Small Business Finance

The small firm has played a significant role in the development of our country. It has served as the vehicle for fostering an entrepreneurial sprit, and it has been important to the economy. In 1983 small businesses employed 48 percent of the private conform work force, contributed 42 percent of the nation’s sales, and generated approximately 38 percent of the nation’s gross national product. Between 1980 and 1982 small businesses generated all of the 984,000 new jobs in the United States. Small businesses produced 2,650,000 new jobs, more than offsetting the 1,664,000 lost by larger businesses. In addition, the service sector accounted fir about half the employment increase.

This chapter examines financial management from the perspective of the owner-manager of a small firm. We will first define small business and then identify financial attributes that are often characteristic of all small business. Next we will consider the importance of cash management for the small firm. Finally, we will identify financing available to the small firm, including the process of entering the public capital markets.

WHAT IS A SMALL BUSINESS?

Answering the question, “What is a small business?” is extremely difficult, since everyone has his or her own idea of a small business. For one person it could be a locally owned and operated store in which the owner is the boss, whereas another person could easily consider a firm with 500 employees as being small. Actually, both may be right; there is no simple definition.

Many definitions of “small business” have been offered; however, the definition and size restrictions formulated by the Small Business Administration (SBA) are of a loan applicant. In general, the SBA defines a small business as one that is independently owned and operated and is no dominating in its field of operations. Also, to be considered small, a manufacturing company may not employ more than specified number of employees, depending upon the industry classification. For wholesale and retail firms to qualify as a small company, annual sales may not exceed a designated dollar amount, with the restriction varying by industry classification.

In this chapter it is not necessary to define a small firm in the precise manner indicated by the SBA. In general, we will define a small firm as one that is growth oriented and does not have easy access to the capital and money markets.