Small business financial management practices in North America: a literature review.

by Richard G.P. McMahon , Scott Holmes Sound financial management is crucial to the survival and well-being of small enterprises of all types. Studies of reasons for small business failure inevitably show poor or careless financial management to be the most important cause (see Berryman 1983, Peacock 1985 for reviews of the relevant literature). Potts (1977, p.2) states the case more succinctly:. . . the clearest and most startling distinctions between successful and discontinued small businesses lie in their approach to the uses which can be made of accounting information ....In recognition of such findings, recent years have seen increased attention to financial management in small business training and education programs and in the many books and articles written for small business.It is not unreasonable to ponder whether this attention has had a visible impact on the way in which small businesses are operated. It seems appropriate to review, and attempt to integrate, available empirical research findings concerning the financial management practices of small business in North America. Such a review can lead to improved understanding of both the research conducted to date and the financial management practices under scrutiny. Furthermore, it can act as a stimulus for future research.An additional function of this review is to identify and highlight trends in the financial management practice of small firms. This will assist policymakers in understanding the financial environment in which small firms operate and the possible impact of the current and proposed policies directed at the small business sector. Over the past decade there has been a significant increase in government sponsored agencies and educational programs directed at the small business sector and in interest in small firms, as illustrated by the President's annual report on small business. Such attention warrants consideration as to whether these policies have positively influenced the financial practices of small firms. This article provides a concise summary of research evidence which indicates that financial practice among small firms has not experienced any significant change over the past fifteen years. This result should have impact on future policy decisions.NORTH AMERICAN PRACTICEAccounting SystemsIt is clear that significant progress has been made in encouraging small business owner-managers to install and use accounting information systems. For example, in a survey of over 360 small businesses in Georgia, DeThomas and Fedenberger (1985) found a high standard of financial recordkeeping. Around 92 percent of respondents had some form of record-keeping beyond check stubs and deposit receipts. D'Amboise and Gasse (1980) studied the utilization of formal management techniques in 25 small shoe manufacturers and 26 small manufacturers in the plastics industry in Quebec, Canada. A cost accounting system was in operation in about 88 percent of businesses studied.It is also clear that the availability of affordable computers and suitable software has played an important part in promoting this situation. In a survey of 129 small manufacturing businesses in the province of Quebec, Raymond and Magnenat-

Thalmann (1982) discovered a preponderance of accounting-related applications among computer software in use, particularly in the areas of accounts receivable, payroll, accounts payable, general ledger, sales analysis, and inventory. Further studies undertaken in a wide variety of settings by Cheney (1983), Raymond (1985), Malone (1985), DeThomas and Fredenberger (1985), Farhoomand and Hryck (1985), and Nickell and Seado (1986) confirm that accounting/financial management applications dominate as computer applications in the small businesses examined.Financial ReportsReflecting the availability of computerized accounting systems, there is some evidence that the standard of financial reporting in small businesses in North America is now quite high. DeThomas and Fredenberger (1985) found that 81 percent of the small businesses in their survey regularly produced summary financial information. Virtually all (91 percent) of the summary information was in the form of traditional financial statements (balance sheet, income statement, funds statement, etc.), with the remainder being bank reconciliations and operating summaries. However, none of the respondents were regularly producing cashflow information. Additional financial information respondents would like to have included were a cashflow summary (67 percent) and a contribution-format (percent-of-sales) income statement (43 percent).Further encouraging results are provided by a study of 398 small pharmacies located in the states of Michigan, North Carolina, Nebraska, Rhode Island and Washington reported by Thomas and Evanson (1987). Income statements and balance sheets were prepared at least quarterly by 62.5 percent of the respondents, and annually by 32.1 percent. Over 85 percent of the respondents indicated that an outside accountant ...

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Journal of business venturinghttp://www.sciencedirect.com/science/journal/08839026Volume 16, Issue 3, May 2001, Pages 285-310

Capital structure decision making: A model for family business

Claudio A. Romano , , a, George A. Tanewskib and Kosmas X. Smyrniosc

a Monash University, Victoria, Australia

b Monash University, Victoria, Australia

c Monash University, Victoria, Australia

Available online 18 December 2000.

Abstract

Most theoretical and empirical studies of capital structure focus on public corporations. Only a limited number of studies on capital structure have been conducted on small-to-medium size enterprises (SMEs), and this deficiency is particularly evident in investigations into factors that influence funding decisions of family business owners.

Theory indicates that there is a complex array of factors that influence SME owner-managers' financing decisions. Recent family business literature suggests that these processes are influenced by firm owners' attitudes toward the utility of debt as a form of funding as moderated by external environmental conditions (e.g., financial and market considerations).

A number of other factors have been shown to influence financing decisions including culture; entrepreneurial characteristics; entrepreneurs' prior experiences in capital structure; business goals; business life-cycle issues; preferred ownership structures; views regarding control, debt–equity ratios, and short- vs. long-term debt; age and size of the firm; sources of funding for growth; attitudes toward debt financing; issues relating to independence and control; and perceived risk and attitudes toward personal risk.

Although these factors have been identified, until now there does not appear to have been any attempts to develop empirically-based models that show relationships between these factors and family business owners' financing decisions. Utilizing theories derived from divergent disciplines, this study develops an empirically tested structural equation model of financing antecedents of family businesses. Participants of our study involved a random sample of 5000 business owners who were mailed a 250-item Australian Family and Private Business questionnaire developed specifically for this investigation.

Notably, our findings reveal that firm size, family control, business planning, and business objectives are significantly associated with debt. Small family businesses and owners who do not have formal planning processes in place tend to rely on family loans as a source of finance. However, family businesses in the service industry (e.g., retailers and wholesalers) are less likely to use family loans as are those owners who are planning to achieve growth through new products or process development. Use of capital and retained profits is likely for family businesses planning to achieve growth through an increase in sales but less is likely for family businesses in the manufacturing sector and lifestyle firms. In addition, debt and family loans are negatively related to capital and retained profits. Equity is a consideration for owners of large businesses, young firms, and owners who plan to achieve growth through increasing profit margins. However, equity is less likely to be a consideration for older family business owners and owners who have a preference for retaining family control.

Our findings suggest that the interplay between multiple social, family, and financial factors is complex. In addition, our findings indicate the importance of utilizing theories that also help to explain behavioral factors (e.g., owners' needs to be in control) that affect financial structure decision-making processes. Practitioners and researchers should consider the dynamic interplay among business characteristics (e.g., size or industry), behavioral aspects of business financing (e.g., business objectives), and financial factors (e.g., gearing levels) when working with and researching family enterprises.

( size, industry, age of the firm, family control, age of the CEO, business plan, business objectives and plan for the achive goals)

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Family businessFrom Wikipedia, the free encyclopediaJump to: navigation, search For other uses, see Family business (disambiguation).

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A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being.

In some countries, many of the largest publicly listed firms are family-owned. A firm is said to be family-owned if a person is the controlling shareholder; that is, a person (rather than a state, corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders.[1]

Contents[hide]

1 Definition 2 Problems 3 Structuring 4 Scenarios 5 Succession 6 Success 7 Family Businesses Examples 8 See also 9 References

10 External links

[edit] Definition

In a family business, one or more members within the management team are drawn from the owning family. Family businesses can have owners who are not family members. Family businesses may also be managed by individuals who are not members of the family. However, family members are often involved in the operations of their family business in some capacity and, in smaller companies, usually one or more family members are the senior officers and managers. Many businesses that are now public companies were family businesses.

Family participation as managers and/or owners of a business can strengthen the company because family members are often loyal and dedicated to the family enterprise. However, family participation as managers and/or owners of a business can present unique problems because the dynamics of the family system and the dynamics of the business systems are often not in balance.

[edit] Problems

The interests of a family member may not be aligned with the interest of the business. For example, if a family member wants to be president but is not as competent as a non-family member, the personal interest of the family member and the well being of the business may be in conflict.

Or, the interests of the entire family may not be balanced with the interests of their business. For example, if a family needs its business to distribute funds for living expenses and retirement but the business requires those to stay competitive, the interests of the entire family and the business are not aligned.

Finally, the interest of one family member may not be aligned with another family member. For example, a family member who is an owner may want to sell the business to maximize their return, but a family member who is an owner and also a manager may want to keep the company because it represents their career and they want their children to have the opportunity to work in the business.

[edit] Structuring

When the family business is basically owned and operated by one person, that person usually does the necessary balancing automatically. For example, the founder may decide the business needs to build a new plant and take less money out of the business for a period so the business can accumulate cash needed to expand. In making this decision, the founder is balancing his personal interests (taking cash out) with the needs of the business (expansion).

Most first generation owner/managers make the majority of the decisions. When the second generation (sibling partnership) is in control, the decision making becomes more consultative. When the larger third generation (cousin consortium)is in control, the decision making becomes more consensual, the family members often take a vote. In this manner, the decision making throughout generations becomes more rational (Alderson, K., 2009).

[edit] Scenarios

But balancing competing interests often become difficult in three situations. The first situation is when the founder wants to change the nature of their involvement in the business. Usually the founder begins this transition by involving others to manage the business. Involving someone else to manage the company requires the founder to be more conscious and formal in balancing personal interests with the interests of the business because they can no longer do this alignment automatically—someone else is involved.

The second situation is when more than one person owns the business and no single person has the power and support of the other owners to determine collective interests. For example, if a founder intends to transfer ownership in the family business to their

four children, two of whom work in the business, how do they balance these unequal differences? The four siblings need a system to do this themselves when the founder is no longer involved.

The third situation is when there are multiple owners and some or all of the owners are not in management. Given the situation above, there is a higher chance that the interests of the two sons not employed in the family business may be different than the interests of the two sons who are employed in the business. Their potential for differences does not mean that the interests cannot be aligned, it just means that there is a greater need for the four owners to have a system in place that differences can be identified and balanced.

[edit] Succession

Two appear to be the main factors affecting the development of family business and succession process: the size of the family, in relative terms the volume of business, and suitability to lead the organization, in terms of managerial ability, technical and commitment (Arieu, 2010). Arieu proposed a model in order to classify family firms into four scenarios: political, openness, foreign management and natural succession (See Succession planning).

[edit] Success

Successfully balancing the differing interests of family members and/or the interests of one or more family members on the one hand and the interests of the business on the other hand require the people involved to have the competencies, character and commitment to do this work.

Family-owned companies present special challenges to those who run them. The reason? They can be quirky, developing unique cultures and procedures as they grow and mature. That's fine, as long as they continue to be managed by people who are steeped in the traditions, or at least able to adapt to them.[2]

Often family members can benefit from involving more than one professional advisor, each having the particular skill set needed by the family. Some of the skill sets that might be needed include communication, conflict resolution, family systems, finance, legal, accounting, insurance, investing, leadership development, management development, and strategic planning.[3]

Ownership in a family business will also show maturity of the business. If all the shares rest with one individual, a family business is still in its infant stage, even if the revenue is strong