The impact of financial Information on organizing and managing a small business

The small business sector plays an important role in the economic development of a country. The contribution of financial management is considered a critical factor in the success and survival of small businesses. However, not much is known about the extent to which small business owners use financial management practices in making different business management decisions. What are those practices, and how New Zealand (NZ) small business owners use financial information in making management decisions, are questions investigated in this study. This dissertation examines the existing literature to find the contribution of financial information in making organizational and managerial decisions. The literature review suggests that the use of financial information in decision making depends on the owners’ attitude and their level of financial literacy skills. A qualitative approach was adopted to investigate what financial information is used in making business decisions and the barriers the small business owners face in operating their businesses. A questionnaire and semi-structured interviews were used to collect primary data from 12 New Zealand small business owners. Using a questionnaire, this study sought to identify some basic perceptions of New Zealand small business owners regarding the benefits of using financial information in decision making. Semi-structured interviews were then conducted to obtain further explanation of the responses to the questionnaire. The study found that the majority of participants were not aware of the critical business decisions which were significant for the success of their businesses. The low level of financial literacy skills in the participants resulted in the use of individual practices for measuring business performance and making business decisions. Internal and external barriers were the two main types of barriers preventing participants from accessing financial information. Internal barriers included impediments emerging from the internal business environment such as participants’ lack of financial, managerial and IT skills. External barriers comprised barriers beyond the participants’ control. Lower level financial skills and financial constraints prevented participants in implementing a computerised accounting system. The study also found that external accountants were providing annual financial reports to their small business clients without explaining the messages conveyed in these reports. These barriers and issues that confronted small business owners, and affected the business performance, can be overcome by the following proposed intervention strategies. The level of financial literacy skills can be improved by educating and providing training to small business owners about published financial management practices. External accountants need to evaluate the financial management needs of their clients and assist them in understanding the benefits of this information. The accountants also need to encourage the owners to implement a computerised accounting system for better financial management. Most importantly a strong communication link need be existed between the owners and small business supporting organizations to formulate strategies which assist the owners in resolving their financial and non-financial problems