Small Vs Large Business

Even with a general definition of “small business”, we might still question the relational for studying small business apart from large business. That is, is the financial management of a small firm different from that of a large firm? If there are no fundamental differences, there is no rationale for studying the financial practices of small business apart from their larger counter parts.

In a study conducted by Walker and Petty the financial differences between large and small forms were evaluated, as measured by various financial ratios. To compare these two groups, financial data were gathered for a sample of growth manufacturing firms with sales not exceeding $5 million. The small firm sample consisted of businesses that had field prospectuses with state securities regulatory bodies in an effort to “go public”. Thus, Walker and Petty were looking at operations involving successful closely held companies in the same industries were also compiled.

In examining Table 24.1 we see that there are clearly are some differences between small and large firms, as measured by selected financial ratio. The most prominent difference is the disparity in dividend politics. for example, dividends as a percent of earnings are approximately 3 percent and 40 percent for small and large firms is seen to be characteristic even of small firms entering the public markets. In fact, 74 percent of the small firms made no distribution in the form of cash dividends in the year preceding the offering, thus, the incentive, as well as the opportunity, for small firms to pay dividends in anticipation of a favorable impact upon the common stock when entering the marketplace is in no way apparent. The investors purchasing such securities must have believed that these securities represented shares in “growth companies”. They were evidently willing to rely almost solely on the capital gains potential from their investment.

The second major difference between small and large firms is liquidly. Large firms have more liquidity, as reflected by the current ratio. This conclusion is consistent with a study conducted by Gupta, which found that the current and quick ratio increase as the firm size becomes larger. The difference would seem to be the result of two factors. First, small firms retain smaller amounts of accounts receivable and inventory, as reflected by their higher accounts receivable and inventory turnovers. Second, small firms rely heavily on current liabilities as shown by the current liabilities total debt ratio. Thus, small firms typically maintained less liquidity.

The apparent difference in liquidity between the large and small firms lends further support to the existing belief that a working-capital shortage is a problem for small firms. The difference could be the result of at least two factors. First, the small firm’s limited access to the capital markets may impose the need for more economy in the use of working capital. Second, the basic nature of the “entrepreneur” could have a bearing upon the work-in capital decisions within the small firm. If the managers of small firms are willing to assume greater risk, as experience would suggest, their attitude may well be reflected in the small firm’s liquidity position.