Introduction to financial management
Source: Managing a Small Business
Financial management in the small firm is characterized, in many different cases, by the need to confront a somewhat different set of problems and opportunities than those confronted by a large corporation. One immediate and obvious difference is that a majority of smaller firms do not normally have the opportunity to publicly sell issues of stocks or bonds in order to raise funds. The owner-manager of a smaller firm must rely primarily on trade credit, bank financing, lease financing, and personal equity to finance the business. One, therefore faces a much more severely restricted set of financing alternatives than those faced by the financial vice president or treasurer of a large corporation.
On the other hand, many financial problems facing the small firm are very similar to those of larger corporations. For example, the analysis required for a long-term investment decision such as the purchase of heavy machinery or the evaluation of lease-buy alternatives, is essentially the same regardless of the size of the firm. Once the decision is made, the financing alternatives available to the firm may be radically different, but the decision process will be generally similar.
One area of particular concern for the smaller business owner lies in the effective management of working capital. Net working capital is defined as the difference between current assets and current liabilities and is often thought of as the "circulating capital" of the business. Lack of control in this crucial area is a primary cause of business failure in both small and large firms.
The business manager must continually be alert to changes in working capital accounts, the cause of these changes and the implic ...