Accounting and Marketing-Key Small

Business Problems
HENRY WICHMANN, University of Alaska

The Small Business Administration (SBA) estimates that small

businesses represent 97 percent of all businesses in the United
States [5, p. l]. The SBA defines a small business as "one that is
not dominate in its field." While the ma and pa shops fall within
this definition, much larger firms are considered small under
SBA criteria.
The owner-managers of these small firms face unique prob-
lems-success or failure is keyed to solving these problems. Each
year in the United States, some 500,000 new businesses start
and 400,000 businesses discontinue operations (1, p. 47]. These
discontinuances are not all due to business failure (a bankrupt
firm). Some small firms are merged with larger companies,
while the spark of life leaves other small firms because the
owner retires without a son or daughter to take over the reins of
leadership.
The purpose of this article is to aid small business manag-
ers by (1) reviewing the process of beginning a business, (2)
identifying some of the attributes that characterize a successful
or unsuccessful small business, and (3) discussing small firms'
problems common to the frontier states of Alaska and Wyoming.

DEFINITIONS

In order to better understand this article, it seems appropriate to de-

fine "management ability," "SBI cases," and "problem".
Management Ability. Management is broadly defined in this article
to include accounting problem-solving, marketing problem-solving, and
other management problem-solving areas. The SBA defines management
in the same way when emphasizing that nine out of ten businesses fail
because of lack of management ability.
SBI Cases. Small Business Institute (SB!) cases are management
counseling studies conducted at colleges and universities throughout the
nation, providing the small businessmen with free management as-
sistance (MA). The Small Business Administration (SBA) first started the
SBI program in 1972-today it is probably one of the most successful MA
programs the SBA has to offer. The student counselors provide MA to
either SBA borrowers or non-borrowers under the guidance of the univer-
sity advisor and SBA counselor. The SBI program calls for a contract be-
tween the SBA and university, resulting in $250 of discretionary money
being paid to the school. This money may be used by the university pro-
fessors for travel funds to present papers at national and regional busi-
ness conferences.

American Journal of Small Business, Vol. VII, No. 4, April-June 1983 19

 Problem. As used in this article, a problem is defined as a business
weakness that may result in less than normal performance-possibly
even failure. Either the businessman client or student SBI counselors
identify the problems with help of SBA MA counselors and college pro-
fessor counselors.

STARTING A BUSINESS

Normally an entrepreneur must go through these steps in starting a

business (4, pp. 27-30):
First, he makes a decision to go into business for himself.
Second, he selects a type of business suited to his character and fi-
nancial resources.
Third, he determines the business venture's capital requirement by
listing facilities (land, buildings, and equipment); estimates working capi-
tal needs (for inventory, accounts receivable, and operating expenses); and
considers his personal living expenses during the period of getting the
business started. The owner, as a general rule, should provide at least
one-third of the required capital. Also, renting real estate is more desir-
able at the start until the business is successful.
Fourth, he must decide on a legal form of organization-sole pro-
prietorship, partnership, or corporation. If a skill is lacking for success, he
might consider a partner. In a study cited later, the author found the
corporate form in 51 percent of the Alaska SBI cases.
Fifth, he obtains the necessary licenses and permits from the state
and local governments.
Sixth, he selects a location and facilities.
Seventh, he plans a sales promotion program (advertising, store im-
age, and public relations) to reach customers.
Eighth, he hires personnel. He should fully realize that lack of man-
agement ability and well-trained personnel are often considered more
critical problems for a small firm than lack of capital.
Ninth, he establishes an accounting system of records and reports
early in the business venture.
The businessman may consider a franchise in addition to or in place
of the above steps. Franchisors provide an established reputation, tailor-
made recordkeeping systems, common supply resources, and profitable
business opportunities.

CHARACTERISTICS OF THE SUCCESSFUL BUSINESSMAN

Success may be attributable to many factors. The personality of a

successful entrepreneur includes the following characteristics: energy,
health, inquisitiveness, confidence, boldness, empathy, good sense of tim-
ing, independence, innovativeness, sense of ethics, tact, adaptability,
imagination, sociability, consideration, and good judgment (2, p. 10].
A recent study. by the author of 1,000 small business loan recipients
showed that 72 percent of the borrowers were between 31 and 50 years of
age and averaged 14 years of education and 13 years of related business

20 American Journal of Small Business, Vol. VII, No. 4, April-June 1988

experience1 • The type of work experience has been shown to be critical.
Work experience as an employee in the same line of business is not neces-
sarily related to survival, but previous ownership of a business, particu-
larly in the same line, is advantageous.

BUSINESS FAILURES

Business discontinuances are difficult to obtain for the nation. 'lbtal

bankruptcies are registered for each state-and these include business
failures. However, the bankrupt firms are only a small part of the total
discontinuing firms each year. As mentioned earlier, business discontinu-
ances may be caused by bankruptcy, retiring owners, and mergers. In ad-
dition, many independent contractors (carpenters, electricians, plumbers,
and others) enter and leave business with ease and little fanfare.
Many of the reasons for business failure are found in what it takes to
be successful. However, some unique causes of failure are shown in Figure
1. Poor management ability (92 percent) is by far the most common rea-
son for failure, with incompetence being the cause 45 percent of the time.

Poor Management 92%

Incompetence 45%

Unbalanced Experience 20%

Inexperience in
Management 18%

Inexperience in Line 8%

Neglect of Business 3%

Fraud 2%

Disaster 1%

Other 2%

Figure 1. Causes of Business Failure. From Decision Making for Small

Business Management, by Jerrald F. Young (John Wiley and Sons, 1977).

PROBLEMS FACED BY ALASKAN AND WYOMING SMALL

BUSINESS

Alaska and Wyoming are both considered last-frontier states where

the opportunity to start a new business may meet fewer obstacles than in
many other states. Also, these two states have an abundance of energy
resources-resulting in a boom to bust to boom economic environment
during the seventies and eighties. The management problems coming out
of this economic environment are shown in Table 1.

American Journal of Small Business, Vol. VII, No. 4, April-June 1983 21

 Businesses may discontinue operations because problems cannot be
avoided or solved. Thble 1 shows the results of an analysis of Small Busi-
ness Institute (SBI) cases conducted at the University of Alaska (three
campuses) and the University of Wyoming (one campus) over an eight
year period. Seventeen problem areas are summarized in Thble 1. The
studies included all the cases in each state (Alaska, 1974-1981 and Wyo-
ming, 1974-1979). These problems are discussed below under the more
general categories of accounting, marketing, and other management prob-
lems. Remember, management ability is defined to include all these prob-
lems.
Accounting may be the key to small business success. The accounting
problems are categorized into recordkeeping, use of accounting informa-
tion, cash control, and cost control. Accounting was found to be the most
frequent problem, resulting in 39 percent of the Alaska cases and 33 per-
cent of the Wyoming cases with a total of 37 percent of the 762 responses.
In this area, the number one problem was recordkeeping (60 percent).
Marketing was found to be another key problem of small businesses
with 35 percent of the 762 responses. Advertising and sales promotion
appeared in 4 7 percent of the 176 SBI cases, while the other marketing
problems include, in order of importance, pricing, defining target market,
inadequate sales, layout and appearance, location, and seasonal variation
in sales. The owner-manager may need to develop a sales promotion pro-
gram and advertising budget to meet his marketing problems.

TABLE 1. REPORTED PROBLEMS ENCOUNTERED IN ONE HUNDRED

SEVENTY-SIX SMALL BUSINESS INSTITUTE (SBI) CASES, 1974-1981 *

Alaska Wyoming Total % SBI

Problems Areas (89 Cases) (87 Cases) (176 Cases) Cases
Accounting Problems:
Cash Control ............... 34 26 60 34%
Cost Control ............... 26 6 32 18
Recordkeeping ............. 49 56 105 60
Use of Accounting
Information .............. ..Afi --3.6 -82 _fl_
'lbtals JM 124 21.a xxxx
Marketing Problems:
Advertising & Promotion 35 47 82 47%
Defining Target Market ..... 33 6 39 22
Layout & Appearance ······ 15 16 31 18
Location ................... 15 14 29 17
Pricing .................... 14 27 41 23
Inadequate Sales ........... 18 18 36 21
Seasonal Variation
in Sales ................. ---2. _a -1.Q _fi._
'lbtals l.a2. l.afi 268 xxxx

22 American Journal of Small Business, Vol. VII, No. 4, April-June 1988

Other Mangement Problems:
Collections
(accounts receivable) ...... 13 13 26 15%
Debt Control
(accounts payable) ........ 11 3 14 8
Inventory Control .......... 19 20 39 22
Long-Range Planning ...... 17 34 51 29
Personnel (selection &
supervision) .............. 23 8 31 18
Others ..................... ...22. -32. .M ..al._
Tutals l.0.5. llO. 2.lfi xx.xx
Final Tutal ................... 3.92 aw 7.6.2

*Problem Areas by Percentage of Tutal Responses:

Alaska Wyoming Tutal

Accounting (279 I 762) ................ 39% 33% 37%
Marketing (268 I 762) ................ 34 37 35
Other Management (215 I 762) ........ 27 30 28

Observations are based on a populatioµ of 89 SBI Cases in Alaska from 1974-1981 and 87
SBI Cases in Wyoming from 1974-1979. The author was a professor at the University of
Wyoming in 1979 and currently is employeed at the University of Alaska, Anchorage.

Other management problems found in the two SBI studies include, in

order of importance, long-range planning, inventory control, personnel se-
lection and supervision, accounts receivable collection, debt control, and
others. Long-range planning (29 percent) tops the list, which might be
expected considering poor management ability is the cause of most busi-
ness failures. The owner-manager should set long-range goals with plans
on how to achieve these goals. He should have short-range objectives with
the available means of accomplishing them in mind. Inventory control,
another big problem, may be broken down into accounting controls (per-
petual and physical inventories) and marketing controls (purchasing and
merchandising). Inventory is normally the largest dollar value item mak-
ing up working capital in retail, wholesale, and manufacturing busi-
nesses. Overstocking and understocking inventory may result in a short-
age of quick assets (cash) or lost sales. Inventory control relates to such
other problem areas as sales, pricing, advertising, cash control, and rec-
ordkeeping.
An observation should be made at this point. The statistics on the
analysis of SBI cases are based on either owner-managers' or student
teams' interpretations under the guidance of the SBA counselor and uni-
versity advisor. These observations on classification of problems may be
influenced by the advisor's and student's areas of interest-accounting,
finance, marketing, data processing, or management. The more SBI cases
accounting or marketing teachers coordinate, the greater may be the
number of accounting or marketing problems uncovered. However, a re-
lated conclusion can be drawn too; that is, if the accounting or marketing
students and teachers are asked to advise small businessmen more often
than counselors in other areas, it may be concluded the demand for ac-
counting or marketing services is high.

American Journal of Small Business, Vol. VII, No. 4, April-June 1983 28

 COMPARING ALASKA AND WYOMING MANAGEMENT
PROBLEMS

Accounting was found to be the number one problem in Alaska and

second only to marketing in Wyoming, with recordkeeping the most fre-
quently cited problem in both states. Table 1 and Table 2 compare the SBI
case survey results for Alaska and Wyoming.
The null hypothesis tested was: There is no significant difference be-
tween the problems faced by Wyoming small businessmen and Alaska
small businessmen. The author of this article was an SBI advisor and
professor at the University of Wyoming and currently performs the same
tasks at the University of Alaska. The survey consisted of an in-depth
analysis of all the finished case reports {15-50 pages each) for the two
states.
As Table 2 shows, the critical Chi-Square value is 5.991 for 2 degrees
of freedom (3 cells minus 1) at the .95 confidence interval. The computed
Chi-Square (5.64577) is within the interval. Therefore, the hypotheses is
accepted-Wyoming and Alaska have similar small business problems. It
should be noted that the Chi-Square Test of Goodness of Fit is a strong
nonparametric test for comparing two populations.

TABLE 2. ALASKA SMALL BUSINESS PROBLEMS COMPARED TO WYOMING

SMALL BUSINESS PROBLEMS-CHI-SQUARE TEST FOR GOODNESS OF FIT•
Second Block (fe)
First Block (fo)
Contingency Table
Times Observed Expected Frequencies for Alaska
Problem in Wyoming Percent Problem (fo)
Accounting 124 34% Accounting (.34)(392) = 133 155
Marketing 136 36 Marketing (.36)(392) = 141 132
Management llO ..ao.. Management (.30)(392) = llB lfili
370 100% (.36)(392) = 392 392

Alaska Block Contingent on Wyoming fo - fe (fo - fe) 2 (fo - fe) 2

-fe-

155 133 22 484 3.63910

132 141 - 9 81 .57447
105 118 -13 169 1.43220

.
x2 (fo - fe) 2
fe
5.64577

x2
< 5.991 for 2 degrees of freedom at the
.95 confidence interval.

•Observations based on a population of 89 SBI Cases in Alaska from 1974 to 1981 and 87
SBI Cases in Wyoming from 1974 to 1979.

24 American Journal of Small Business, Vol. VII, No. 4, April-June 1988

 THE ACCOUNTANT'S ROLE IN SMALL BUSINESS SUCCESS

The accountant can help the small businessman design accounting

systems, cash flow forecasts, cost analysis, break-even charts, cash bud-
gets, capital budgets, advertising budgets, expense budgets, financial
statement analysis, accounts receivable aging, and inventory control sys-
tems. Some of the SBI case clients had not filed income tax returns for
several years-the accountant can be of particular help with taxes (3,
p. 23]. Accountants also have the skills that help in pricing products and
long-range planning. In other words, many of the problems of small busi-
ness are either in the area of accounting or accounting-related.
A brief reference should be made to how the accountant can help in
loan packaging. When starting a new business or financing an existing
business, the accountant can help in loan packaging. The SBA will ask
for a projected income statement for the first year of operations, while
projections for three years on earnings, cash flow, and balance sheets on a
new business are required for Farm Home Administration (FmHA) loans.
If an existing business desires a loan, the owner will have to provide an
income statement for the previous year and current year for a SBA loan,
while the FmHA requires an income statement, cash flow statement, and
balance sheet for the past three years. For a loan to an existing business,
the SBA and FmHA both require a current balance sheet. Even if the
commercial banker does not work through the SBA or FmHA loan guar-
antee programs, the small business borrower may be asked to obtain the
above information for a bank loan [6].

THE MARKETER'S ROLE IN SMALL BUSINESS SUCCESS

The marketer can help the small business owner-manager by devel-

oping advertising and sales promotion programs, defining target markets,
surveying consumer demands, locating the store to increase customer
traffic, rearranging the business for better layout and appearance, analyz-
ing the market to determine proper prices for merchandise, and training
the sales force to promote and close sales. The marketer can explain the
importance of proper inventory control and merchandising ability. Mer-
chandising is the ability of the businessman to have the right product in
the right place, at the right price, in the right quantity, and at the right
time in order to make a sale. A market is the place where the buyer and
seller meet to form a contract at a certain price. The market is a central
concept in the American free enterprise system. Sales must be made for a
business to survive.

SUMMARY AND CONCLUSION

Adequate or inadequate management ability is the most common

cause for business success or failure. Another way of putting it: success
and failure are on opposite sides of the same coin-management ability.
The Alaska and Wyoming studies revealed accounting and marketing as
the key problem areas in management ability. The small business owner-

American Journal of Small Business, Vol. VII, No. 4, April-June 1983 25

manager must either acquire knowledge about accounting and marketing,
hire well-trained personnel, hire expertise from accountants or manage-
ment consultants, or contact the local SBA office or university for free
help from SBI student-counselors.

FOOTNOTES
A questionnaire was sent to a statistical sample of 500 SBA borrowers in Colorado: an
1

overall response of 45 percent was achieved. The population consisted of approximately 1,000
SBA borrowers listed in SBA annual reports.

REFERENCES
1. Burr, Pat L. and Richard J. Heckmann. "Why So Many Small Businesses Flop-And
Some Succeed." Across the Board, February, 1979.
2. Burstiner, Irving. The Small Business Handbook. Prentice Hall, 1979.
3. Markland, Robert E. "The Role of the Computer in Small Business Management." Jour-
nal of Small Business Management, January, 1974.
4. U.S. Small Business Administration. SCORE/ACE Counselor's Guidebook. Washington,
D.C.: U.S. Government Printing Office, 1977.
5. U.S. Small Business Administration. Office of Planning, Research and Data Manage-
ment. Small Business in the Economy. Washington, D.C.: U.S. Government Printing Of-
fice, 1978.
6. Wichman, Henry, Jr. "Guidelines for Obtaining an SBA Business Loan." Journal of Small
Business Management, 17(31:36-46, April, 1979. Also, personal interviews were conducted
with SBA and FmHA personnel.

Reorder Now For

Vol. VIII
Begins September, 1983

26 American Journal of Small Business, Vol. Vil, No. 4, April-June 1983