The study was conducted to assess the internal and external business environment of the associationsrnoperating in Arba Minch town. The areas of internal business environment of the associations includernorganizational structure and management, internal resources, working premises, line of businessesrnand marketing activities, and the firms' business concepts. The external environmental factorsrninvestigated are linkages of the firms, government-related factors, finance, supply and market factors.rnWhereas multi-stage sampling design was used, structured interviews with the chairpersons of thernfirms, unstructured interviews with key informants, and personal observations of the researcher werernemployed to collect primary data. For secondary data; reports, proclamation and policy documentsrnfrom SMEs development desk, Omo MFI, and A1MlTlTllnlT offices were consulted. To analyze data,rndescriptive research method was employed. Due to the creation of associations, employmentrnopportunities were created for many unemployed and poor residents of the town. According ly, theirrnsocio-economic status Goint actions and benefits, employment and income), and the income of thernlocality have changed. However; poor organizational structures; inadequate finance, working premisesrnand tools of production; poor record keeping, and poor promotion activities are the major internalrnproblems. The constraints from the external environment are absence of inter-firm associations, poorrnlinkages of the firms with medium and large business firms; inadequate training and BOSs from thernlocal government due to poor implementation capacity (shortage of human, financial and materialrnresources), bureaucracies and inequitable focus of government authorities for business sectors; poorrnquality, high cost and few alternative sources of raw materials; confinement to the local market ,rndearness of cost of life in the locality and under-optimal supplies of infrastructural facilities. Inrnconclusion, those shortfalls can end up in the under-capacity operations of the firms and under-optimalrnincome generating capacity of the entrepreneurs. Specifically, overlapping of tasks and thereforerndistrusts and conflicts among the team members; poor resource management, and limited marketingrnefforts of the firms; lack of inter-firm associations, poor implementation capacity of the local authorityrnand discriminatory supports and focuses of the local government for business sectors and activities arernthe major problems. Therefore, the under-capacity operations of the SMEs should be capacitated byrnaddressing the financial, business premises, supply of inputs, and tools of production needs of thernenterprises. Stabilizing the rising costs of items in the market place and strengthening the purchasingrnpower of the community have to be capitalized on. Demand-driven productions are alsornVIIrnrecommendable. The marketing scope of the firms should be promoted beyond the locality and theyrnshould not be limited to government organizations but their linkages with NGOs, other SMEs, privaternorganizations and other government organizations in and outside the area have to be promoted.rnCreating fair and equitable market opportunities for the competing firms is also important factor.rnPromotion, distribution; new products, markets, and new business lines development are the otherrnefforts of the firms need to be strengthened. Besides, undertaking training need assessment, andrncapacitating local institutional infrastructure are the other important inputs. The regulatory provisions tornprivilege associations need to be revised in a way other business ownerships are promoted; thernassociations become self reliant, income of the local authority is optimized, and income contributionrncultures of the entrepreneurs to the locality are stimulated. Lastly, the implementation capacity of thernlocal authority should be strengthened