Performance, firm size, and management problem solving

Abstract

Growth in small businesses is rare. This study expands on Penrose's (1957) concept of managerial capacity and links it to firm growth. Growth is hypothesized to occur when a threshold of administrative or managerial acumen is attained by the management team. Empirical analysis is based on a random survey of 1,004 small and medium-sized Canadian businesses. The study found that: fewer than one quarter of the sampled businesses reported two consecutive years of revenue increases; growing firms tended to be younger companies while firms in decline were comparatively older; and the presence of a business plan was highly correlated with performance (yet only one-third of the firms formally planned). The findings are consistent with the theory that small firm growth is neither linear nor described well by biological paradigms. This study also investigated the problems that confront owners and managers at different stages in business development. It found that the severity of managerial problems varies by firm attributes, including size. Problems of domestic demand, the availability of alternative sources of finance, a lack of financial expertise, and lack of information about financing options were particular problems for smaller (micro) operations. Female business owners were more likely to report lack of access to capital as a problem.