A comparison of entrepreneurship/small business and finance professors' reaction to selected entrepreneurial and small business financial planning and management issues.

Dunn, Paul ; Liang, Kathleen

INTRODUCTION

The rate of failures and discontinuances among small businesses is high especially during the first few years after startup. An often mentioned cause of small business failures is poor management, particularly poor financial planning and undercapitalization. Additionally, poor financial planning and management during the life of the enterprise creates problems for small businesses owners. Many colleges of business have established entrepreneurship and small business classes and programs to prepare students for careers as entrepreneurs and in small business. The purpose of this research was to compare what professors of entrepreneurship and small business with finance professors about several important aspects of financial management and planning during various phases of small business firm life cycles. In particular, their knowledge about planning and managing fixed and current assets and presumably what they think entrepreneurs should know about financing and managing assets during start up, survival, growth, and through various phases of the firm's life cycle.

LITERATURE REVIEW

Primary reasons for small business failure in academic and popular literature are poor financial planning and management. Undercapitalization, a startup problem, the emphasis among authors seems to be on a failure to anticipate cash needs to reach cash flow break even. Early authors in small business management recognized this as a problem. Baumback, Lawyer and Kelly(1973, p. 191) emphasize that, "... entrepreneurs must allow for a reasonable period of time to elapse, usually three to six months, before income from the business will cover expenses" including personal income. Later authors have a similar emphasis. Baron and Shane (2005) indicate that negative cash flow in the early days of most new ventures is likely to be failure if additional cash is not injected into the business. In the academic literature Perry (2001) discovered that there was a significant relationship between firm failure and lack of planning. Similarly, Gaskill, Van Auken, and Manning (1993) found that primary reasons given for failure centered on poor management and planning; a second important factor found was finances and working capital management, a third factor was related to the competitive environment and a factor was related to growth. Xu and Wang (2007) indicate that a widely recognized cause of failure is poor financial management. Cassar (2002) says that how a business obtains startup funding is critical in determining adequacy, financial performance and probability of failure.

Mason (2008) says that small business failure results from a lack of management skills and/or lack of proper capitalization. Smythe (2007, p. 1) without equivocation suggests that, "The lack of start-up capital is a problem most small businesses encounter." Clark (1997) indicates that money is one factor that must be properly planned. He suggests that break even for a start-up company takes much longer than most entrepreneurs expect. He suggests having a nest egg at least three times longer than projected to break even with the business.

Small business management and entrepreneurship text book authors often discuss financial planning as a potential problem. Kuratko and Hodgets (2004, p. 253) indicate that ..." Remember, it is not enough for a small business to get started, it must be able to survive at least 90 days without further inflows of funds." Similarly, Scarborough and Zimmerer (2008, p 390) suggest that "Too often entrepreneurs are overly optimistic in their financial plans and fail to recognize that expenses initially exceed income (and cash outflow exceeds cash inflow) for most firms. This.. .may last from a few months to several years." Longenecker, Moore, and Petty (2000, p. 515) indicated a similar source of problems, "More businesses fail because of a lack of cash than because of a lack of profits." Vesper (1996, p. 300) suggests that, "The ultimate evidence of error in venturing is a shortage of cash. Either too little came in, or it went out too fast or both. The ultimate pitfall of venture financing is to run out of cash." In much the same vein, the popular literature expresses similar ideas.

Many internet sources of information for entrepreneurs and small business emphasize the importance of financial planning and management. Businesswealth.com, suggests that inadequate cash reserves are the single most common cause of business failure. This source recommends six months or so of extra cash at startup. Similarly KSA Business Recovery and Insolvency Services (ksabr.com) indicates that poor cash management is the main reason for small business failures. Factors cited that cause poor cash flow are: increases in inventory, poor credit control, increased days in receivables, bad debts, late billing, poor forecasting, failure to plan for capital and/or exceptional expenditures. Another website, prweb.com, suggests that financial management (cash flow) is a factor that causes failures and ..." cash flow problems are responsible for over 70 percent of business failure with their first year." Videouniversity.com cites poor cash flow management and inappropriate sources of finance are causes of failure.

Clearly, poor financial planning and management create problems for entrepreneurs and small business owner/managers. To try find out how entrepreneurs and small business owners should plan and manage current assets (cash, receivables and inventory), we looked into some standard texts used in basic finance courses. These texts provide insight into the financing options available to entrepreneurs and small business managers. These options include three options for financing assets: 1) the aggressive approach that suggests financing fixed assets and the permanent portion of current assets with long term sources, 2) the matching approach that suggests financing assets with terms that match their life, and 3) the conservative approach that suggests financing fixed assets, permanent working capital and a portion of seasonal working capital with long term sources (Lasher, 2003 and Brigham and Houston, 2007).

Some small business management text authors seem to take the aggressive approach. Carland and Carland (1998, p. 444), for example, indicate that, "Treating the permanent portion of current assets as long lived and using long term debt to finance it can make sense." Osteryoung, Newman, and Davies (1997, p. 137) say that. "As a general working principle, assets should be financed from a source with a maturity commensurate with the cash-flow generation of the asset." They suggest that long term assets, permanent current assets included, be financed long-term. Others, (Rogers, 2002) (Ibrahim and Ellis, 1993) do not address the issue directly, but focus on cash flow planning and management as tools to maintain the liquidity of the firm. Baron and Shane (2005, p. 182) suggest that ..." experienced entrepreneurs often say that it is best to look for money before the need arises. That way, it will be available when, as almost always happens, expenses are larger than anticipated and cash inflows are slower than expected."

The logic is clear, when small business start and as they move through the firm life cycle, financial planning and management are key factors in their continued existence. If that is the case, those who teach finance should provide their student entrepreneurs and small business owners with a good background in financial planning and management, including length of sources of funds. The purpose of this paper is to compare the understanding of good financial planning and management between finance professors and entrepreneurship/small business management professors.

METHODOLOGY

A questionnaire was designed to gather pertinent demographic information and to pose several start up finance and/or financial management situations to which an entrepreneur or small business person might be required to or at least be expected to react. The assertions about financial management were presented to both finance and entrepreneurship/small business professors to which they were asked to strongly agree, agree, disagree, or strongly disagree. The questionnaire was uploaded to the internet at the SurveyMonkey site. An email list of finance professors from the websites of 662 colleges across the country was provided by a colleague. The link to the site was emailed to 1676 finance professors with a request that they respond. Of those emailed, 436 were returned as undeliverable. Ninety four responded, for a return rate of 8 percent.

A list of entrepreneurship and small business professors was not available to the researchers. Therefore the questionnaire link to the site was emailed to several known entrepreneurship and small business networks with a request that they forward the address to their members. The networks included the Association for Small Business and Entrepreneurship, the northeastern Small Business Institute group, the national Small Business Institute, and the Entrepreneurship and Education Network. There were 98 individuals who opened the questionnaire and responded to some of the demographic questions, but only 79 responded to most of the assertions. The responses from both groups are included in the current analysis.

FINDINGS OF THE STUDY

Table 1 shows the demographics of both respondent groups. Males were predominant in both groups with 83.8 percent of finance professors and 73.4 percent of small business and entrepreneurship professors. Most of the professors were over 45 years of age. Finance professors were significantly younger however. Over % of both groups had Ph.D. degrees.

There was, as would be expected, a significant difference in the academic field of study. Small business and entrepreneurship professors had fairly diverse fields. Most of the small business and entrepreneurship professors taught entrepreneurship and/or small business with a few in other areas. Most of the finance professors' primary teaching area was finance with only 1.5 percent in other areas. There were no significant differences in the length of time each group had taught. Small business and entrepreneurship professors tended to have taught a little longer than finance professors.

The respondents were from across the U.S. with a few of the Small Business and Entrepreneurship from foreign countries. Table 2. This results from using the approach used in sampling, a list of schools in the U.S. for finance professors and networks for small business and entrepreneurship professors.

Table 3 shows the comparisons of entrepreneurship and small business professors and finance professors responses to the financial management assertions. There was no difference between the two groups on financing fixed assets with 80 percent plus agreeing that these assets should be financed using long term sources of funds. However approximately 20 percent of both groups disagreed with this assertion. The matching principal would call for financing long term assets (fixed) with long term sources. Over 95 percent of both groups correctly agreed that entrepreneurs tend to under estimate their firms working capital needs when starting a new venture. This seems to result from optimism among entrepreneurs which leads them to think their business will generate sufficient cash flow quickly, not often the case. This tendency often leads to problems for new ventures. Not statistically different. Using owners' resources to purchase fixed assets was not the correct course of action according to 85 percent of entrepreneurship/small business professors and 79.1 percent of finance professors. Using owners' resources often leads to illiquidity for entrepreneurs in new ventures. Too, financial institutions are much more likely to finance fixed assets than working capital. Again there was no statistical difference between the groups.

Basic inventory should be financed using longer term sources. Entrepreneurs often think that since inventory turns, short term sources would suffice. That assumption leads to cash flow problems often since it is likely to take some time to allow the firm's marketing strategy to work. A majority of entrepreneurship/small business professors, 59.7 percent, and finance professors, 60.9 percent agreed. It is a source of some concern that nearly 40 percent of both groups responded incorrectly to this assertion. Reserving owners' money for working capital helps maintain the liquidity of the firm using more secure funding. Financial institutions do not like to loan money for working capital, particularly in new ventures. Most of the professors, entrepreneurship/small business, 90.8 percent, and finance professors, 78.2 percent, correctly agreed. There was a statistically significant difference, at the .10 level, between the groups on this assertion. Most professors, 89.9 percent of entrepreneurship/small business and 93.9 percent of the finance professors correctly agreed with the assertion that seasonal inventory could reasonably be financed using short term sources of funds. Again, the matching principal would indicate this course of action.

Many entrepreneurs who have time deposits think that cashing them and using them to finance their venture is necessary or appropriate. When CDs and savings accounts are cashed and used, entrepreneurs tend to think of these as "their" money and may use them to buy assets that could be leased or rented or buy new assets instead of good used assets. The resources could be pledged as collateral for a loan in which case, entrepreneurs have a different attitude toward the funds and tend to be more conservative in their use. Almost 70 percent of entrepreneurship/small business professors disagreed with this assertion while only 46.3 percent of the finance professors disagreed. There was disagreement with this assertion within each group and between the two groups. The groups were significantly different at the .05 level. While there will be an interest rate differential, using time deposits as collateral imposes a kind of "fiscal discipline" on entrepreneurs in that they are more likely to be more conservative in their expenditure of loan funds and are compelled to repay the loan. When these time deposits are cashed, they are considered personal funds and may be spent less effectively than borrowed funds.

Both groups, 58.2 percent of entrepreneurship/small business professors and 69.7 percent of finance professors, agreed that rapid growth creates cash flow problems. Most small business owners think that growth is great, but growth must be controlled. Increases in inventory and accounts receivables and expenses may require additional cash injections to support growth. Pricing strategy can be used to control growth. Survival cash is the cash needed to allow the firm time to reach cash flow breakeven. It makes sense to plan for this cash at the beginning and to be sure that it will be available when needed. Going back to the bank for additional funds for operations is not viewed well by loan officers. It is better to arrange these funds as the initial funding is sought. Often these funds will be in the form of a line of credit. Both groups, 94.8 percent of entrepreneurship/small business professors and 93.9 percent of finance professors, agreed with this strategy and there was no difference between them. they should be financed using longer term sources of funds. Seventy seven percent of the entrepreneurship/small business professors and 72.7 percent of finance professors agreed with the assertion. There was no significant difference between the groups.

The final assertion was that entrepreneurs underestimate their firm's capacity to generate cash flow. Almost sixty percent, 58.2 percent of the entrepreneurship/small business professors agreed and 53.3 percent of the finance professors agreed. There was no statistically significant difference between the groups. This is an interesting finding since more professors agreed that entrepreneurs overestimate sales and underestimate expenses.

SUMMARY AND CONCLUSIONS

The causes of small business failures have been attributed to management failures especially poor financial management. The paper was designed to compare finance and entrepreneurship/small business professors' reactions to selected financial management assertions. The comparisons indicate that finance and entrepreneurship/small business professors agree on most of the assertions. Entrepreneurship/small business professors were significant, at .07 level, more likely to agree that owner's money should be reserved for working capital and significantly, at .03 level, more likely to disagree that entrepreneurs should cash CDs and savings for use in financing the business rather than use the instruments as collateral for loans.

However, some finance and entrepreneurship/small business professors incorrectly disagreed that fixed assets should be financed using long term sources of funds, a few that entrepreneurs underestimate their working capital needs, that basic inventory should be financed with longer term sources of funds, that owner's money should be reserved for working capital, that seasonal inventory can be financed using short term sources of funds, that survival cash should be negotiated at the beginning, that cash balances increase during the decline stage of the business cycle, and that accounts receivables should be financed using longer term sources of funds. Some also agreed when disagreement would have been appropriate. We are sure these disagreements are honest ones. We do, however, think that entrepreneurship students are not getting a good financial management education.

Those of us in entrepreneurship education need to be sure that our students have a good background in all phases of small business planning and management. To that end, we need to be sure that we understand what we are teaching. In addition, we may want to open a dialog with our finance counter parts and be sure that they understand our perspective on financial planning and management and that they understand the unique perspective of our students who aspire to become small business owners, not bankers and finance professionals.

REFERENCES

Baron, R. and Shane. S (2005). Entrepreneurship: A Process Perspective, 1st Edition, Mason, Ohio, South-Western Publishing, p. 182, 60.

Baumback, C; Lawyer, K; and Kelley, P (1973). How to Organize and Operate a Small Business, 5th Edition. Englewood Cliffs, N.J., Prentice Hall, p. 191.

Brigham, E. and J. Houston (2007). Fundamentals of Financial Management, Concise 5th Edition, Mason, OH, Thomson/South-Western.

Carland, Jim,and JoAnn Carland (1998). Small Business Management: Tools for Success, Second Edition, Houston, TX, Dame Publications, Inc. p. 444.

Cassar, Gavin (2002). The financing of business start-ups. Journal of Business Venturing, Vol. 19, pp. 261-283.

Clark (1997) Retrieved March 9, 2008 from http://portland.bizjournals.com/portland/stories/1997/06/30/smallb3.html

Gaskill, L. R., H. E. Van Auken, and R. A. Manning (1993) A Factor Analytic Study of the Perceived Causes of Small Business Failure. Journal of Small Business Management 31: 18-30.

Ibrahim, A. B. and W. H. Ellis(1993) Entrepreneurship and Small Business Management, 2nd Edition, Dubuque, IA, Kendall/Hunt Publishing Company.

ksabr.com Retrieved March 8, 2008, from http://www.ksabr.com/index.php?page=themaincausesofbusinessfailure

Kuratko, D. and Hodgetts, R. (2004). Entrepreneurship, 5th Edition, Mason Ohio, South-Western, p. 253.

Lasher, W. R. (2003). The Management of Working Capital. In M. Reynolds, S. Smart, K. ZumBahlen, J. Barans, and M. Sears (Eds.) Practical Financial Management (3rd ed.) (pp. 492-537). U.S.: Thomson South-Western.

Longenecker, Justin; Moore, Carlos; and Petty, J. William (2000). Small Business Management, 11th Edition. Cincinnati, South-Western College Publishing, p. 515.

Mason (2008). Retrieved March 9, 2008 from http://www.moyak.com/researcher/resume/papers/failure.html

Osteryoung, J. S., D.L. Newman and L.G. Davies (1997). Small Firm Finance, Fort Worth, Harcourt Brace College Publishers, p. 137.

Perry, S. C. (2001). The Relationship between Written Business Plans and the Failure of Small Businesses in the U.S. Journal of Small Business Management 39: 210-208.

Rogers, Steven (2002). The Entrepreneur's Guide to Finance and Business, Boston, McGraw Hill.

Scarborough, Norman M. and Zimmerer, Thomas W. (2008). Essentials of Entrepreneurship and Small Business Management, 5th Edition. New Jersey, Pearson Prentice-Hall, Inc., p. 390.

Smythe (2007) Retrieved March 9, 2008 from http://www.articlesbase.com/finance-articles/causes-of-businessinsolvency- 280634.html

Vesper, C. (1996). New Venture Experience, Revised Edition. Seattle, Vector Books, p. 300.

Xiaoyan Xu and Yu Wang (2007) School of Management, University of Science and Technology of China, Hefei, Anhui 230026, PR China

Paul Dunn, University of Louisiana at Monroe

Kathleen Liang, University of Vermont Table 1. Respondent Demographics (Percent Distribution) Entr/SB Finance Professors Professors Gender Female 26.6 16.2 Male 73.4 83.8 Total 100.0 100.0 n 79 68 Chi Square 0.092 Gamma 0.119 Age * 26-35 3.8 4.3 36-45 15.0 20.3 46 0 55 23.8 39.1 56-65 35.0 27.5 Over 65 22.5 8.7 Total 100.0 100.0 n 80 69 Chi Square 0.075 Gamma 0.010 Major Field ** Management 28.8 0.0 Entrepreneurship 10.0 0.0 Business 15.0 1.6 Marketing 16.3 0.0 Finance 8.8 84.4 Economics 6.3 7.8 Other 15.0 6.3 Total 100.0 100.0 n 80 64 Chi Square 0.000 Gamma 0.000 Teaching Area ** Small Business 17.7 0.0 Entrepreneurship 51.9 0.0 Business 3.8 0.0 Marketing 8.9 0.0 Finance 3.8 98.5 Economics 3.8 0.0 Other 10.1 1.5 Total 100.0 100.0 n 79 66 Chi Square 0.000 Gamma 0.000 Years Taught < 6 12.5 11.6 6--10 Years 6.3 14.5 11--15 years 20.0 14.5 > 15 61.3 59.4 Total 100.0 100.0 n 80 69 Chi Square 0.363 Gamma 0.698 Highest Degree Bachelors 0.0 1.4 Masters 24.4 18.8 Ph. D. 75.6 79.7 Total 100.0 100.0 n 78 69 Chi Square 0.423 Gamma 0.589 Table 2. State or Territory Entr/SB Professors Finance Professors NR 3.8 5.8 MI 0.0 2.9 MO 0.0 1.4 PA 1.3 0.0 TX 1.3 2.9 AL 8.8 1.4 AR 6.3 1.4 CA 7.5 14.5 CO 0.0 2.9 CT 0.0 2.9 DC 0.0 1.4 DE 1.3 0.0 FL 2.5 4.3 HI 0.0 1.4 IA 1.3 0.0 IL 0.0 5.8 IN 0.0 5.8 KS 2.5 0.0 KY 1.3 0.0 LA 7.5 0.0 MA 1.3 2.9 MO 1.3 0.0 MS 0.0 1.4 NC 6.3 0.0 NH 1.3 2.9 NJ 5.0 2.9 NM 1.3 0.0 NY 3.8 4.3 OH 1.3 4.3 OK 13.8 0.0 PA 0.0 1.4 RI 0.0 1.4 SC 1.3 1.4 SD 0.0 1.4 TN 1.3 4.3 TX 10.0 10.1 VA 1.3 2.9 VT 1.3 0.0 WA 0.0 1.4 WV 0.0 1.4 Ireland 1.3 0.0 Portugal 1.3 0.0 South 1.3 0.0 Korea 1.3 0.0 Canada 1.3 0.0 Total 100 100 Table 3. Comparison of Entrepreneurship/Small Business and Finance Professors' Responses to Assertions (Percent Distribution) Entr/SB Finance Professors Professors Fixed Assets Use Long Term Strongly Agree 17.7 20.9 Agree 63.3 61.2 Disagree 16.5 17.9 Strongly Disagree 2.5 0.0 Total 100.0 100.0 N 79 67 Chi Square 0.581 Gamma 0.637 Purchase Fixed with Owner's Funds Strongly Agree 7.6 4.5 Agree 16.5 16.4 Disagree 49.4 59.7 Strongly Disagree 26.6 19.4 Total 100.0 100.0 N 79 67 Chi Square 0.554 Under Estimate Working Capital Needs Strongly Agree 41.6 41.5 Agree 54.5 55.4 Disagree 2.6 3.1 Strongly Disagree 1.3 0.0 Total 100.0 100.0 n 77 65 Chi Square 0.831 Gamma 0.953 Basic Inventory Longer Term Strongly Agree 7.8 3.1 Agree 51.9 57.8 Disagree 37.7 37.5 Strongly Disagree 2.6 1.6 Total 100.0 100.0 n 77 64 Chi Square 0.628 Table 3. Comparison of Entrepreneurship/Small Business and Finance Professors' Responses to Assertions (Percent Distribution) Entr/SB Finance Professors Professors Gamma 0.762 Reserve Owners Money for Working Capital * Strongly Agree 27.6 18.8 Agree 63.2 59.4 Disagree 7.9 21.9 Strongly Disagree 1.3 0.0 Total 100.0 100.0 N 76 64 Chi Square 0.077 Gamma 0.043 Cash and Use CDs and Savings ** Strongly Agree 6.3 9.0 Agree 25.3 44.8 Disagree 58.2 43.3 Strongly Disagree 10.1 3.0 Total 100.0 100.0 N 79 67 Chi Square 0.035 Gamma 0.004 Negotiate Survival Cash at Beginning Strongly Agree 32.5 31.8 Agree 62.3 62.1 Disagree 5.2 6.1 Strongly Disagree 0.0 0.0 Total 100.0 100.0 n 77 66 Chi Square 0.974 Gamma 0.884 Gamma 0.880 Seasonal Inventory Short Term Strongly Agree 12.1 Agree 81.0 81.8 Disagree 8.9 6.1 Strongly Disagree 1.3 0.0 Total 100.0 100.0 n 79 66 Chi Square 0.664 Gamma 0.299 Rapid Growth Creates Cash Flow Problems Strongly Agree 58.2 69.7 Agree 39.2 28.8 Disagree 2.5 1.5 Strongly Disagree 0.0 0.0 Total 100.0 100.0 n 79 66 Chi Square 0.356 Gamma 0.145 Cash Balances Increase in Decline Phase Strongly Agree 12.0 12.3 Agree 58.7 69.2 Disagree 29.3 16.9 Strongly Disagree 0.0 1.5 Total 100.0 100.0 n 75 65 Chi Square 0.257 Gamma 0.259 Overestimate Sales Under Estimate Expenses Strongly Agree 67.5 62.1 Agree 31.2 33.3 Disagree 1.3 3.0 Strongly Disagree 0.0 1.5 Total 100.0 100.0 n 77 66 Chi Square 0.596 Gamma 0.427 Under Estimate Cash Flow Strongly Agree 35.4 36.9 Agree 22.8 15.4 Disagree 29.1 35.4 Strongly Disagree 12.7 12.3 Total 100.0 100.0 n 79 65 Chi Square 0.690 Gamma 0.824 Accounts Receivables Longer Term Strongly Agree 16.7 9.1 Agree 60.3 63.6 Disagree 19.2 27.3 Strongly Disagree 3.8 0.0 Total 100.0 100.0 n 78 66 Chi Square 0.160 Gamma 0.317