Human Resources, Financial Resources and Performance in Small Business

When reviewing the literature regarding human resources in small business we found out that the small business’ entrepreneur/owner is to be emphasized as a resource of paramount importance. According to Story (1994), the entrepreneur’s experience, expertise and abilities are generally considered a primary parameter of influence over the firm’s survival and development. Mullins (1996) claims that the entrepreneur’s decision-making capacity strongly affects organizational processes that constitute the foundation for competitive advantage as well as for growth. Rangone (1999) has defined the entrepreneur as a “unique” resource which supports the rest of the resources. Financial resources is more scarce in relate to small business literature, we can cite Westhead, Wright and Usbasaran (2001) who suggested that human and financial resources are those that need to be incorporated into the research model, which they had constructed.

Several studies were conducted in order to learn about the relationship between human or financial resources and small business performance. Cooper, Gimeno-Gascon and Woo (1994) have found that human resources, and especially the owner’s education, are correlated with growth. Moreover, knowledge of the industry and financial resources contribute to growth as well as to the firm’s survival. According to Westhead (1995), the founder’s experience affected performance and survival in hi-tech enterprises over a period of six years from the day of foundation. Brush and Chaganti (1999) examined small trade and service oriented businesses. Their study designates two dimensions of human resources – owner resources and owner commitment. A significant positive correlation was found between the two dimensions and net cash flow. No correlation has been found to the log of employment growth. Westhead et al. (2001) findings support the hypothesis that, if the firm’s founder possesses a significant prior knowledge of the industry, it is to be expected that the firm would register profitability beyond the means of its competitors. Premaratne (2001) indicates at a correlation between subsidies granted to the firm and increase in sales. However, he does not support a correlation between subsidies and profitability. Wiklund and Shepherd (2005) have found a significant positive correlation between access to capital and performance. Pena (2004) examined the relationship between human resources (education; management experience; prior entrepreneurial experience; entrepreneurs' relatives; implementation of ideas acquired in previous workplaces) and increase in profit, increase in sales and increase in the number of employees. A positive correlation was found between education and the implementation of ideas acquired in previous workplaces, and an increase in the number of employees and in sales. Chrisman, Mcmullan and Hall (2005) utilized education and prior experience as control variables. A correlation was found between prior experience and an increase in the number of employees and in sales. No such correlation with education was found.

Literature Review: Strategic Planning and Performance in Small Business

From the mid seventies we can note that scholars makes the distinction between small and large businesses in terms of needs, level of sophistication and range of strategic planning. Bracker and Pearson (1986), Rue and Ibrahim (1998), Perry (2001) and Wijewardena, Zoysa, Fonseka and Perera (2004) all formulate definitions of strategic planning which take the uniqueness of small businesses into account and allow for the fact that small businesses cannot draw on management and material resources in a manner similar to that of large organizations.

Empiric studies’ findings indicate at a correlation between strategic planning and performance. Nevertheless, the findings are mixed. A survey of twenty-six experimental studies enabled Miller and Cardinal (1994) to identify a significant positive connection between strategic planning and small business performance. Robinson (1982) found a significantly high level of profitability as well as an increase in sales and returns on sales and the number of full time employees in a group of small businesses that employed external consultants for the purpose of strategic planning. Compared with other businesses, Bracker and Pearson (1986) discovered a significant increase in income and remuneration per entrepreneur in businesses that prepared strategic plans (the highest of four designated levels of strategic planning). No significant increase was detected in the measure salary expenditure divided on the sum total of sales. A significant differentiation in the rate of sales increase was found by Rue and Ibrahim (1998) in small businesses that incorporated written planning (basic or sophisticated), as opposed to other businesses. Perry (2001) detected a significant differentiation in the degree to which planning was conducted in small businesses that did not applied for bankruptcy as opposed to those that did. Wijewardena et al. (2004) define three levels of planning: no written planning; basic planning; and detailed planning. The findings indicate that the level of planning stands in direct proportion to the level of increase in sales. Yusuf and Saffu (2005) classify three levels of planning: low; moderate; and high. A connection was found between increase in sales and the low level of planning. No correlation was found between strategic planning and increases in market share or in profitability.

Do Government Assistance Programs in Fact Assist Small Businesses?

Government budgets are relayed to various assistance programs whose purpose is to encourage economic activity in small businesses. It is often asked whether these programs do in fact fulfill their purpose or maybe these budgets are wasted? A groundbreaking research jointly conducted by Ben-Gurion University and the Ministry of Industry, Trade & Labor elucidates this issue. Researchers Dr. Rami Schayek and Prof. Dov Dvir have developed an innovative model which measures the effect of government assistance programs on small businesses, identifies the most important components incorporated in the assistance program and determines which managerial, operational and behavioral activities should be focused in order to improve on business performance. The research included one hundred and thirty five small businesses which participated in the Ministry of Industry, Trade & Labor’s Standard Coaching project. This project is one of several business coaching projects run by the ITL ministry and it is designed for small and medium businesses of five to one hundred employees. A business of five to ten employees is appointed up to one hundred coaching hours. A business of eleven to one hundred employees is appointed up to one hundred and fifty hours. The coaching project finances 75% of the cost of coaching. 25% are financed by the business.

Results indicate that there is a return on the taxpayer’s money!
Findings indicate that government assistance program involvement positively affects small business performance. The basic research model, which examined only the direct effect the assistance program has on small business performance, shows that the greater the number of quantitative components (hours of consultation; proximity of consultation encounters; range of issues incorporated into the consultation), and the higher the standard of qualitative components (level of the consultant’s professional understanding of the respective subjects of consultation; level of organization and planning of the consultation process; level of trust, commitment and mutual understanding between consultant and small business owner), the higher will be the level of performance in the small business. When adding to the model an examination of indirect effects, assistance programs are shown to affect small business performance primarily through the consultant’s influence on the small business owner which is expressed in the latter’s motivation to take action, like as attention to the service provided after the sale, understanding the fluctuation in customer preferences and the small business’s operative environment, and the need to measure and analyze customer satisfaction and respond to the customer’s complaints regarding either the service or the product provided by the small business. The consultant also affects the business owner with respect to the latter’s ability to manipulate business opportunities through utilization of competitors’ weaknesses and an understanding of the ways in which the small business as a whole may benefit the customer. Consultation raises the small business owner’s level of awareness as to the need to innovate, take risks and increase the level of activity, both in implementing changes in the service or products he provides and as regards conduct in the face of competition. In fact, the consultation process motivates the small business owner to take actions which would raise the level of market orientation and entrepreneurship in the small business, and as a result initiate an increase in its level of performance.

How is it possible to win an even greater return?
The findings of Dr. Schayek’s doctorate thesis supervised by Prof. Dov Dvir, facilitate recommendation on a number of issues which could intensify the effect of public assistance programs on performance in small businesses. Thus it is important that the consultant emphasize before the client that submitting reliable and comprehensive information to the consultant, as well as willingness on the part of the business owner to implement changes in accordance with decisions reached as a result of cooperation with the consultant, is paramount for the success of the assistance process and the improvement on performance in the small business. Based on the research model, the client constitutes an integral part of the assistance program. The more involved and active he becomes in the process of coaching, the greater will be the assistance program’s positive effect on the small business’ performance. In addition, the research indicates that effort must be made on the part of the consultant in improving the client’s capacity of raising finance. The client’s capital raising capabilities which, according to the model constitute a parameter in the improvement of the level of performance, will improve if the client is given an explanation as to existing finance opportunities and is prepared as to the manner in which one should approach and present the small business’ requirements before possible financing sources (such as banks or credit companies).