Financial Literacy in Family Firms: An Exploratory Examination and Opportunity for Business Owners and Student Learning

Abstract

IntroductionTo be successful, a business owner must be well-versed in all aspects of the business from the creative (e.g., idea generation, product development), to the more routine (e.g., hiring and retaining employees, financing operations). Because most entrepreneurs tend to favor the creative side, one of their biggest challenges is the finance and accounting aspects of the business operations from start-up, to sale or transition (Chrisman and Leslie, 1989; Gibson, McDowell, and Harris, 2011; Harris, Grubb and Herbert, 2005; Harris, McDowell, Zhang, and Gibson, 2011).This study has two objectives. First, provide initial empirical evidence about the knowledge of family business owners in five ubiquitous finance and accounting topics. Second, finding the overall knowledge base is not as strong as might be desirable to promote long-term business success, provide practical discussions and informative examples as a primer about the five topics. In doing this, the study seeks to narrow the gap between what business owners should know about a subset of finance and accounting topics and, based on the results of a sample of family business owners, what they actually know.The findings and discussion are accessible and useful to both business owners and educators. Business owners can use the information to improve their financial and accounting knowledge. Educators may find the information useful as a classroom case study.Literature reviewSmall businesses serve as an important source of economic growth and job creation in the U.S. national economy. According to the latest available data of the Small Business Administration (SBA) Office of Advocacy, more than 99% of all current employers are classified as small businesses and employ approximately 50% of private-sector workers (SBA Office of Advocacy, 2012, 2010). In addition, the Office of Advocacy estimates that most of the future job growth will come from the small business sector (SBA Office of Advocacy, 2012, 2010).While there is no denying the impact of small business ownership on the U.S. economy, there are many obstacles that can negatively impact the longterm survival rates of these ventures. Although the situation may not be as dire as U.S. Senator, Paul Rand's claim that nine out of 10 businesses fail (Kessler, 2014), the latest statistics suggest that approximately 66% of small businesses survive their first two years, but the survival rate drops to 39.5% after six years of operation, and to less than 20% after ten years (SBA Office of Advocacy, 2010).Appropriate financial decisions are critical for long-term business survival (Van Auken, Kaufman and Herrman, 2009); and effective financial management is a critical concern of small business owners (Chrisman and Leslie, 1989; Gibson et al., 2011; Harris et al., 2005, 2011). Financial literacy requires both a depth and breadth of knowledge related to, among other things, funding sources, cash flow, debt management, contracting, and inventory control (Koropp, Grichnik, and Kellermanns, 2013).For family businesses to enjoy long-term business viability and success, it is necessary for owner-managers and their family collaborators to commit to developing adequate knowledge of these financial issues. While many family business owners acknowledge shortcomings in terms of understanding finance and accounting matters, they typically do not perceive these to be as important as other functions of the business, such as the operations and marketing functions (Brown, Saunders, and Beresford, 2006). By "testing" the finance and accounting knowledge of a sample of family business owners, the study provides evidence of a meaningful gap in what owners know-compared to what they should know.The paper proceeds as follows. In the next section, we describe the methodology used to collect data. The following section describes the survey's findings and provides practical discussions and examples intended to deepen the finance and accounting literacy of family business owners. …