A Small Business is not a Little Big Business Harvard Business Review, Vol. 59, No. 4, July/August, 1981, pp.18 (9 pages

Harvard Business Review, Vol. 59, No. 4, July/August, 1981, pp.18 (9 pages) The authors, both of the Caruth Institute of Owner-Managed Business at Southern Methodist University, write from personal experience and use carefully constructed but realistic examples to demonstrate how, in the area of financial management, small businesses differ from large ones. Their contention is that small businesses tend to suffer from a condition termed ’resource poverty’, and thus cannot easily survive mistakes or misjudgements. The large firm has plenty of resources, to withstand or support variations in performance. Such variations are usually small (in proportion to overall activity) and take place over extended time periods (such as a year). In contrast, variations in small firm performance (particularly in growing firms) are usually substantial, and therefore require closer monitoring over a much shorter time scale. These differences are reflected in several areas of financial management, as demonstrated by the authors’ examples. Firstly, the term ’cash flow’ is, for a large company, an accounting concept which can be computed by adding non-cash expenses to net profit. In a small company facing a new project it refers to the difference between totals of cheques being received and those being written out. It is not enough that the cash flows should eventually be positive; their timing is critical. Secondly, conventional break-even analysis is also a large company tool. Since any expected variations will be proportionately small, it is reasonable to draw straight lines to reach a break-even point. In the example given, the small company reality, the presence of volume discounts produces a convex sales curve, while the addition of capacity produces a saw-tooth cost curve. The result is several break-even points. The authors then proceed to point out that paying attention to ROI, which is essentially about improving the efficiency of production, is a luxury which small firms cannot afford. They are, or should be, too busy controlling liquidity. Finally, there is a discussion of ’the debt-equity impasse’ which introduces the importance of margins in the consideration of financing growth.