The Use of Financial Statements by Small Firms When Making Decision

Shawn Carraher, PhD

Hodson Endowed Chair & Professor
Indiana Wesleyan University

and

Howard Van Auken, PhD

University Professor
Iowa State University

December, 2011
 The Use of Financial Statements by Small Firms When Making Decision

Financial statements are prepared so that financial information can be used by

stakeholders to better understand and manage the firm. Owners of small firms, however, are too

often not fully equipped to effectively use financial statements when making decision. The use

of financial statements can enable owners to make better decisions. Having reliable and timely

financial statements is insufficient because owners also must understand how to interpret and

actually use the financial statements (Van Auken, 2005). Effective interpretation and use of

financial statements is especially important because poor financial management is a leading

cause of financial stress and failure (Wiklund and Shepherd, 2005; Carter and Van Auken, 2005;

Headd, 2003; Coleman, 2002). The use of financial statements should also be closely linked to

and supportive of the firm’s strategic goals because decisions made without regard to financial

impact on the firm’s goals can lead to a confused company focus and financial distress. Firms

should use the information contained in financial statements to evaluate and generate investment

opportunities (Breen et al, 2004).

The use and interpretation of the information contained in financial statements can be

influenced by an owner’s perceptions of their firm’s potential. Because entrepreneurs are

commonly optimistic, perhaps over-optimistic, about their firm’s financial potential, their

optimism can lead to inaccurately assessing the probability of failure, ineffective decisions, and

financial distress (Smith, 2011; Landier and Thesmar, 2009). Outside assistance with

interpreting the meaning of and how the information contained in financial statements can be

used can enable owners to make better informed decisions (Breen et al, 2004). Gooderham et al

(2004) reported that small firms tend to not seek external financial advice, but will rely on
accountants as financial advisors when external advice is sought and that owner confidence in

financial advice is associated with the quality of services rendered.

The importance of the decisions is evident from the high discontinuance/failure rate

among small firms (van Praag, 2003). Owners of small firms often lack strong finance skills and

thus may not fully understand the impact of their decisions on their firm. Inappropriate decisions

can threaten a small firm's viability and create problems associated with all areas of operations.

(Timmons and Spinelli, 2004). Financial statements provide information for SMEs to manage

their business using detailed and economically relevant information that is needed to operate a

business efficiently and effectively (Shields, 2011).

This paper examines issues associated with owners’ use of financial statements in

decision-making. Specifically, the research examines which factors determine the use of

financial statements by SMEs and their owners’ comfort in interpreting them. Both issues are

important to examine because of the importance of financial statements among all stakeholders.

The vast majority of the research on the use of financial information and financial statements has

been focused on large firms. There appear to be few papers on how SMEs use financial

statements in making decisions (Shields, 2010). Financial statements, however, provide

important information that should be incorporated into a firm’s operational and strategic

decision-making process. Ignoring or misusing the information contained in financial statements

can negatively affect all areas of the firm, creating problems such as unreliable operations,

ineffective marketing, and inability to hire qualified personnel (Timmons and Spinelli, 2004;

McMahon, 2001).
 Research Issues

A number of studies suggested that an entrepreneurs background and firm characteristics

affect decisions (Avery, Bostic, and Samolyk 1998; Chaganti, DeCarolis and Deeds 1995;

Buttner and Moore, 1997; Watson 2002. Business owners who are not knowledgeable about

issues related to the impact of decisions on their firms may make decisions that adversely affect

risk and potential returns (Van Auken, 2001). Ramano and Ratatunga (1994) and Romano et al

(2001) suggest that decision-making in small firms is complex and involves many factors.

Busenitz and Barney (1997) noted that limited experience and over-confidence too often leads to

inappropriate decisions, and that small firms are vulnerable to the impact of poor financial

decisions because of their limited resources.

Owners’ Comfort in Using Financial Statements to Make Decisions

Owners who are not comfortable in using financial statements to inform their decisions

are likely to use their financial statements less than owners who are more comfortable in using

their financial statements. Comfort in using their financial statements may be affected by

various factors. Firms that prepare financial statements internally rather than externally have

employees who are knowledgeable about financial statements. Internal expertise would be

expected to facilitate greater interaction and explanation between the owner and staff expert

(Smallbone et al, 1993). This greater level of internal communication should enable owners to

become more comfortable in using financial statements.

Educational level has also been shown to impact financial decisions (Watson 2002).

Advanced levels of education were shown to increase the likelihood of business owners having

access to traditional debt and investment funding (Carter et al. 2003). Higher educational levels

enable owners to better understand financial statements and communicate more effectively
(Neeley and Van Auken, 2010; Hanlon and Saunders 2007). Cassar (2009) reported that owners

with a stronger finance and accounting background are more likely to use external accounts for

advice.

Financial management recognizes the important role of revenue in small firms’ decisions.

The level of revenue, sometimes used as a proxy for firm size, affects many dimensions of small

firm decisions that include both operational and strategic decisions. Higher revenue suggests that

the firm has greater resource levels as well as access to resources. Changing revenue commonly

directly impacts a firm’s perspective on resource constraints and needs. (Byers et al, 1997).

Neeley and Van Auken (2010) found that the level of revenue was one factor affecting small

firms’ decisions. Busenitz and Barney (1997) suggest that organizational size affects decisions

because larger firms commonly have more resources and information on which to base their

decisions. Financial statements are critical to understanding how revenue levels affect small

firms, especially because small firms need to plan for associated resource demands.

The frequency of preparation may also be an indicator of an owner’s comfort in using

financial statements to make decisions. Firms that have financial statements prepared more often

may be a less sophisticated and have less understanding about how important financial

statements are in making decisions (Cassar, 2009). Reduction of uncertainty, especially in

competitive environments, is directly associated with the frequency of preparation of financial

statements. Small firms that have their financial statements prepared less frequently may be

viewing a perceived benefit of lower costs as compared to firms that have their financial

statements prepared more often. This suggests that some firms don’t recognize the benefits of

more timely financial information and are not willing to incur the higher costs and would be less

comfortable in being able to use the information.

 The aforementioned leads to these testable hypotheses:

H1a: An owner’s comfort in using financial statements to make decisions is positively associated
with whether financial statements are prepared internally.

H1b: An owner’s comfort in using financial statements to make decisions is positively associated
with the firm’s total revenue during previous year.

H1c: An owner’s comfort in using financial statements to make decisions is negatively

associated
with how often the firm’s financial statements are prepared.

H1d: An owner’s comfort in using financial statements to make decisions is negatively

associated
with the owner’s level of education.

Owners’ Use of Financial Statements to Make Decisions

Few published studies have examined the use of financial statements by small businesses.

Bruns and McKinnon (1993) reported that managers want better information for making

decisions and that the quality of information impacts the effectiveness of their decisions (Berger

and Udell, 1998; Gibson, 1992). While traditional finance theory assumes rational decision

making, behavioral finance recognizes the potential role of overconfidence and optimism (or

lack of) on decisions (Ritter, 2003; Barberis and Thaler, 2002).

Holmes and Nichols (1988) found that the annual use of financial statements was

associated with firm characteristics demographics. Lack of financial skills can signal a need for

owner training on how to use financial statements when making decisions (Berger and Udell,

1998). Owners who are not comfortable with understanding financial statements are less likely

to use the financial statements when making decision.

Early work by McMahon (2001) and McMahon and Stanger (1995) suggested that small

firms may not be financially sophisticated in their use of financial statements. Halabi, Barrett
and Dyt (2010) also reported that financial statements were not widely used by small firms when

making decisions.

Sian and Roberts (2009) reported that owner understanding of financial statements varies

widely and they are often confused by the information. Because of their complexity, most SME

owners don’t find their financial statements to be very useful and must rely on their accountants

to explain the information contained in them. Cassar (2009) found that the frequency of

financial statement preparation varied with use of outside funding and venture size. Reduction

of uncertainty, especially in competitive environments, is directly associated with the frequency

of preparation of financial statements. The type of financial statement prepared was found to

vary with firm characteristics. The use of these statements to make decisions can be impacted by

the advice given by external accounts. While most owners of SMEs are not trained to

understand financial statements, owners with a stronger finance and accounting background are

more likely to use external accounts for advice because they understand the importance of

accurate statements (Cassar, 2009; Sian and Roberts, 2009).

Sales, often used as a proxy for firm size (Carter and Van Auken, 2005), may serve as a

signal for the complexity of operations and the financial reporting needs of the firm. Berger and

Udell (1998) suggested that smaller firms are more financially opaque and become more

financially transparent as they grow. As a result, owners’ use of financial statements would be

expected to vary with sales. Higher sales, for example, would be associated with higher resource

needs, greater financial exposure and, thus, the need for more financial information. Lower sales

may motivate owners to devote more attention to the associated financial impact on their firm.

Owners who are better educated, especially if the education might include business skill

training, may be more likely to use financial statements as well as be more comfortable in using
financial statements. Similarly, owners of firms with higher levels of revenue may have needed

to learn more about financial statements as the firm grew and, thus, be more likely to use -- and

be more comfortable interpreting -- financial statements. Firms that have financial statements

prepared internally as opposed to having them prepared externally suggest that the firm and

owner are more capable at using financial statements. Finally, firms that prepare financial

statement more often (e.g. monthly as opposed to annually) are likely to appreciate the value of

the information contained in these statements.

The aforementioned leads to these testable hypotheses:

H2a: An owner’s use of financial statements to make decisions is positively associated with the
owner’s comfort with using financial statements

H2b: An owner’s use of financial statements to make decisions is positively associated with
whether financial statements are prepared internally or externally

H2c: An owner’s use of financial statements to make decisions is positively associated with the
firm’s total revenue during the previous year

H2d: An owner’s use of financial statements to make decisions is positively associated with the
owner’s level of education.

Methodology

Sample and Questionnaire

A questionnaire was developed during the fall of 2010. In addition to the findings from

focus group discussions, the questionnaire was based on past research on small firm financing

decisions, including Van Auken (2005), Carter and Van Auken (2005), Busenitz et al, (2003),

Kuratko, Hornsby, and Naffiziger (1997), McMahon and Stanger (1995), Petty and Bygrave

(1993), and Ang (1992). The final questionnaire was pre-tested and further revised.

The questionnaire consisted of two sections: (1) demographic information and (2) information

associated with use and understanding of financial statements. The first section asked
respondents about characteristics of their firms, including the age of the business, organizational

structure, type of firm, total assets, gender of owner, and revenue. The second section of the

questionnaire asked respondents about their use of financial statements, including frequency of

financial statement preparation, confidence in the accuracy of the financial statements, and

ability to interpret financial statement information.

The sample consisted of small firms located in a southwestern state and was designed to

represent the structure of the region following the stratified sampling principles in finite

populations. The southern tier of the state was initially segmented into districts. The population

of firms included all SMEs located in these districts. Subsequently, ten small firms within each

district were selected to participate in the study. Business owners were then contacted by

telephone to determine if they would participate. If the business owner declined, then another

business from the district was contacted. No non-response bias was expected in the sample

because non-responding organizations were replaced by similar organizations. Upon

comparison,

 the size and age of the final sample did not differ from the original sample at the .01 level.

Owners were used for the study because of their importance as decision makers and

because their perceptions shape strategic behavior (Van Gills, 2005; O’Regan and Sims (2008)).

This process resulted in a total of 312 useable questionnaires. Isolating the sample to a single

state has several advantages. First, this focus facilitates data collection. This benefit is especially

relevant in the context of regional differences that might exist among owners of small firms.

Second, using data from a single state minimizes the number of extraneous variables. For

example, various states have different educational programs, different levels of support for small
firms, and variations in banking practices associated with financial statement requirements

(Carter and Van Auken, 2005).

Variables

Dependent Variables

Two dependent variables and two different regressions are used in the study. The first

dependent variable measures the owners’ comfort in ability to use financial decisions to make

decisions. The variable was calculated at the (arithmetic) mean value of owners’ ranking (1-7

scale, with 1=not comfortable and 7=very comfortable) of their ability to interpret an income

statement, balance sheet, cash budget, expense forecast, and sales forecast. These five variables

were combined into a single variable because the respondents’ rankings were highly correlated

The second dependent variable is whether the owner used financial statements when

making decisions (yes or no). The variable has a value of 1 if financial statements were used in

decision making and 0 if not.

Independent Variables

The first group of independent variables used in the first regression analysis (dependent

variable = owners’ comfort with using financial statements when making decisions) are

associated with financial aspects within the firm. Respondents were asked to indicate how often

their income statement, balance sheet, and cash budget were prepared (1=never, 2=monthly,

3=quarterly, or 4=annually) were prepared. Responses to frequency of financial statements

preparation were formed into a new variable called “frequency”. This new variable was created

because the correlations between the frequencies of preparation of these financial statements
were very high. The second independent variable was whether the financial statements were

prepared internally or externally (1=internal and 0=external).

The independent variable used in the second regression analysis (dependent variable =

whether the owner used financial statement when making decisions; yes or no) is associated with

the ability of the owner to use financial statements. Respondents were asked to indicate how

comfortable they felt with their ability to interpret income statements, balance sheet, cash budget,

sales forecast, and expense forecast (1-7 scale, with 1=not comfortable and 7 = very

comfortable). A new variable called “comfort” was created because the correlations of responses

on income statements, balance sheet, cash budget, sales forecast, and expense forecast responses

were very high. The second independent variable was whether the financial statements were

prepared internally or externally (1=internal and 0=external).

Control Variables

Control variables used in the analysis are the firm’s total annual revenues during the

previous calendar year (1=<$10,000, 2=$10,001-$50,000, 3=$50,001-$100,000, and

4=>$100,000) and education of the owner. Revenue and education have been used as control

variables in SME financial research. Revenue may be an indicator of firm financial

sophistication because firms with higher revenues likely have greater financial controls and

better developed financial processes (Carter and Van Auken, 2008). Education level (1=high

school, 2=bachelor’s degree, 3=graduate degree) may signal greater human capital and suggests

greater firm viability (Cassar, 2004; Coleman and Cohn, 2000; Storey, 1994).

Analysis
 The results were initially summarized using univariate statistics to provide a better

understanding of the respondents and characteristics of the responding companies. Percentages

for categories were calculated for educational level of owner, gender, type of business, total

assets, and revenue. T-tests of differences in (arithmetic) mean rankings were also calculated

that compared responses by owners that did versus those that did not use financial statements to

make decisions.

Spearman correlations (shown in Table 2) between the independent variables were

calculated to assess the significance of relationships between the control and independent

variables. Because no significant correlations exist between the independent variables,

multicollinearity was not a problem. Spearman correlations coefficient estimation is a non-

parametric technique based on ranks rather than value of responses. This non-parametric technique

was used because of uncertainty about the population distribution.

The analysis relied on regression analysis, commonly used in entrepreneurship research,

because this approach was thought to be the most suitable method for understanding the

relationship between dependent and independent variables. Regression analysis is especially

relevant when analyzing how the dependent variable changes as the independent variable is

varied. Two regression models were used – a generalized least squares model when owners’

comfort in using financial statements was the dependent variable and a logit regression model

when whether the owner used financial statements was the dependent variable.

The first regression used generalized least squares analysis to examine the relationship

between the owners’ comfort in using financial statements to make decisions (dependent

variable; 1-7 Likert scale ranking) and whether financial statements are prepared internally or
externally (independent variable), level of revenue (independent variable), how often the

financial statements were prepared (independent variable), and education (control variable).

The second regression used logit regression analysis to examine the relationship between

whether owners used financial statements to make decision (dependent variable) and the owner’s

comfort with interpreting financial statements (independent variable), ), how often the financial

statements were prepared (independent variable), level of revenue (independent variable), and

education (control variable). A logit model is particularly suited for the analysis since the

dependent variable (whether owners use financial statements) is an indicator variable (see Pindyck

and Rubinfeld 1981).

The two regression models were:

OC = a0 + b1Prep+ b2Rev + b3Freq + b4Edu

UD = a0 + b1OC + b2Prep + b3Rev + b4Edu

where:

OC = Owners’ Comfort in Using Financial Statements to Make Decisions

UD = Whether Financial Statements Used to Make Decisions
Prep = Whether financial statements are prepared internally or externally
(1=internal and 0=external)
Edu = Owner’s Level of Education
Rev = Firm’s Total Revenue During Previous Year
Freq = How Often Financial Statements Are Prepared

Results

Sample Characteristics

Table 1 shows the percent of respondents by category. The table shows that less than

one-half of the respondents’ highest educational level was high school and that just over one-half

had a Bachelors or Graduate Degree. About two-thirds of the business owners were male and

one-third female. Almost one-half of the firms were organized as a sole proprietorship, followed

by corporation (17.1%) and partnership (16.8%). The majority of respondents were retail
(37.9%) or service firms (42.1%). The largest percentage of responding firms had total assets

>100,000 (33.6%), the distribution of other firms among the various categories was similar.

Correspondingly, the largest percentage of responding firms had total revenue >100,000

(39.1%), the distribution of other firms among the various categories was similar.

Regression Analysis: Owner’s Comfort in Using Financial Statements

Table 3 shows the regression results (F=10.25, significant at 1%; R2=0.1706) where the

dependent variable is the owner’s comfort in using financial statements to make decisions; the

independent variable is whether financial statements are prepared internally or externally and

how often the financial statements are prepared; and the control variables are education of the

owner and total revenue.

Table values also show that the variable “Revenue” (coefficient = 0.178, significant at

5%) is directly associated with owners’ comfort in using financial statements. This supports

hypothesis H1b. Owners of firms with higher revenues are more comfortable in using financial

statements than owners of firms that have lower revenues. This relationship suggests that

owners of firms with higher revenues are more financially sophisticated than owners of firms

with lower revenues. Higher revenues would be expected to be associated with a higher asset

based and, thus, greater financial risk exposure than firms with lower revenues and smaller asset

base. Higher asset base and financial risk exposure may have motivated owners to learn about

financial statements more than those firms with a lower asset base and financial risk exposure.

Table values also show that the variable “frequency (coefficient = -0.157, significant at

1%) is inversely associated with owners’ comfort in using financial statements. This supports

hypothesis H1c. Owners that have financial statements prepared more often are less confident in

their ability to interpret their financial statements. Conversely, owners that have financial
statements prepared less often are more confident in their ability to interpret their financial

statements. These results suggest that frequency of financial statement preparation is

significantly associated with comfort in owner ability to interpret the statements. Financial

statements may be prepared more often when owners are less confident in order to compensate

for their unease in their abilities. Owners who are more confident may feel that their enhanced

perspective allows them to interpret the longer term implications of the information that financial

statements provide.

The coefficients for preparation and education are not significantly associated with owner

comfort using financial statements. Hypotheses H1a and H1d are not supported.

Regression Analysis: Whether Financial Statements Are Used in Decision Making

Table 4 shows the logit regression results (Likelihood Ration=47.603, significant at 1%)

where the dependent variable is whether the owner uses financial decisions when making

decisions. R2 is not reported because logistic regression does not have an equivalent to the R2

that is found in generalized least squares regression models. The independent variables are the

owner’s comfort in interpreting financial statements and whether the financial statements are

prepared internally or externally. The control variables are education of the owner and total

revenue.

Table values show that the coefficient for comfort (coefficient = .06549, significant at

1%) is directly associated with whether owners use financial statements to make decisions. This

supports hypothesis H2a. Owners would likely use financial statements to make decisions when

they are more comfortable with their ability to interpret financial statements. Conversely,

owners do not use financial statements to make decisions when they are less comfortable with

their ability to interpret financial statements. These results suggest that owner training and
understanding of financial statements may be a key factor in determining how the information

from financial statements is used in decision making.

Table values also show that the coefficient for preparation (coefficient=-0.029, significant

at 5%) is inversely associated with whether financial statements are used to make decisions.

This result supports hypothesis H2b. This finding suggests that owners are more likely to use

financial statements when making decisions if prepared externally and less likely to use financial

statements when making decisions if prepared internally. These results implies that owners have

more confidence in externally prepared financial statements and are more willing to use these

statements when making decisions.

The results show that education (coefficient=0.440, significant at 1%) is directly

associated with whether financial statements are used to make decisions. This result supports

hypothesis H2d. Owners who have higher levels of education are more likely to use their

financial statements to make decisions than owners with lower levels of education. Higher levels

of education would enable owners to better understand the information contained in the financial

statements as well as help owners understand how important financial statement are when

making decisions. Greater education can help build confidence as well as enhance decision-

making capabilities.

The coefficient for revenue is not significantly associated with whether owners use

financial statements to make decisions. Hypotheses H2c is not supported.

Discussion

Understanding how owners used financial statements is important because of the role of

financial statements when making decisions. Financial statements are often one of the most

important sources of information underlying decisions. Ineffective decisions are often associated
with poor financial management, one of the primary causes of firm distress and failure (Headd,

2003). Improved financial management can position the firm to remain viable and pursue

profitable opportunities. Good financial decisions are predicated on reliable financial

information and an ability to understand financial statements. Reliable financial statements

provide the information that is needed to make decisions that will help meet the firm’s financial

and operational goals. Even with reliable information, being able to understand and interpret

financial statements is a prerequisite for making effective decisions.

The findings in this paper provide greater insight into small firm owners’ use of financial

statements when making decisions. The study focused on two aspects of the use of financial

statements: owners’ comfort in using financial statements and whether owners used financial

statements when making decisions. These dependent variables were selected because of their

pivotal role in the use of financial statements (Timmons and Spinelli, 2004; McMahon, 2001).

The degree to which an owner is confident using financial statements may affect how and

how often they are used. The analysis, then, assesses factors that may impact the owners’

comfort with using financial statements. The negative relationship between owners’ comfort in

using financial statements to make decisions and frequency of financial statement preparation

may be due to owners compensating for their perceived lack of comfort with the financial

statements. Being less confident may lead the owners to believe that they need more frequent

financial statements while greater comfort may lead owners to have more confidence and believe

that financial statement need to be prepared less often. Comfort in ability to interpret financial

statements and frequency of financial statement preparation don’t, of course, guarantee that good

decisions will be made (Shields, 2010; Timmon and Spinelli, 2004). Quality of analysis of the
financial information as well as effective implementation are pivotal issues affecting the quality

of decisions.

The results also show that owners’ comfort in their ability to interpret financial

statements is positively associated with level of revenue. This finding is consistent with Neeley

and Van Auken (2010) and Busenitz and Barnet (1997) who reported that firm size affects not

only the nature of decision-making, but also the reliance on financial information to make

decisions. Owners who are more comfortable with their ability to interpret financial statements

own firms that have higher revenues while owners who are less comfortable in their ability to

interpret financial statement operate firms with less revenues. Because higher revenues suggest

more capital would be at risk, comfort in interpreting financial statements would be important.

Owners would likely have gained experience or the education needed to manage the firm as

revenues grew.

The second issue examined in this study focused on factors affecting whether financial

statements were used to make decisions. The direct association between using financial

statements to make decisions and educational level might be expected. More educated owners

would likely, for example, be better trained in the interpretation and importance of financial

statements while less educated owners would be less trained and thus less likely to use financial

statements to make decisions. In fact, educational level has also been found to be directly

associated with small firm success (Cassar, 2009; Hanlon and Saunders 2007; Carter et al. 2003).

The results showed a direct association between whether owners used financial statement

to make decisions and their comfort with interpreting financial statements. Being comfortable

with interpreting financial statements reflects an understanding of the importance of the

information as well as familiarity with the information contained. Being comfortable with
interpreting a financial statement probably leads to greater use because owners are able to

understand the information and believe the information is valuable. While owners may still rely

on advisors to draw conclusions about financial statement analysis before making decisions, the

owners can also use their owner analysis before making decisions. Of course, owners may still

be overconfident in their judgment and ability to use financial statements when they interpret the

information. This sequence may be associated with aspects of behavioral finance where

decision-makers form beliefs that influence their practice (Ritter, 2003; Barberis and Thaler,

2002).

External preparation of financial statements may be a signal of the firm’s financial

sophistication and internal expertise (Breen et al, 2004). Firms that have weak internal financial

expertise can outsource financial statement preparation while firms that have appropriate

financial expertise can prepare the financial statements internally. The preparation of financial

statements by external experts would give firms that have inadequate internal expertise greater

confidence in using the financial statements to make decisions than if the financial statements

were internally prepared. Owners who have more confidence in the reliability of the financial

statements are more likely to use the financial statements to make decisions (Shields, 2010).

Conclusions

This paper reported on a study that examined factors associated with whether SME

owners use financial statements and are comfortable with their ability to interpret financial

statements. The analysis is based on a sample of 312 SMEs located in a southwest state in the

US. Few studies have examined the role of financial statements in decision-making among

SMEs. The study is important because of the important role of financial statements to

stakeholders and the financial impact of decisions on firm sustainability over time.
 The results showed that owners who have financial statements prepared more often are

less confident in their ability to interpret their financial statements while owners who have

financial statements prepared less often are more confident in their ability to interpret their

financial statements. Also, owners who report greater comfort in their ability to interpret

financial statements own firms that have higher revenues while owners who are less comfortable

in their ability to interpret financial statement operate firms with less revenues.

The second regression analysis shows that owners use financial statements to make

decisions when they are more comfortable with their ability to interpret financial statements.

Conversely, owners do not use financial statements to make decisions when they are less

comfortable with their ability to interpret financial statements. These results suggest that owner

training and understanding of financial statements may be a key factor in determining how the

information from financial statements is used in decision making. Additionally, owners are more

likely to use financial statements when making decisions if prepared externally and less likely to

use financial statements when making decisions if prepared internally. These results implies that

owners have more confidence in externally prepared financial statements and are more willing to

use the statements when making decisions.

The results of the study may be useful for owners of SMEs and providers of services to

SMEs. Financial statements provide important information that should be used by external

evaluators and internally to help guide decisions. Both owners and providers of services can use

the information to better understand factors affecting their use of financial statements.

Understanding what factors impact the use of financial statements may lead to improving the

process through which financial statements are incorporated into decisions.

 The study has several limitations that provide avenues for potential future research. The

study could be expanded to other areas of the US and world to explore differences by region,

ethnicity, type of business, and rural versus urban areas. The study also did not examine the

specific relationship between financial statement use and the impact on the firm. Finally, the

data was also collected at a single point in time. A longitudinal study could provide evidence on

how financial statements are used at different stages of a firm’s development and over the

business cycle.
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Educational Level Percent
van Praag, C. (2003). High School 43.4 “Business Survival
and Success of Bachelors Degree 35.7 Young Small
Business Owners,” Graduate Degree 16.1 Small
Business Other 4.8 Economics, 21, 1-17.

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performance Female 34.6 of male- and female-
controlled Male 65.4 businesses: relating
outputs to inputs.
Legal Structure Entrepreneurship
Theory and Sole Proprietorship 49.3 Practice, (26)3, 91-
100. Partnership 16.8
S-Corp 7.1
Wiklund, J. and D. Shepherd (2005),
Corporation 17.1
“Entrepreneurial Orientation and
LLC 9.6
Small Business
Performance: A Configurational
Approach,” Journal Type of Business of Business
Venturing, 20(1),71- Retail 37.9 91.
Services 42.1
Agricultural 5.1
Manufacturing 6.8
Other 6.8

Total Assets
< $10,001 17.7
$10,001-$25,000 10.5
25,001-50,000 11.2
50,001-75,000 14.8
75,001-100,000 11.2
$100,000 33.6

Revenue
< $10,001 15.9
$10,001-$50,000 26.5
$$50,000-
$100,000 18.2
>$100,000 39.1
 Table 2
Spearman Correlations Between Variables
(n=312)
Panel A: Variables in Regression Where Owner’s Comfort in Using Financial Statements
is the Dependent Variable

Variables Responsibility Education Finance Revenue

Preparation 1.0

Education .053 1.0

Frequency -.110 -.094 1.0

Revenue .058 .148 -.262 1.0

Panel B: Variables in Regression Where Financial Statements Used in Decisions is

the Dependent Variable
Comfort in
Variables Responsibility Education Interpreting Revenue

Preparation 1.0

Education .114 1.0

Comfort -.046 .123 1.0

Revenue .198 .148 .227 1.0

 Table 3
Least Squares Regression Analysis
Dependent Variable=Owner’s Comfort in Using
Financial Statements
Independent Variables= Preparation, Revenue,
Frequency, Education
(n=312)
Variables Table 4 Coefficient
Intercept Logit Regression Analysis
5.051***
Dependent Variable=Financial Statements
Preparation Used in Decisions
-0.235
Independent
RevenueVariables= Comfort, Preparation,
0.178** Revenue,
Frequency Education -0.157 ***

Education (n=312) 0.142

Variables
F=10.25 *** Coefficient
Intercept
*** Significant at 1% 4.743***
Comfortat 5%
** Significant 06549 ***
Preparation -0.029 **
Revenue -0.293
Education -0.440 ***
Likelihood Ratio (X2=47.603***)
Score (X2=43.070***)
Wald (X2=37.008***)
*** Significant at 1%
** Significant at 5%