Economics in Katowice Poland, attempted to determine firm specific variables on enterprise profitability during a recession (2012). These variables included firm size (amount of employees), type of manager (owner or hired), and market range (domestic or international).
In the study 1107 firms with fewer than 250 employees were used in the survey sample. Of the respondents 58.4% were micro-firms, 28.6 % were small firms and 9% were medium size firms. 90% of the firms were owner-managed meaning that the owners had some level of daily management within the company.
-Companies run by a professional manager were less exposed to decreasing wealth in a recession.
-Joint stock and limited liability businesses experienced fewer declines in wealth than other forms of small to medium businesses.
-Joint stock and limited liability companies with international exposure experienced less declines than other forms of local businesses.
The final results help small to medium business owners to consider the best forms of conducting business when trying to hedge against recession and poor market conditions. The best practices included finding professional managers, using joint stock or limited liability legal forms, as well ensuring they have a level of international market exposure. Through the use of solid business decisions such firms can reduce their potential loss and liability when compared to other forms of businesses operating within their local market.
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