Modern Financial Management Theory and Small Business

The following are some examples of modern financial management theories that are considered "a set of basic principles that form the basis of financial theory and financial decision making" (Emery et al. 1991). Attempts will be made to link the principles behind these concepts to the financial management of small businesses. Acting Theory

The agency theory deals with people who own a business enterprise and all others interested in it, such as managers, banks, creditors, family members, and employees. The agency theory assumes that the day-to-day operations of an enterprise are carried out by the manager as an agent and by the business owner as the principal (also known as the shareholder). This theory is about the concept of the "bilateral transaction" principle, which holds that any financial transaction involves both parties, both acting in their own best interests, but with different expectations

The theory may include:

I. Information Asymmetry – In this case, the agent has information about the company's financial situation and prospects, which is not known to the responsible person (Emery et al. For example, the Business Roundtable emphasized that in planning communications with shareholders and investors, companies should consider never misleading or misleading shareholders about the company's operations or financial condition. Despite this principle, Enron's management lacks transparency, leading to its collapse;

ii. Moral Hazard – In this case, the agent deliberately uses information asymmetry to redistribute wealth to itself in an invisible manner, which ultimately damages the principal. An appropriate example is that the board of directors of the Enron compensation committee did not raise any questions about remuneration, allowances, annuities, life insurance and rewards to the executive at critical moments of Enron's life; one of the executives had acquired ownership of the company's aircraft, As a bonus, a $ 77 million loan to the CEO even if the Sarbanes-Oxley Act in the United States prohibits lending to its executives in the company; and

iii. Adverse selection – This involves a situation in which the agents incorrectly represent the skills or abilities they bring to the business. As a result, the client's wealth is not maximized (Emery et al. 1991).

In response to agents seeking to maximize their interests to the detrimental to the client's inherent risk (ie, all stakeholders), each stakeholder attempts to increase the expected return on participating firms. Creditors can increase the rate they receive from the business.

According to the theory of risk faced by agents, small business financial management researchers believe that corporate financial management is a very important factor in many small businesses, the relationship between the owners and managers may not exist , Because the owner is also the manager; and the primary nature of the SME makes the common solution to agency problems, such as monitoring and linking costs expensive, thus increasing the transaction costs between stakeholders (Emery et al.

Nonetheless, it translates into many matters of financial management for SMEs and shows a considerable number of ways to implement and perceive SME financial management. It also enables academics and practitioners to pursue strategies that can help sustain the growth of small and medium-sized enterprises. Signaling Theory

Signal theory is based on the transfer and interpretation of information from commercial enterprises to the capital market, and the recognition of the acquired knowledge into the terms of the firm's access to capital. In other words, the flow of funds between firms and capital markets depends on the flow of information between them. (Emery et al., 1991). Such as management's decision to buy or sell; repurchase of outstanding shares; and decisions by outsiders, such as institutional investors who decide to withhold a certain amount of equity or debt financing. The emerging evidence on the relevance of signaling theory to the financial management of small businesses is mixed. Until recently, there was no substantial and reliable empirical evidence that signal theory accurately represented the special case of SME financial management, or it added insights not provided by modern theory (Emery et al. 1991)

Keasey (1992) write that the ability of small firms to communicate their value to potential investors is only positively correlated with firm value and the firm's value, as shown below: Shareholding Percentage Owner Retained Of the net proceeds raised by the issue of equity, the choice of financial advisors to the problem (assuming that more credible accountants, bankers or auditors may lead to greater confidence placed in the floating prospectus) Pricing. Signal theory is now considered to have more insight into some aspects of small business financial management than others (Emery et al 1991).

Pecking order theory or framework (POF)

This is another financial theory, which is considered to be related to the financial management of SMEs. This is a financial theory that suggests that management tends to start with retained earnings, then debt, then mixed forms of finance, such as convertible loans, and finally the use of externally issued equity financing; bankruptcy costs, agency costs and information asymmetry Have little effect in influencing capital structure policies. A study conducted by Norton (1991b) found that 75 percent of the small businesses used seemed to make financial structural decisions within a hierarchical or pecking order framework. (1991) recognizes that POFs are consistent with the small business sector because they are owner-managed and do not want to dilute their ownership. Owner-managed firms often prefer to retain profits because they want to maintain control over assets and business operations

This is not surprising considering that in Ghana, empirical evidence suggests that SME funds are funded by 86% Assets and loans to families and friends (see Table 1). The loss of this money is like losing its reputation in Ghana, which is often considered very serious

Access to capital

Bolton's report on small businesses in 1971 outlines the implications of the concept of a "financial gap" (which has two components – the knowledge gap – the lack of an appropriate source of knowledge, financial strengths and weaknesses, and the supply gap – Small businesses are underfunded or debt costs exceed the debt costs of large firms.) Smaller companies face a range of difficulties. Smaller companies are taxed more heavily, are exposed to higher loan survey costs, often do not understand the source of financing, and can not meet the loan requirements. Small companies have limited access to capital and money markets, and therefore suffer from long-term capital shortfalls. The result is that they are likely to over-pursue expensive capital and impede their economic development


This is the term used to describe the opposite of assets and liabilities, that is, the proportion of total assets financed by equity, which can be called the ratio of assets to assets. The study of leverage in this section focuses on the percentage of total debt to equity or total assets. However, there are some studies on the relative proportions of different types of debt held by small and large enterprises

Equity Funds

Equity is also known as owner's equity, capital or net worth.

Costand et al. (1990) argue that larger firms will use a higher level of debt financing than smaller firms. This means that larger companies will be financier than smaller companies relying on a relatively small share of equity. According to the pecking order framework, small firms have two issues in equity financing [McMahon et al. (1993, pp153)]:

1) Small businesses usually can not choose to issue additional equity to the public.

2) The owners 'managers are strongly opposed to any dilution of their owners' equity and control. Thus, they are not prepared to recognize a wider range of funding options, unlike managers who typically have only a limited degree of control and limited attention to large ownership interests


With the large number of financial problems leading to the high failure rates of small and medium-sized enterprises, how does small business financial management of small businesses fight against this failure?

Osteryoung et al. (1997) wrote: "While financial management is a key element in the overall management of an enterprise, its asset management may be the most important in this function. In the long run, the asset- The life of these assets will be taken during the life of the business, but if the firm can not formulate appropriate policies to effectively manage its working capital, the firm will never see the long term.In fact, the owner manager's poor financial management or lack of financial management is

Hall and Young (1991) In a UK study, three samples of the 100 cases of involuntary winding-up in 1973 and 1983 49.8 per cent of the causes of failure were found to be of a financial nature in 1983. 86.6 per cent of the 247 reasons given were of a financial nature, according to the official receiver interviewed by the same small business According to Peacock (1985a), the positive correlation between poverty or zero-financial management (including basic accounting) and business failure has been documented in Western countries

The fact is that despite the need to manage every aspect of small Enterprises, while few internal and external support, so managers are often only in certain functional areas have experience or training

There is a thought that "a well-run commercial enterprise should be unconscious financial health fit The person is his or her breath. "It must be possible to produce, market, distribute, etc. without recurring or being hampered by financial pressure and pressure, however, this does not mean that small business owners – managers can ignore finance Whether it is obvious to casual observers or not, in a small, prosperous small business, the owner-manager himself has a firm grasp of the principles of financial management and is actively involved in applying it to his or her own situation. & Quot; McMahon et al. (1993).

To enable management to respond quickly to changing circumstances

– Training Lenders Identify important factors that determine the likelihood of an enterprise failing

– Helps Loan Organizations Make Marketing by More Efficiently Identifying Their Customers' Financial Needs

They continue to argue that small businesses are very different from large enterprises in borrowing small businesses and lacking long-term debt

For small private firms, these measures are unreliable and the textbook approach used to judge investment opportunities is not always useful in private-owned organizations, and is viewed in a true and fair way

Therefore, modern financial management is not the ultimate solution to every business problem, including large and small enterprises. However, it can be argued that, for SMEs, this study. As can be seen, for example, from the literature reviewed, the financial records are designed to review and analyze the business of the company. Return on equity, return on assets, return on investment and debt to equity ratio are also useful measures of the performance of large enterprises and small and medium enterprises.