Chapter 16 • Small businesses
16.10 Dividends
Much of what is true concerning dividends in the context of large businesses also applies
to small ones, although there are differences. Perhaps most importantly, it is feasible for
the directors of small businesses to know their shareholders’ preferences as regards
dividend policy and to make efforts to accommodate those preferences. This really is
necessary, since typically it is not very practical for shareholders to sell their shares and
replace them with those of another business whose dividend policy appeals rather more.
For a small business, it may be more practical than for a large one to treat indi-
vidual shareholders differently. For example, it may be easier to offer cash dividends
to some shareholders, while allowing others to take a scrip dividend(a bonus issue of
shares, not available to all shareholders).16.11 Working capital and small businesses
It seems likely that smaller businesses will not typically show the same working
capital profile as their larger counterparts. The most obvious reasons for this are less
bargaining power in the market and the inability to benefit from economies of scale.Inventories
Although there appear to be no available statistics to confirm the point, it seems
likely that smaller businesses will hold larger inventories levels (relative to, say, sales
turnover) than their larger counterparts. There are several reasons for this, including:l a general tendency for there to be economies of scale in inventories holding: a busi-
ness doubling its turnover would probably not have the need to double the level of
inventories held;
l the need to place orders of a minimum size to be able to gain bulk discounts on buy-
ing prices; and
l an inability to use techniques like just in time ( JIT) because suppliers would not be
prepared to apply this where the purchase quantities are small.Trade receivables (debtors)
It seems that small businesses have to finance proportionately higher levels of trade
receivables than larger businesses. Wilson and Summers (2002) found that smaller
businesses, when selling to larger ones, lack bargaining strength and this forces them
to accept longer trade receivables settlement periods. Morrison (2003) cites evidence
compiled by the Credit Management Research Centre that shows that small busi-
nesses have to wait on average 19 days longer for payment of their trade receivables
(80 days rather than 61 days). This means that the level of trade receivables for smaller
businesses is 31 per cent higher, relative to sales revenue, than it is for larger ones.Trade payables (creditors)
Again there appear to be no published statistics, but it seems likely that smaller busi-
nesses will tend to have lower average levels periods of settlement of trade payables‘