THE PECULIARITIES OF FINANCIAL MANAGEMENT PRACTICES IN SMALL BUSINESSES
THE PECULIARITIES OF FINANCIAL MANAGEMENT PRACTICES IN SMALL BUSINESSES

Summary/Abstract: The study aims to explore financial management practices in small businesses and to contrast them with techniques used by large companies. The results of this study could be of particular interest to policy-makers because they could help to raise awareness of the specific problems of effective financial management in a small business and to provide a valuable insight into differences between practices in small and large companies. Small and medium enterprises play an important role in the development of national economies both in developed and developing countries. Consequently, effective financial and business management of these companies could be considered a prerequisite of sustainable economy. In comparison with large corporations, small businesses have different financial goals and characteristics resulting in the need for different financial techniques and sources of funds. The development of small companies is specific because they are more profitable, less liquid and highly geared. In small companies the professional and educational background of the owner or manager are among the main influencing factors in selecting approaches to financial management. Poor or careless financial management is stated to be the most important cause of small business failure. It has been revealed that usually financial management practices in a small business depend on the stage of its development. Small businesses are inclined to preparing capital budgets by necessity unlike large companies which have annual budgets. Traditionally, small companies are reluctant to use newer and more sophisticated financial management techniques and practices. However, a tendency to simplify the process of analysis is also typical of large businesses. Although over the years the popularity of such methods as discounted cash flow has increased, the percentage of small businesses using them is lower compared with large companies. If a certain financial analysis technique is used, it is applied equally frequently both in small and large companies. However, carrying out cost-volume-profit analysis, contribution analysis, flexible budgeting and marginal analysis could be hindered by the difficulty experienced by small companies in separating variable and fixed costs. Small businesses are forced to use intensively short-term sources of funding which make them more susceptible to macro-economic fluctuations. Thus, efficiency of working capital management, particularly, managing accounts receivables and payables, is crucial for their survival. Few small companies adopt traditional formal approach to working capital management. Instead, they give preference to subjective working capital decision-making. The majority of small businesses concentrate just on one area of working capital management (cash, stock or debtors) and the minority do not manage any area. The maximization principle of available amounts of cash instead of its skilful short-term investment as well as poor con

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