SMALL VS BIG BUSINESS INSTALL
The company will install this new equipment in Month 1 at a cost of $180,000. The “overhead” item contains, among other things, the depreciation on expensive production equipment.
It uses an estimated average income tax rate of 30 %, based on a rough forecast of the coming year’s earnings. The company makes income tax deposits in the month following each quarter in an amount equal to the accrued liability for that quarter. It buys brochures, however, in quantity, receiving a one-year supply in Month 1. It purchases materials, advertising, brochures, and other general and administrative services on net 30-day terms. The company is on good terms with its suppliers. Smith does not hesitate to send the workers home when they have produced sufficient units to meet orders.Įxhibit I Intercity Assembly Company, Inc. Labor costs to assemble each unit average 10 cents, and the work force is fully employed at that task. They are delivered in lots of 5,000 units.
The cost of materials for a unit, whatever it may be, is a dollar, including freight. Smith, is quite confident he can attain the forecasted sales. for the first seven months of the coming fiscal year. Exhibit I forecasts the operations of Intercity Assembly Company, Inc. The following example may help explain the cash flow problem confronting many small companies. Owner-managers of many fast-growing companies, however, cannot avoid the gnawing feeling that somehow the principle doesn’t apply to them.
SMALL VS BIG BUSINESS PLUS
Nearly every owner-manager hears at some point the financial principle that cash flow equals net profit plus depreciation and other noncash expenses. Profitable growth will produce greater profits and hence, they conclude, more money. To them, however, the need for cash seems only temporary. Small business owner-managers usually agree quite readily that growth requires investment. But we believe there are some special financial management tools available to small companies that can enable them to make the most efficient and practical use of their meager resources. What can small businesses do to overcome the problems posed by resource poverty? Certainly no magical solutions exist. Few small businesses could survive such an error. It took several months and a million dollars to correct the flaw, but production continued unabated and local management was not even scolded.
SMALL VS BIG BUSINESS GENERATOR
On the first day of operation, the Environmental Protection Agency closed the new generator plant because of a fundamental design fault. For instance, a production unit of a New York Stock Exchange listed company not long ago installed an additional steam generating plant at a cost of $3 million. Such limitations mean that small businesses can seldom survive mistakes or misjudgments. Changes in government regulations, tax laws, and labor and interest rates usually affect a greater percentage of expenses for small businesses than they do for large corporations. In addition, external forces tend to have more impact on small businesses than on large businesses. Similarly, small businesses cannot usually afford to pay for the kind of accounting and bookkeeping services they need, nor can new employees be adequately tested and trained in advance. No matter that excessive price cutting quickly destroys profits.Īlso, the owner-manager’s salary in a small business represents a much larger fraction of revenues than in a big company, often such a large fraction that little is left over to pay additional managers or to reward investors. For one thing, small businesses tend to be clustered in highly fragmented industries-wholesaling, retailing, services, job-shop manufacturing-that have many competitors which are prone to price-cutting as a way to build revenues. Resource poverty results because of various conditions unique to smaller companies.
We would argue, though, that the very size of small businesses creates a special condition-which can be referred to as resource poverty-that distinguishes them from their larger counterparts and requires some very different management approaches. Underlying that assumption has been the notion that small companies are much like big companies, except that small businesses have lower sales, smaller assets, and fewer employees. A traditional assumption among managers has been that small businesses should use essentially the same management principles as big businesses, only on a smaller scale.
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