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

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. …