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