In most research concerning small business financial management strategies, it is assumed that the small business owner bases decisions on a strategy aimed at increasing wealth as much as possible. This assumption may not hold true, however. There may in fact be substantial differences in the financial management of small enterprises which are not adequately captured by the normative goal of wealth maximization of owners and which therefore justify a modified financial objective function.
A rapidly growing literature on the financing and financial management of small enterprise suggests there is a considerable number of reasons for believing that the financial management of small enterprises is or should be qualitatively as well as quantitatively different from that of large enterprises. There are obvious institutional differences such as regulatory influences, sources and types of finance, and forms of financial assistance. In addition, quite distinctive inherent characteristics of small enterprises are likely to lead to differences. Welsh and White (1981), Levin and Travis (1987), and Petty and Bygrave (1993) discuss the following: (1) In large enterprises there is frequently separation between management and ownership, whereas small enterprises are more likely to operate as extensions of their owner-managers; (2) small enterprises may be faced with fewer investment and financing options; (3) small enterprises often suffer from "resource poverty," particularly of a financial nature; (4) starting from a smaller base, small enterprises are generally more likely to experience problems associated with the consequences of growth, such as liquidity pressure; (5) small enterprise financial management is inevitably more dependent on the ability of a single individual or a small number of individuals than is the case in large enterprises; (6) the absence of a well-formed market for ownership stakes in small enterprises is likely to impact on their financial management.
On the motivations of small enterprise owner-managers (hereafter called owner-managers), three important messages appear to emerge from the empirical literature (Luoma 1967; Hankinson 1977 and 1985; Shuman 1975; D'Amboise and Gasse 1980; Ray and Hutchinson 1983; Bolton 1971; Cooley and Edwards 1983). They suggest that owner-managers: (1) may not have a single overriding aim like wealth maximization but rather their intentions are likely to be numerous and complex; (2) have motives which are unequivocally non-monetary; and (3) have considerable freedom to pursue objectives, monetary or otherwise. Frequently cited motivating factors include the need to control one's own life, to have greater flexibility for personal and family life, to achieve a higher position in society, to be respected, and to have freedom in adapting one's own approach to work (Zimmer and Holmes 1993).
Keats and Bracker (1988, 53) suggest that "performance may have a different set of meanings for small firms than for large firms." The melding of ownership and management in small enterprises allows the goals of the owner(s) to become the goals of the firm (Naffziger, Hornsby, and Kuratko 1992). In this way, it appears that behavior and decision-making in small enterprises are unequivocally attached to the personal motivations of the owner-managers (Katz 1992). The Bolton Committee (1971) reported that the need to attain and preserve independence was the fundamental motivation in most small enterprises. Other researchers concur with this view and assert that both financial and personal independence are frequently pivotal factors in the decision to initiate a small business (Borland 1974; Shapero 1975; Timmons 1978; Pandey and Tewary 1979; Perry 1980). Hamilton (1987) found that from a sample of New Zealand firms, 33 percent were motivated by the need for independence compared to those who were making the most of a commercial opportunity (39.8 percent), creating wealth (9.9 percent), and avoiding unemployment (8. …