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Morris Lamberson, University of Central Arkansas


This article summarized the responses of 103 small manufacturers to a mail questionnaire survey sent to the chief
financial officer of 477 firms located in the southern region of the U.S. The major thrust of the paper was to provide
insight into the importance of and utilization of financial analysis and working capital management concepts by small
manufacturers. Findings from the study suggest that respondents considered financial analysis and working capital
management to be important and most firms were heavy users of these concepts. While the findings were encouraging,
a significant percentage of the small firms expressed little or no usage of the concepts. Academicians need to continue
efforts to communicate to practitioners of the potential benefits of applying these financial management concepts.


A frequent concern, expressed by those who develop collegiate finance curricula, is whether or not the financial
concepts normally taught in undergraduate finance courses are actually utilized in the business world. While we
recognize the fact that a gap will always exist between what is taught in the classroom and what is practiced in the
business world, academicians have a responsibility to both students and financial managers to help bridge the gap
between theory and practice. This concern over real world application of concepts developed and taught by
academicians is reflected in the following quote:

We need to establish an active partnership with industry and enlist their expertise in our efforts to provide a more
relevant and exciting learning experience for our students. We need to build increased relevance into our instructional
programs and our research and strengthen our relationships with the constituency that we serve. [5, p. 5]

A study conducted among the Fortune 1000 firms in 1985 [2] found that financial planning and budgeting were ranked
as highly important and practitioners devote greater time to the management of assets while textbooks seem to place
greater emphasis on liabilities and equities. A 1982 article by Gitman and Mercurio [3] suggested that finance
academicians and financial managers should develop a stronger communication link to enhance the transfer of
knowledge and needs between them.

A study by Scott and Johnson [9] among large corporations indicated that the firms utilized financial leverage ratios,
subscribed to the optimal capital structure concept, and believed that the prudent use of debt can lower the firm's cost of
capital. Several studies [1,6,7,8] provide evidence in support of the view that the propensity to use more sophisticated
financial concepts increases as the size of the firm increases.

While there has been considerable research among large firms concerning their use of financial concepts, very few of
these studies have focussed on small firms. The impetus for this study evolved from the author's interest in obtaining
insight into the extent to which small manufacturers utilize the financial concepts normally taught in financial
management courses. Intuition as well as some research studies suggest that larger firms are likely to utilize financial
concepts to a greater extent than smaller firms.

Managers of small businesses often maintain that the financial management of their firms is different from the financial
management of large firms because some large company financial practices simply are not necessary or appropriate for
the small firm. Also, financial managers of small firms often have very restricted choices available to them, such as
fewer options for investing excess funds. The following quote from Levin and Travis [4, p. 30] expressed a commonly
held view among small businesses that "textbook finance doesn't work in private companies." A large percentage of the
private companies would qualify as small firms.

If the financial management of large and small firms is different, a study among small firms should reflect this
difference. If these differences can be identified, financial managers and academicians can more effectively determine
the implications of various financial concepts for small firms.

This article concentrates on an examination of the extent to which small manufacturers use the financial concepts of
financial analysis and planning and working capital management. The author defined small firms as those that employ
fewer than 500, which is commonly used by the Small Business Administration for small manufacturers.

This paper is organized in the following manner. Initially, survey methodology and respondents are discussed. Then the
findings are presented in a section by section analysis following the design of the questionnaire. The paper concludes
with some observations from analysis of findings.



A questionnaire was mailed to a random sample of 477 small manufacturers (fewer than 500 employees) located in the
southern region of the United States. A cover letter accompanied the questionnaire explaining the purpose of the study
and requesting that the chief financial officer complete the questionnaire. A second mailing was made to all
manufacturers who did not respond to the first mailing. A decision was made not to send questionnaires to
manufacturers who had fewer than 100 employees. This decision was made for economic reasons and because mere
size limits the ability of many small firms to utilize sophisticated financial techniques more commonly used in larger

Profile of Respondents

Usable responses were received from 103 of the 477 firms (21.6% return). As the analysis will reflect later in this
paper, every respondent did not answer every question; thus the number of respondents on specific questions will not
total 103.

A profile of the respondents by employee size is presented in Table 1.


Number of Employee Size Respondents

100-200 48 201-350 26 351-500 29

Total 103

The chief financial officer was the respondent in 89 of the 103 returns. The title of the respondents included vice
president of finance, controller, treasurer, or CEO. These titles do suggest that the information obtained should be fairly

The next section of this paper contains an analysis of the findings from the questionnaires.


This section includes an analysis of the findings from the survey in the following order: (1) financial analysis and
planning, and (2) working capital management. The author explained the meaning of specific terms where confusion
was likely to occur.

Financial Analysis and Planning

There were six questions on the questionnaire that sought information on the extent to which ratio analysis and
financial planning were utilized by respondents.

RATIO ANALYSIS. Information was secured from respondents on their usage of ratio analysis, which ratios they
used, and how often they used them. Of the 98 responses, 83 (85%) indicated that they did use ratio analysis. Table 2
indicates how often these ratios were used by respondents for financial analysis purposes. Most of these firms (72%)
utilized ratio analysis on a monthly basis.


*Response Frequency Percentage

Weekly 7.1% Monthly 72.4 Quarterly 40.8 Annually 45.9

*The number of responses was not the same on every question since respondents did not answer every question.

A topic that frequently surfaces when ratios are discussed is concerned with what ratios do firms utilize. Respondents
were asked to check ratios used from a list in the questionnaire. Table 3 summarizes the responses of these firms to this
question. Profitability and asset management ratios were used most heavily by the respondents.


Response Ratio Percentage

Gross Profit Margin 76.8% Inventory Turnover 74.7 Net Profit Margin 66.7 Average Collection Period 63.6 Current
Ratio 62.6 Return on Assets 53.5 Return on Equity 42.4 Debt 30.3 Total Asset Turnover 24.2 Acid Test 22.2 Times
Interest Earned 7.1

FINANCIAL PLANNING. To assess the extent to which financial planning and forecasting were used, respondents
were asked if they actually engaged in these activities. Of 99 respondents, 89 (90%) indicated that they used financial
planning and forecasting on a regular basis. Respondents were asked to check techniques used from a list. Table 4
summarizes their responses to the question concerning which financial planning techniques they used.


Response Technique Percentage

Operating Budgets 83.8% Capital Budget 72.7 Cash Budget 59.6 Funds Statement 50.5 Computerized Planning Models

The above responses indicated heavy use of all the financial planning techniques except computerized planning models.
However, these responses were encouraging in that these basic finance concepts seem to be widely utilized by these
small manufacturers.

Working Capital Management

There were three questions included in this survey that sought information on working capital management practices of
these firms. Responses were sought on such topics as the importance of working capital management and techniques
used in managing cash, accounts receivable, and inventory.

Importance of Working Capital Management. As Table 5 indicates, working capital management was very important to
these firms. Approximately 56 percent of the respondents checked "very important" when asked to rank the importance
of working capital management. Working Capital Management is extremely important to small manufacturers since
they traditionally have a problem maintaining adequate working capital (liquidity). Their limited access to the capital
markets and the basic nature of the "entrepreneur" to assume greater risk undoubtedly contribute to the working capital


Response Response Percentage

Very Important 56.1% Important 32.7 Not Very Important 11.2

Total 100.0

MANAGING CURRENT ASSETS. The firms were asked if they utilized specific techniques in managing cash and
marketable securities, accounts receivable, and inventory. The specific techniques used by these firms are discussed
below. Table 6 summarizes their responses to the question of whether or not they used specific techniques in managing
their current assets.


Percentage Using Specific Techniques Cash & Acc. Response M/S Rec. Inventory

Yes 28.3% 50.5% 62.2% No 71.7 49.5 37.8

Total 100.0 100.0 100.0

Based on the responses above, the management of accounts receivable and inventory seemed to be more important to
the respondents. Less interest in managing cash is likely related to the relatively low level of interest rates that existed
at the time of this survey.

TECHNIQUES USED IN MANAGING CURRENT ASSETS. The firms that responded "yes" to the use of specific
techniques in Table 6 above were asked to identify the specific techniques utilized from a list provided in the
questionnaire. The most frequently used techniques in managing cash were: lockbox; a sweep account; and zero bank
balances. However, none of these were utilized by a large number of respondents.

The most frequently mentioned techniques used by respondents in managing accounts receivable were: aging of
accounts; setting credit limits; and an aggressive collection policy. Again, no one technique seemed to dominate.

The two techniques mentioned most frequently by respondents in managing inventory were the EOQ Model (23%) and
Computer Models (50%). Of the three types of current assets discussed in this paper, inventory was the only one in
which any management techniques seemed to dominate. The widespread availability of computer software packages in
inventory management undoubtedly has contributed to the above results.

Overall, numerous techniques were used to manage current assets, but usage varied widely among the firms. The larger
firms indicated a higher level of usage of each technique.


This article summarized the response of 103 small manufacturing firms to a mail questionnaire survey sent to the chief
financial officers of 477 firms located in the southern region of the U.S. The major thrust of this paper was to provide
insight into the importance of and utilization of financial analysis and working capital management techniques among
small manufacturers. In general, the study suggests that respondents considered financial analysis and working capital
management to be important and most firms were heavy users of these concepts.

While the findings from this study suggest widespread use of these finance concepts, there continues to be a fairly large
number of small manufacturers who do not utilize these techniques. While this study did not do an analysis of usage by
size of firms, the author did observe that the use of these concepts seemed to increase as firm size increased. In
surveying small firms, one could possibly conclude that we need a separate set of financial concepts for use by the
small firms. While there appear to be differences in the extent to which some concepts can be applied in the small firm,
the financial concepts discussed in this paper seem to have valid application in both small and large firms even though
modifications may be necessary with small firms. A natural sequence to this study would be another study that
compares the practices of small and large manufacturers. In conclusion, the findings of this study were encouraging;
however, academicians and practitioners must continue efforts to improve the usefulness and application of these
techniques among the small manufacturers.
[1] Christiansen, Rolf, and Crumpton Ferrell, "Survey of Capital Budgeting Methods Used by Medium Size
Manufacturing Firms," Baylor Business Studies, (Nov-Dec 1980), pp. 35-43.

[2] Gitman, Lawrence J., and Charles Maxwell, "Financial Activities of Major U.S. Firms: Survey and Analysis of
Fortune's 1000," Financial Management, Vol. 14, (Winter 1985), pp. 57-65.

[3] Gitman, L.J., and V.A. Mercurio, "Cost of Capital Techniques Used By Major U.S. Firms: Survey and Analysis of
Fortune's 1000," Financial Management, Vol. 11, (Winter 1982, pp. 21- 29.

[4] Levin, Richard I., and Virginia Travis, "Small Company Finance: What the Books Don't Say," Harvard Business
Review, Vol. 65, (November-December 1987), pp. 30-32.

[5] Muse, William V., "If all the Business Schools in the Country Were Eliminated. Would Anyone Notice?"
Collegiate News & Views, Vol. 36, (Spring 1983), pp. 1-5.

[6] Patillo, Donald, "Capital Investment Practices of Small Manufacturers: American Versus Multinational," Journal of
Small Business Management, Vol. 19, (April 1981), pp. 29-36.

[7] Ross, Marc, "Capital Budgeting Practices of Twelve Large Manufacturers," Financial Management, Vol 15,
(Winter 1986), pp. 15-22.

[8] Scott, David F. Jr., Otha Gray & Monroe Bird, "Investing and Financing Behavior of Small Manufacturing Firms,"
MSU Business Topics, (Summer 1972), pp. 29-38.

[9] Scott, David F. Jr., and Dana J. Johnson, "Financing Policies and Practices in Large Corporations," Financial
Management, Vol. 11, (Summer 1982), pp. 51-59.