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 PRACTICE
Accounting Systems
It 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 Reports
Reflecting 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 venturing

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

Capital structure decision making: A model for family business

, ,a
Claudio A. Romano , 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 business
From Wikipedia, the free encyclopedia
Jump to: navigation, search
For other uses, see Family business (disambiguation).
This article needs references that appear in reliable third-party publications.
Primary sources or sources affiliated with the subject are generally not sufficient
for a Wikipedia article. Please add more appropriate citations from reliable
 sources. (August 2008)
This article may require cleanup to meet Wikipedia's quality standards. Please
improve this article if you can. The talk page may contain suggestions. (August 2008)

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