How do small business owners actually make their financial decisions? Understanding SME financial behaviour using a case-based approach

ABSTRACT

Conventional approaches to the study of SME finance tend to focus on the changing financing options and preferences as small businesses move through different stages. However, one of the limitations of such approaches is that they do not explain how small businesses make decisions that lead to their financial structures. This paper suggests that small business owners deliberately choose how they manage their firms’ finance as a direct consequence of their personal objectives for owning a business. This paper summarizes the findings of a qualitative study with 11 small business owners using a novel qualitative model developed by Holmes and Gupta [2015, Opening Aladdin’s cave: Unpacking the factors impacting on small businesses. In A. Moore & J. Simon (Eds.), Small business conditions and finance (pp. 37–56). Sydney: Reserve Bank of Australia.]. The results uncover a series of underlying factors (such as personal perspectives, life events and future outlook) which shape the goals and perceptions of small business owners, and influence their financial decision, actions and future funding options, thereby reinforcing the view that small firms are an extension of their personal objectives.

KEYWORDS:

• SMEs
• financing preferences
• qualitative model
• financial structure
• satisfying
• working capital management

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Dr Alexandra Wong is a Research Fellow at the Institute for Culture and Society, Western Sydney University. Her research explores the interplay of creativity, culture and urbanism, covering topics on innovation enterprises, creative economy, knowledge cities and entrepreneurship.

Professor Scott Holmes is the Senior Deputy Vice Chancellor; Dean, School of Business; and Professor of Public Policy at The Whitlam Institute, Western Sydney University. He holds honorary Professorships at the University of Queensland, Australia and the University of Economics Ho Chi Minh City, Vietnam.

Dr Michael T. Schaper is the Deputy Chairman of the Australian Competition and Consumer Commission and a former Small Business Commissioner. In 2009, he was named Australia’s “National Small Business Champion”. He is also an Adjunct Professor at several Australian universities.

Notes

1 The 12 business impact factors identified in the survey are competition, access to finance, managing cash flow, costs and overheads, maintaining and growing revenue, economic uncertainty, red tape, taxation and compliance, technology and system change, finding and retaining skilled staff, access to professional advisory service, access to timely information, research and development and owner and management succession planning (Holmes & Gupta, 2015). Due to a limit of space, this paper will only focus on the discussion of financial issues. For a comprehensive analysis of these 12 impact factors, see Holmes and Gupta (2015).

2 According to the Australian Bureau of Statistics (ABS), a small business is defined as one with less than 20 employees (ABS, 2001).

3 Figure 1 shows the ‘possible explanation’ of the drivers of financial choices. It is only a graphical interpretation of the factors that we found from the study and is not intended to be quantitatively exact.