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Financial Management Techniques in Family Businesses.(contains bibliography)(Industry Overview)
This paper explores financial management techniques of family businesses. We surveyed family businesses to understand the extent to which they use capital budgeting techniques, risk adjustment techniques, and working capital management techniques. We found that more established, larger family businesses that have either an outside board of directors or a nonfamily member in the financial decision-making role are more likely than their smaller counterparts to employ sophisticated financial management techniques.
Introduction
According to Paisner (1999), family businesses make up approximately 90% of the 15 million businesses in the United States. Family businesses are characterized as those firms in which an entrepreneur or at least one descendent remains in a primary decision-making role within a business.
In the competitive environment of today, family businesses face more challenges than ever. Paisner points out that only one-third of family businesses retain their status to the second generation, and only 10% survive the third generation. Although a considerable proportion of this failure rate may be tied to issues unique to family businesses (succession issues, for example), financial management issues are also vital to the success of family businesses. Managers need to utilize both current and long-term assets efficiently, employing sophisticated, financial analysis techniques used by many of their competitors.
The financial management area of capital budgeting, for example, impacts a firm for many years, and helps determine its long-term strategy. Does management of family firms make adjustments for risks associated with proposed capital projects? Is inflation over the project's life considered in the analysis?
Another vital part of a manager's job involves working capital. Over half of a typical financial manager's job involves daily working capital decisions. Do managers of family firms employ any models of cash management, accounts receivable, breakeven analysis, or inventory?
In addition, there is the question of how financial management techniques in family businesses differ from those of other firms. Are these differences based on size, the presence of outside decision makers, or the age of the business?
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