December 1, 2022

Tartufocracia

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How Related Are Small Businesses and Existing Financial Management Theories and Concepts?

2 min read

Sahlman (1983, 1990) refers to what he terms as ‘primitive rules’ in modern finance- more cash is preferred to less cash; cash sooner is preferred to cash later; and cash that is not risky is preferred to cash that is risky.
Discussing these notions under a perfect market capital with its numerous assumptions including, no government levied taxes, equal access to the capital market by all investors, no individual is influential enough to determine the rate of return on funds made available, bankruptcies and liquidation of assets of individuals and business enterprises are costless; there was an assertion that if a perfect market was to exist, the maxims of modern finance theory which logically follow would make the task of the finance manager of a business enterprise relatively undemanding leaving the finance manager with only the decision of investing the funds.

The perfect capital market assumptions used in the development of modern finance theory fail to represent the financial world actually experienced by investors and business enterprises. For example, all individuals do not enjoy the same access to the capital market; and bankruptcies and liquidations are penalised. Recent spate of corporate scandals involving companies like Parmalat and Conseco as well as insiders trading are evidence of that limitation. There are therefore, imperfections in the capital market. This in effect gives the financial manager every cause to worry about not only capital budgeting but financial management in general.

Small busineses in Ghana in particular and the least developing countries in general also prefer more cash to less cash; want to make profit sooner than later; that is in the short-term hence the unnecessary price wars, and are risk averse in their investment tactics. The financial effect of sustaining growth in a firm is the profit generated by the firm for day to day operations of the firm as well as to aid expansion when required.

Financial Management of small enterprises are no doubt different from that of large enterprises. This is to say that their day to day operations are definitely not expected to be similar taking into account the different techniques opened to them.

Ang (1991) concedes that there are enough differences between large and small business financial management.

For this reason, therefore, financial management of small businesses needs to be given top priority in the business academia if SMEs could survive the “short life” they experience in the business world. It should be remembered that all businesses were once, small businesses.

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