Economics of micro businesses
Such single owner proprietorships include very small micro businesses like corner shops, small cycle or motorcycle repair shops, fruit and vegetable carts, sweet shops and bakeries, and many more such businesses. Many medium and some large size businesses also happen to be single owner proprietorships, although for a variety of reasons (including but not limited to tax reasons) they may be organised as private limited companies or partnerships.
According to a popular definition, small businesses are those that have up to 50 employees, and those that employ 51-250 employees are considered as medium size enterprises.
A micro business, on the other hand, is a very small business unit, owned and run by a single owner (or possibly with the help of family members). Microcredit institutions target this segment in an attempt to allow the poor to start earning their livelihood on a sustainable basis.
Micro business, however, is the weakest and most vulnerable form of business organisation. It heavily relies on a single person (or at best a single family). Just imagine someone who sells kulfis (milk ice cream lollipops) door to door. His and his family’s livelihood depends on this one person’s availability and ability to work. If for any reason (health, bereavement, wedding, etc) he cannot work, he and his family will lose their daily income. Therefore, this type of business organisation plays a significant role for the sustainability of operations and generation of income for the owners.
One must have observed scores of potato chips and french fries vendors in markets and bazaars in different cities of Pakistan. On a daily basis, these vendors happen to sell between 35 to 80 kilogrammes of potatoes, depending on the weather, location of the vendor and whether it is a special season (like the festive month of Ramazan). The estimated daily sale of an average french fries seller is Rs2,300, out of which they normally take away Rs1,000 as their daily earning. This amounts to a monthly income of Rs30,000 (if we assume a 30-day working month, which is quite common among vendors and street hawkers). This is a reasonable amount to sustain an average family in that social stratum.
The story of a single potato chips vendor is not compelling and perhaps irrelevant for many. But when we add 1,000 such vendors together and structure an inter-linking corporate business whose product is selling freshly cut and fried potato chips on the road or street in front of potential customers, the story changes and may appeal to many who believe in innovation in business for profitability and social responsibility.
For simplicity, assume someone “takes over” 1,000 potato chips vendors by paying them a cash price per unit, and then hires these same vendors as employees and shareholders in the business. This creates a new form of business organisation: one might say a corporate but at a micro scale. Now employed, vendors continue to receive Rs30,000 as a monthly wage plus a share say 20% cumulative – in the overall business.
If we assume scale efficiency of 20% and an ability to raise the price of the potato chips by another 20% (due to rebranding, higher quality, better hygiene, etc), the financials of such a potato chips’ business reveal an interesting outcome. This amounts to a daily profit of Rs512 for the overall corporate, after paying to vendors their daily wage of Rs1,000. In terms of annual gross profit, this equals to over Rs148.32 million for the corporate.
Even after paying a 20% bonus to the vendor employees, the corporate is left with a healthy profit of Rs118.66 million.
It is evident from this albeit simple example that not only are the former owners of the vendors better off (by Rs2,472 per month) but so too are the investors who created this larger corporate. One important lesson to learn is that investing in the equity of micro businesses adds more social and economic value than simply providing microcredit to such small units or to households and individuals to create micro businesses. This is a concept that advocates of microcredit must ponder over in order to develop sustainable businesses for the benefits of all stakeholders.
THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY
Published in The Express Tribune, July 2nd, 2012.
COMMENTS (1)
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What you are recommending is essentially franchising of french fries sales outlets (my argument could be misplaced and I am open to valid reasoning).
Firstly the owner the vendor would have to give up potential revenues (or some proportion) from future expansion if they settle for a daily wage.
The take over of these vendors would lead to an organizational setup with close resemblance to an oligopoly, which could limit innovation and value addition (at least with a sale efficiency constraint of 20%)
In this case the separation of ownership and control may cause conflict of interests, problems in consolidation of revenues due to geographical dispersion of sales outlets and increased managerial cost due to coordination of activities.