by Bernie J. Grablowsky Modem cash management methods, especially those usually presented in college textbooks and classrooms, are generally neither understood by most small-business managers nor applicable to the vast majority of their businesses. Not only do these managers often have difficulty in comprehending sophisticated forecasting techniques, but the cash flows of their companies are usually dependent upon fewer customers and a smaller number of product lines than those of their larger competitors. Thus the cash flow pattern of the small firm is typically too unstable over time and the available data describing it too limited for reliable forecasting. The small business is subject to still other constraints, apart from those applicable to all firms, which tend to restrict the use of even relatively simple cash management techniques. Small firms, for example, are normally unable to afford the division of talent available to larger companies in the form of highly educated financial managers. Many small firms, struggling hard just to remain solvent and earn a fair return, suffer further from lack of recognition that a cash management problem even exists. Once a problem is discovered the manager may lack knowledge of the methods available for a viable solution. A solution which requires more manpower or expenditures than can be covered out of normal cash flow is Dr. Grablowsky is assistant professor and rhairman of the Department of Finance at Oid Dominion University. He has published articles in the JSBM, the Journal of Financial Education, and the Journal of Behavioral Economics. Prior to his entry into education. Dr. Grablowsky was with the Department of Cost, Planning, Systems, and Analysis at the Monsanto Co., World Head, quarters, St. Louis.
typically rejected by the small business.' This article will present the results of a survey of small-business cashmanagement practices and compare these methods with techniques commonly employed by larger corporations. Small businesses are defined in this study as firms with annual sales under $5 million.' Data for this study were collected by means of a mail questionnaire distributed to two hundred firms selected randomly, within the various business classifications, from classified advertisements appearing in the telephone directories of the Greater Norfolk-Portsmouth SMSA and the Hampton-Newport News SMSA. The firms were selected in five different distribution levels, with annual sales varying from under $50,000 up to $5 million. The firms in the survey operated at from one to thirteen locations and employed up to three hundred persons, although more than half had fewer than ten employees. Of the two hundred businesses selected for study, 66, or 30 percent, responded. A breakdown of the respondent firms by industry and size is given in Table 1. The Cash Budget
It was hypothesized that few of the firms with sales under a million dollars would prepare cash budgets; in fact, only 30 percent of all firms in the sample did so. Several interesting relationships were noted in this regard. One was that the newer firms 1 For an example of this situation see B. J. Grablowsky, "Management of Accounts Receivable by Small Businesses," Journal of Small Business Management, Vol. 14, No. 4, October, 1976, pp. 26-27. 5 According to E. Donaldson, J. Pfahl, and P. MuUins, Corporate Finance (New York: The Ronald Press Co., 1975), pp. 22-23, this would include, based on average sales per company, over 86 percent of all firms in the U,S.
Tabre 1 FIRMS RESPONDiNG TO SURVEY, BY INDUSTRY AND SIZE Percent of Total
Industry: Construction 7 Manufacturing 4 Retailing 29 Wholesaling 16 Services (repairs, funeral homes, printers, real estate) 10 Total 66
11 6 44 24 15
100 8 5 18 16 11 42
budgets, the larger ones updated their budgets more frequently than the others. One of the reasons for the more frequent update was that none of the...