Use of Financial Management Techniques in the U.K.-Based Small and Medium Sized Enterprises: Empirical Research Findings

By Gorton, Matthew | Journal of Financial Management & Analysis, January-June 1999 | Go to article overview

Use of Financial Management Techniques in the U.K.-Based Small and Medium Sized Enterprises: Empirical Research Findings


Gorton, Matthew, Journal of Financial Management & Analysis


Introduction

While the use of appropriate financial management techniques has long been presented to small businesses as a sound basis for the management of profitability and its component parts (costs, volumes, and prices), there is little published evidence on the use of these techniques in small businesses. This study"attempts to deal with this weakness by considering the use of financial management techniques in the U.K. based small and medium-sized enterprises (SMEs) and the comparative performance of firms which use such techniques compared to non-adopters. Following the generally accepted approach of the European Commission, SMEs are defined in this study as independent businesses employing less than 250 workers, with small businesses defined as independent enterprises employing less than fifty full-time equivalent; (Commission ol the European Communities: 1992)'.

Prelude

McMahon and Holmes (1991)2 sum up their review of the North American small business financial management literature by arguing that rigorous statistical analysis of the results has been virtually nonexistent. The evidence for other countries is for the most part similarly anecdotal and patchy. lnterpretation is further hindered by the use of varying definitions ol SMEs and the type ol businesses covered in previous research (see Exhibit).

One of the few rigorous studies conducted by Nayak and Greenfield (1994)3 on 200 manufacturing firms employing less than ten people in the U.K, found that only thirty-four per cent of firms used any form of budgeting and sixteen per cent of firms with debtors kept no debtor records. This appears lower than Lindecamp and Ric's (1983)' evidence on financial statement analysis garnered from 102 owner-managers of small retail stores in Mississippi. In the latter study, ahout seventy-three per cent reported that they analysed a detailed breakdown of their cost figures on a frequent or regular basis but sixty per cent indicated that they did not maintain up-to-date figures on the contribution to profit of individual products. However DeThomas and Fredenberger INnS)' found much lower figures: only eleven per cent of respondents reported using financial statement information as part of their formal process of managerial evaluation and decision making. Yet sixty-one per cent of respondents felt the statements provided the information they required for planning and decision making.

One possible reason for these variations is differences in the size of firms included in the studies: larger firms lend to have more sophisticated monitoring procedures. While this study adopts the EC definition of SMEs. previous research has used varying size boundaries. The U.S. Small Business Administration (SBA) classifies small businesses as enterprises with up to 50() employees and the Bolton Committee report. which analysed the prospects of small enterprises in the U.K classified small businesses as having up to 200 employees (Bolton: 1971)7

In part these differences in definitions and attention given to SMEs reflect international variations in the importance ol small firms. In the U.K. in 1993 there were 46 enterprises per 1,000 inhabitants, with an average firm size ol eight employees and firms employing less than 500 employees accounting for 65 per cent of employment. In lower income countries, the number of enterprises per 10(lt) inhabitants and small firms' share or total employment tends to be higher (Storey: 1994)8. For example. in 1993 there were 67 enterprises per 1,000 inhabitants in Greece. The average firm had three employees and firms employing less than 500 people accounted lor 91 per cent of total employment. In North America the proportion of the work force employed in large enterprises is greater than in any European country. This holds true for both manufacturing and service sectors and in 1993 only 51 per cent of all employment in the U.S.A. was in enterprises having less than 500 workers. …

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