Cash management, liquidity, and longevity of family owned restaurants

Cash management, liquidity, and longevity of family-owned restaurants

Walden UniversityCOLLEGE OF MANAGEMENT AND TECHNOLOGY

This is to certify that the doctoral dissertation by

Curtis Webley

has been found to be complete and satisfactory in all respects,

and that any and all revisions required by the review committee have been made

Abstract Cash Management, Liquidity, and Longevity

of Family-Owned Restaurants

by Curtis Webley MBA, Walden University, 2005 MST, Washington School of Law, 1995 CPA, State of Illinois, 1993

Dissertation Submitted in Partial Fulfillment

of the Requirements for the Degree of

Doctor of Philosophy Applied Management and Decision Sciences

Walden University February 2011

Abstract The majority of family-owned restaurants go out of business within the first 4 years of operations This is financially disruptive to families and communities The purpose of this explanatory study was to examine the effect of cash management on the liquidity and longevity of family-owned restaurants This quantitative research study was based on literature from entrepreneurship, the family firm, cash management, and financial

reporting A self-administered questionnaire was used to collect data on cash

management practices and financial performances from 102 family-owned restaurants in

a Midwestern U.S suburb Based on the principles of cash management practices among publicly traded companies which include monitoring the cash cycle of a business,

preparing a cash budget with the basic financial statements, and applying standard debt management and longevity tools, data were gathered to determine if these principles applied to family-owned non-franchised restaurants The data were analyzed with the use

of the t-test to determine if there is a relationship between cash management and liquidity and cash management and longevity of business operations The results of this study support the hypotheses that a relationship exists between the independent variable, cash management, operationalized as good cash management/poor cash management, and each of the dependent variables, liquidity and longevity (p <.001) This study contributes

to positive social change by showing that restauranteurs who incorporate proper cash management practices can significantly improve the liquidity and longevity of their businesses; thereby bringing greater economic stability to families in the communities in which they are located

Cash Management, Liquidity, and Longevity

of Family-Owned Restaurants

by Curtis Webley MBA, Walden University, 2005 MST, Washington School of Law, 1995 CPA, State of Illinois, 1993

Dissertation Submitted in Partial Fulfillment

of the Requirements for the Degree of

Doctor of Philosophy Applied Management and Decision Sciences

Walden University February 2011

UMI Number: 3440242

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Dedication This dissertation is dedicated to my late Grandmother, Etheline March Heywood, who instilled in me one of her philosophies, that education is the way out of poverty Without her academic guidance, moral support, vigilance, sacrifices, and determination throughout my adolescent years, I might not have been able to achieve this milestone To

my mother, Edith King, thank you for giving me the opportunity to immigrate to a wonderful country, a country where educational opportunities are limitless, the great United States of America

Acknowledgments

I wish to thank my dissertation committee chair, Dr Jeffrey Prinster, for his continuous words of wisdom, encouragement, and confidence in me during the entire dissertation process I thank my committee members, Dr Richard Gayer and Dr Robert Levasseur, for their professional criticisms, guidance, patience, focus, and

encouragement A special thanks to Dr Levasseur who helped me tremendously to overcome the many hurdles I faced during the measurement and statistics portions of the dissertation A special thanks to Dr John Nirenberg, my reviewer, for his detailed

analysis, review, and constructive comments, which at times were challenging, but were vital to my academic success Thank you for your individual and collective contributions

to my dissertation, which helped to ensure that I produced a scholarly work Without your cumulative help, I could not have completed my dissertation successfully

Thanks to my dear wife and best friend, Phillipina Webley, who, as a law school student, and without hesitation, tackled the tasks as a part-time father, a full-time wife, and a full-time mother, while I worked feverishly to accomplish this task Thanks to my children Tanya, Eric, Tiffany, and Matthew, who knew how and when to interrupt my studies while echoing accolades of confidence; and to my son, Todd, whose actions toward education gave me that special academic boost

I also am grateful to all those family-owned restauranteurs on Chicago’s

Northshore who completed the questionnaire, and to everyone else who contributed to the successful completion of this dissertation

Table of Contents

List of Tables v

List of Figures vi

Chapter 1: Introduction to the Study 1

Introduction 1

Background of the Study 4

Problem Statement 6

Purpose of the Study 7

Nature of the Study 7

Research Questions and Hypotheses 9

Theoretical Base 10

Definition of Terms 16

Assumptions 18

Limitations 19

Delimitations 19

Significance of the Study 20

Social Change Implication 24

Rationale of the Study 26

Summary and Transition 27

Chapter 2: Literature Review 29

Introduction 29

Entrepreneurship 30

Differences between Family-Owned Firms and Non-family Firms 38

Family-Owned Businesses 41

Human Capital 43

Social Capital 44

Patient Financial Capital 44

Survivability Capital 45

Governance Structure and Agency Costs 45

The Cash Cycle of a Restaurant 47

Preparing and Understanding the Financial Statements 48

Managing Cash Flows 53

Cash Management 55

Managing Debts 60

Preparation of a Cash Budget 67

Summary 70

Chapter 3: Research Method 73

Introduction 73

Research Design and Approach 73

Survey Research Method 74

Experimental Research Method 75

Research Approach 76

Setting and Sample 79

Sampling Procedures 80

iii

Probability Sampling 80

Non-probability Sampling 84

Sampling 85

Sample Size 85

Sample Error 86

Gaining Access to Participants 87

Data Collection and Analysis 88

Data Collection 88

Data Analysis 91

Instrumentation and Materials 93

Instrumentation 93

Measurement 97

Ethical Consideration 110

Summary 112

Chapter 4: Results 114

Introduction 114

Hypotheses 114

Pilot Study Pretest 115

Data Collection for the Study Instrument 116

Response Rate, Demographic Distribution, and Sample Characteristics 117

Descriptive Statistics of the Survey Instrument 117

Descriptive Statistics and Reliability Index (Cronbach’s Alpha) of Measures

in the Main Survey for Cash Management 119

Data Analysis and Results 120

Good versus Poor Cash Management 120

Research Question 1 121

Research Question 2 123

Summary 123

Chapter 5: Discussion, Conclusions, and Recommendations 125

Overview 125

Summary of Research Findings 125

Interpretation of Findings 127

Implications for Social Change 130

Recommendations for Action 131

Recommendations for Further Study 132

Conclusion 132

References 134

Appendix A: Survey Participation Request 157

Appendix B: Survey Participation Request 160

Appendix C: Raw Data for the Survey Instrument 162

Appendix D: Cash Management Survey Questionnaire 166

Curriculum Vitae 177

List of Tables Table 1 Descriptive Statistics and Reliability Index (Cronbach’s Alpha) of Measures in

the Main Survey Instrument 119

Table 2 Statistics of Dependent Variables 122

Table 3 Good Cash Management versus Poor Cash Management 128

Table 4 Categories of Good Cash Management Practices 129

viList of Figures Figure 1 Histogram of Average Cash Management Scores in Pilot Study 118

Chapter 1: Introduction to the Study

Introduction

Businesses are considered the financial spine of a country (Crane & Crane, 2007) They drive its economy, providing goods, services, and employment to the nation

Businesses, small and large, are made up of entrepreneurs which include the self

employed, managers, and stockholders of all ages, races, and genders who have become empowered to take risk and reap a reward rooted in the success of their creation (Small Business Association [SBA], 2007) Small businesses make two vital contributions to the economy (Kuratko, 2005) First, “they are an integral part of the renewal process that pervades and defines market economies Entrepreneurial firms play a crucial role in the innovations that lead to technological change and productivity growth” (p 578); “67% of all new inventions are created by smaller firms” (Reynolds, Hay, & Camp, as cited in Kuratko, 2005, p 577) Second, “entrepreneurial firms are the essential mechanism by which millions enter the economic mainstream Entrepreneurial firms enable millions of people, including women, minorities, and immigrants, to access the pursuit of economic success” (p 578), by providing employment for the unemployed, and inspire others to become entrepreneurs

Small business growth in the United States increased over the last 2 decades, especially in the 1980s (Hormozi, 2004) In 2006, small businesses employed 50% of the private work force, accounted for 47% of sales, and 50% of private sector Gross

Domestic Product ([GDP] SBA, 2007) Tax cuts, economic prosperity, technological advances, and corporate downsizing contributed to this growth (Hormozi, 2004)

Although small businesses have continued to grow, most of them closed their doors within the first 4 years of operation (Knaup, 2005; Knaup & Piazza, 2007; SBA, 2007) There are many factors that contribute to this failure; the most common reason to be a lack of proper cash management (Brown, 2007; Fuller-Love, 2006; Miller & Galeaz, 2007; Peavler, 2009) The SBA postulated that financial foresight, planning for cash flow and capital needs, is a requirement of entrepreneurial management It has become one of the greatest threats to the survival of new businesses, because the appearance of short-term success reduces financial insight and vigilance Brown (2007) asserted:

Every business owner should have an understanding of the process of raising capital, managing cash flow, and reading basic financial statements such as a balance sheet and an income statement If one doesn’t understand these concepts,

it is impossible to measure the success of a new business or even to recognize when it is beginning to fail (p 16)

When a small company is unable to meet its obligations, the causes for failure are always the same: lack of cash, inability to raise capital, and loss of control due to escalating expenses (Reiss, 2008; SBA, 2007) These three financial burdens often hit together at the same time Yet, any one by itself endangers the health, if not the life, of the new venture (Illinois Department of Commerce and Economic Opportunity [IDCEO], 2006; SBA, 2007) These businesses need cash flow analysis, cash flow forecasts, and cash management skills in order to stay financially focused Failure to properly manage cash could add to their untimely demise (Brown, 2007) The implication is that small business owners must be aware that cash management plays a vital role in the survival and

longevity of a business This requires ongoing monitoring of financial resources to ensure that enough cash is available, controls are in place to alert managers of cash needs, and that the vehicle to provide additional cash inflows is in place to help reduce financial burden when the need arises

As small businesses grow, an increase in sales of 40 to 50% requires a new capital structure and ongoing implementation for the company to become successful Private sources of financing, such as from family members, become inadequate and should be replaced with public sources such as equity financing (Salvato, 2004; SBA, 2008)

Zhenyu, Chua, and Chrisman (2007) argued that public sources of financing involve significant costs and economies of scale favor private sources of financing While this may be correct, Salvato argued that financial resources are likely to be scarce in family businesses, and external sources of funds should be secured This is because new

businesses or competitors may enter the market, and plans must be in place to facilitate growth Internal factors, such as increases in sales volume, employees, and

organizational complexity, also may cause the small businesses to grow, and may require owners to acquire new skills (SBA, 2008) This includes a good management system to build team efforts rather than having one or two persons doing everything; otherwise, a management crisis may occur (Lynott, 2007) There could be limited success if the

operations become so routine that people of limited competence can do a good job with limited supervision (Reider, 2008) This is because good management requires employees

to acquire adequate skills to help the business grow Without this expertise, growth will

be limited, which can have an adverse effect on the business

Small business failure can and should be prevented because if owners look more closely at the financial data, they should see signs of cash flow problems that require preventative actions to avoid a financial collapse (Coyne & Singh, 2008) For this reason, cash flows, capital, and financial controls should be in place and should take precedence over short-term profit Owners of new ventures typically make profit a priority, rather than focusing on cash flow; even though the company needs added resources (Gomez & Korine, 2008) Such focus requires management to prepare a financial forecast to plan ahead for anticipated cash needs Raising cash in a hurry is costly and uses managerial resources in going from one financial institution to another, which could be productively utilized in other areas of the operations (Duffy et al., 2005; Joabar, 2007) Aghion, Fally, and Scarpetta (2007) argued that new ventures are under cash pressure when the

opportunities are greatest Excellent products, market share, and growth prospect might

be present, but without a good financial structure, control could be lost, and the business might have difficulty regaining its market position (Reider, 2008; Sihler, Crawford, & Davis, 2004) If proper financial planning is not in place, a business might not be able to acquire the inventory, innovation, and intellectual skills it needs to grow This reduces its ability to compete, and its wherewithal to obtain cash, which is conducive to proper cash management

Background of the Study

Prior to the Great Depression of the 1920s and 1930s, companies placed very little emphasis on cash management The trend was centered on profit, and the main concern

of financial management was to prevent companies from going into bankruptcy (Demers

& Merskin, 2000; Drucker, 1985) During the depression, revenues slowed dramatically, and many businesses were forced to close their doors, not because of a lack of profit but because of a lack of cash (Graham & Narasimhan, 2001; Smitha, 2005) This suggested that cash management was not emphasized, and profit was considered the epitome of the business operations

The structure of a company and the means of capital acquisition played a part in assessing this success or failure (Zhenyu et al., 2007) Businesses that issued stocks as investment opportunities were able to weather the storm while those that borrowed funds from financial institutions bore the burden of paying the obligation as the loan became due (Drucker, 1985; Graham & Narasimhan, 2001) Unable to meet this ongoing

requirement, the once profitable companies became victims of the Depression Those that survived were able to do so because of the agility factor associated with paying dividends

to its stockholders and investors The cash was used in operations and payments to stockholders as a return on capital investments became secondary (Drucker, 1985;

Gomez & Korine, 2008) Financial institutions also were forced to reduce line of credits and negated to renew loans in order to stay afloat (Ferguson, 2008; Graham &

Narasimhan, 2001; Smitha, 2005) since the businesses that were financed through debts secured by the financial institutions were not in any position to meet their monthly

obligations

Many company executives thought that sales would continue to drive businesses, and there would never be a need to worry about cash flows as long as customers were spending their money to acquire goods and services (Graham & Narasimhan, 2001) It

was a lesson that was yet to be learned Liquidity problems occurred twice-once in the 1920s and again in the 1930s (Drucker, 1985; Ferguson, 2008; Smitha, 2005) which reaffirmed the lack of financial planning, preparedness for financial liquidity, and failure

to maintain a balance between consuming and generating cash Many companies did not see a need to invest in human capital to right the wrongs of the past

The Great Depression gave birth to new financial policies and human intellect began to play a key role in balancing the effects of prosperity with the periods of

depression and recession (Ferguson, 2008; Graham & Narasimhan, 2001; Smitha, 2005) This era forced companies to realize the importance of financial liquidity and the role of cash flow management in the operation of a business Unsound and incubatory financial structures began to unfold with the dramatization of both the depression and the recession (Drucker, 1985; Graham & Narasimhan, 2001) Consequently, cash management

eventually became the financial tool for vigilance, constant perusal, and implementation

to mitigate this pariah This suggested that a learning process began to emerge and the commandments for cash management began to take shape

Problem Statement

There is a problem with poor cash management of family-owned restaurants as evidenced by their high failure rate in the United States Sixty one percent of all new restaurants closed their doors within the first 4 years of operation (Knaup, 2005; Knaup

& Piazza, 2005; SBA, 2008) There are several factors contributing to this high failure rate Among them are ineffective marketing, managerial limitations, insufficient start-up capital, and poor cash management (Jordan, 2007; Lynott, 2006; Peavler, 2009) IDCEO

(2003), Opiela (2006), Parsa, Self, Njite, and King, (2005), and Peavler argued that proper cash management can make or break a small business Not only will poor cash management cause liquidity problems, it could lead companies to become victims

(Churchill & Mullins, 2001), and adversely affect the economy and its citizens This suggested that governmental revenue and social programs would be reduced or

eliminated; unemployment would increase, and the lives of citizens in all communities would be altered because of increased poverty This is a major ongoing problem worthy

of addressing, because America depends on its small businesses to drive the economy

Purpose of the Study

The purpose of this explanatory research study was to investigate the effects of cash management on liquidity, and to determine if cash management is a contributing factor that can help family-owned restauranteurs on Chicago’s Northshore increase their longevity Surveys collected from family-owned restauranteurs who have been in

business for at least 1 year were used to determine how study participants apply cash management practices in their restaurants in an effort to increase business liquidity, and longevity This study was an examination of cash management (independent variable) and its effects on the liquidity and longevity of family-owned restaurants (dependent variables) as discussed in chapter 3

Nature of the Study

The nature of this study was to determine the extent of cash management in family-owned restaurants and what relationship, if any, cash management has on liquidity and longevity The five areas of sound cash management practices of publicly traded

corporations, as well as questions on liquidity, and longevity, were used to capture the data The data, which were collected from survey questionnaires, were used with the explanatory approach to the survey research method of inquiry The survey questionnaire emphasized each of the five categories of cash management, which according to Hancock Bank (2007), IDCEO (2004), Lynott (2006), and Mullins and Churchill (2004) are the cash cycle, cash budget, income statement, balance sheet, and the statement of cash flows Failure to utilize any of the five categories of cash management showed the degree

of cash management, and cash management strategies that family-owned restauranteurs use as provided for in the research literature A rating scale was established and responses were equally weighted as explained in chapter 3 Data from the questionnaire determined whether or not there is a relationship between cash management, liquidity, and longevity, and how this relationship might impair or strengthen the financial success of family-owned restaurants

The survey research method of inquiry was used to test the relationship between the variables It was considered the best approach to this study because it is empirically verifiable, involves the quantification of data, and has the following attributes:

• Survey research is guided by logical constraints and fosters understanding

• Survey research is deterministic, based on logic, and clear elaboration of cause and effect

• Survey research is general because it is conducted for the purpose of

understanding the larger population from which the sample is drawn

• Survey research is parsimonious; it seeks to obtain the greatest amount of understanding by examining the fewest number of variables

• Survey research is specific because the measurement of each variable is constructed from specific responses to specific questionnaire items that are coded and scored in a specific manner (Babbie, 1998, pp 41-42)

This method of research is used to measure the degree of association between two

or more variables by asking participants’ questions about an object, and examining the data for evidence of a relationship It is an efficient data gathering technique that answers many questions, and provides detail information about the heterogeneous population by studying a sample of that population (Babbie, 1998; Singleton & Straits, 2005) While the survey research method is used to test assumed causal relationship, a major weakness is that “beyond association between variables, the criteria for inferring cause and effect relationships cannot be clearly established as easily in surveys as in experiments”

(Singleton & Straits, 2005, p 277) Thus, a relationship can exist but the objective is to show that the variables are related, by examining the body of the data presented (Bryman

& Bell, 2003) Although qualitative research methods were considered, they were not appropriate for this study because of their inductive nature, whose goal is to generate a theory from inferences drawn from the observation (Creswell, 2003) This is discussed in

more detail in chapter 3

Research Questions and Hypotheses

1 Is there a relationship between cash management and the liquidity of family-

owned restaurants on Chicago’s Northshore?

Ho: There is no relationship between cash management and the liquidity of

family-owned restaurants on Chicago’s Northshore

Ha: There is a relationship between cash management and the liquidity of owned restaurants on Chicago’s Northshore

family-2 Is there a relationship between cash management and the longevity of family- owned restaurants on Chicago’s Northshore?

Ho: There is no relationship between cash management and the longevity of family-owned restaurants on Chicago’s Northshore

Ha: There is a relationship between cash management and the longevity of owned restaurants on Chicago’s Northshore

family-These hypotheses were developed so that they would be testable using the t-test statistical technique The t-test was selected for this study because it is a statistical

research method that is used to determine the existence of differences among population means (Aczel & Sounderpandian, 2006) Trochim (2006) corroborated this and added that the t-test also is used to test the equality of means in the null hypothesis, to see if two groups are statistically different from each other This is consistent with the research design, and the analytical methods that are discussed in chapter 3

Theoretical Base

This study was based on entrepreneurship, family firm, cash management,

financial statements analysis, management accounting and financial controls, and

financial ratios theories, as dictated by accounting and finance practitioners,

academicians, researchers, and the Financial Accounting Standard Board (FASB)

“Throughout the theoretical history of entrepreneurship, scholars from multiple

disciplines in the social sciences have grappled with a diverse set of interpretations and definitions to conceptualize this abstract idea” (Burnett, 2000, p 1) Some writers have identified entrepreneurship with the function of uncertainty-bearing, others with the coordination of productive resources, others with the introduction of innovation, and still others with the provision of capital (Burnett, 2000; Shane, 2006; Shane & Venkataraman, 2000) Although some agreement emerged about the characteristics of entrepreneurship, various definitions still exist For example, economists such as Marshall, Mill, Ricardo, and Smith, popularized and added notoriety for their contributions (Burnett, 2000; Ebner, 2006; Montanye, 2006; Shane & Venkataraman, 2000) This opened the doors to many future debates, as researchers and theorists attempted to arrive at a general consensus as

to what constitutes entrepreneurship (Burnett, 2000; Kuratko, 2005; McMullen, Bagby, & Palich, 2008) Therefore, researchers continually have to define the term based on the context in which it is used in order to reduce anomalies, asymmetry, and increase

comprehension in scholarly written material

Citing Schumpeter (1951), Burnett (2000) asserted that the French economist, Cantillon coined the word entrepreneur, and defined it as “the agent who buys means of production at certain prices in order to combine them into a new product” (p 1) The author and Parker (2004) contended that economist Say expanded on this definition to include a leader who mobilizes people to obtain productive organizational synergy Consistent with the views of Knight (1921), Parker suggested that the entrepreneur is

made and is considered an opportunist who can choose freely between entrepreneurship and paid employment depending on which generates greater utility Schumpeter (1939)

on the other hand, concurred with Say, but added that entrepreneurs acquire new

opportunities to innovate and create wealth The author implied that the direct result of entrepreneurial leadership is profit McClelland (as cited in Nafziger, 1986) contended that wealth is not a source of financial enrichment, but a measure of achievement This means that implementation to manage and minimize risk and economic uncertainty is ongoing, and could lead to satisfaction that is not associated with financial gains With the different definitions of entrepreneurship, two train of thoughts emerged from

entrepreneurship theories: The first train of thought viewed entrepreneurs as an

arbitrageur who is driven by profit, and the second focused on the importance of

uncertainty (Gartner, 2001; Montanye, 2006; Parker, 2004)

Modern entrepreneurship theory begins with the views of Knight (1921) and added that the market is competitive, technology is given, and entrepreneurs are price takers, whose focus is the exchange of transactions between a willing seller and a willing buyer (Parker, 2004) The merging of these views indicated that while some

entrepreneurs might be driven by profit, others prefer to focus on the reduction of

uncertainly that is associated with the production of goods (Kellermanns & Eddleston, 2006) Still, there are those risk-averse entrepreneurs whose approach might be to obtain

a balance between profit, and the production of goods

Family firm theories have been extant for the past 30 years, but they have just begun to emerge as a separate field of study This is because researchers and practitioners

did not include family firms in their studies, and business theories failed to mention them

as a separate form of business (Chrisman, Steier, & Chua, 2006; Heck, Hoy, Poutziouris,

& Steier, 2008) Family firms were viewed as premodern businesses, concerned with wealth preservation, not equip to manage and develop corporations, exhibiting lack of self-control, and riddled with personal rivalries and nepotism (Carney, 2005) New

studies have emerged that lauded family firms for their significant contribution to the United States’ economy, and to the GNP in emerging markets (Steier, Chrisman, & Chua, 2004; Sundaramurthy & Kreiner, 2008) Forty percent of the Fortune 500 companies are either family-owned or controlled, and more than half of the United States private

workforce originated as a family business (Oswald, Muse, & Rutherford, 2009) In the United States, family businesses account for 49% of GDP and 78% of new job creation Worldwide, family businesses are ubiquitous, and are the leading players in those

economies (Craig, Dibrell, & Davis, 2008) Through current research, scholars have now recognized that family firms have been dominant in many economies for centuries

(Carney, 2005; Chrisman et al., 2005) Researchers and practitioners have begun to notice

“that the family firm is a combination of the family system with entrepreneurial

behaviors of its members” (Heck et al., 2008, p 318); many businesses still have

members of the owning family involve in the business either as owner, manager, or employees (Heck et al., 2008) This creates familiness by the commingling of family resources, and the interactions and capabilities of these family members (Pearson, Carr,

& Shaw, 2008)

Two theories emanated from scholarly studies of family firms, which are seminal

to the development of family businesses (Chang et al., 2008; Chrisman et al., 2005; Sirmon & Hitt, 2003) The agency theory argued that managers are agents of

shareholders, who engage in decision-making that is inconsistent with the maximization

of shareholders’ wealth (Steier et al., 2004) In other words, managers may pursue their own goals for personal reasons (Oswald et al., 2009) This explains the consequences and the cost of conflict of interest, and asymmetric information that arise from the separation

of ownership and management (Chang et al., 2008) The resource base value theory argued that the family firm has unique resources that allow them to develop family-driven competitive advantages (Chrisman et al., 2005) These unique characteristics include but are not limited to business survivability and governance capital (Chang et al., 2008; Steier & Ward, 2006) Little is known about why some family firms fail when others do not, and strategic management attempts to provide some answers (Kellermans

& Eddleston, 2006; Sirmon & Hitt, 2003; Vought et al., 2008) Scholars argued that in order for the family firms to be successful, its resources must be effectively managed (Sirmon & Hitt, 2003) This suggested that a lack of proper management might be

germane to the survival and longevity of these businesses The views of Knight (1921) from the entrepreneurial theories, coupled with the agency theory view of family firms are used throughout the remainder of this research study

The cash management and liquidity practices of this study resulted from the residual effects of the depression and the recession of the 1920s and 1930s which, due to business failures, spawned the development of new financial techniques that would

solidify and increase the application of cash flow management (Ferderer, 2003; Gitman, Moses, & White, 1979; Graham & Narasimhan, 2001; Laperche & Uzunidis, 2008) While the learning process was slow, key developments took place in the 1950s Steps were taken to provide adequate cash flow based on conservatism, with theoretical

contributions in the areas of cash balances, cash collections, disbursements, and

budgeting (Boyce & Ville, 2002; Saperstein, 2006) Cash was redefined since it is the most liquid of all assets, and was classified as precautionary and or speculative consistent with the theorists of early economic champions (Saperstein, 2006) to reduce future

financial obstacles, by increasing internal cash management controls

Citing Keynes, Gitman et al (1979) suggested that precautionary balance is defined as a financial cushion for future uncertainty, and speculative as the hoarding of cash to purchase financial instruments with the intention of reaping a profit on its sale at a later date to combat contingencies Companies began to pay close attention to cash

preservation, cash flow, and budgeting According to Ferderer (2003), and Graham and Narasimhan (2001), new industries and mergers began to take shape, and financial

structures, liquidity consideration, and cash flows became the fixtures of rapid industrial expansions This suggested that the financial structures differentiated between debt and equity financing in an attempt to bring liquidity problems to the forefront

Although the financial framework was put into place, and a number of academic theories on cash management were developed, enough was not done in actual practice to alleviate corporate financial burdens, especially those of smaller firms (Gitman et al., 1979) Enthusiasm for cash management was motivated again, because of interest rate

volatility in the 1970s, which caused companies to extrapolate and bleed their current assets and liabilities to get a few days worth of liquidity during high and volatile interest rates swings (Ferderer, 2003; Saperstein, 2006) To minimize this transparency, financial institutions began to offer external cash management as an alternative, although internal policies to control disbursements, inventory, and receivables were in place (Gitman et al., 1979) While this problem existed for decades, companies still need an extra incentive to properly manage their cash (Ferguson, 2008) Bank floats provided immediate liquidity advantage for companies in need of temporary cash relief, because funds that were

deposited and not yet cleared could be used as cash The financial controls resonated with the Federal Reserve System and its operatives, who had immediate access to the payment system, the financial institutions (Ferderer, 2003; Meltzer, 2001; Sauer, 1984) This implied that while the financial controls were vested in the managerial hierarchy of companies, an external need existed to complement those internal policies to ensure that

businesses utilized short-term investment opportunities as a vehicle to increase liquidity

Definition of Terms

Agency costs: Refers to (a) the risk that agents will use company resources for

their own benefits, and (b) the costs of controls use to mitigate those risks (Karra, Tracey,

& Phillips, 2006; Chrisman et al., 2004, 2006)

Cash budget: A prediction of future cash inflow and outflow of a business (Lowe,

2008)

Chicago’s Northshore: The lakefront suburbs north of Chicago, which was

serviced by the now defunct Chicago North Shore and Milwaukee Railroad The railroad

ran along Lake Michigan’s western shores between Chicago and Milwaukee, and

serviced 13 suburbs (Ebner, 1988)

Family-owned restaurants: All businesses whose main product is the sale of

meals, are not franchised or considered chain restaurants, and are owned by a single individual; owned or managed by members of or descendants of biological families Such restaurants must be in operations for at least 1 year, located on Chicago’s Northshore in Illinois, and according to SBA (2008), must generate annual sales of less than

$7,000,000, and have fewer than 500 employees

Financial Accounting Standards Board, (FASB: The accounting body designated

by the Securities and Exchange Commission Act of 1934, to develop and enhance

Generally Accepted Accounting Principles (GAAP) for financial accounting and

reporting in the United States

Generally Accepted Accounting Principles, (GAAP: The accounting rules,

principles, and procedures that companies follow in the United States to report their financial data (Fan, 2006)

Liquidity: The ability of a company to pay its bills as they become due (Allen &

Bolton, 2004; Guglielmo, 2007)

Poor cash management: The inability of owners and managers to plan and control

cash flows (The Illinois Department of Commerce and Economic Opportunity) [IDCEO], 2005; Robinson, 2007)

Private payroll: The payroll for all services provided by employees who are not

considered employees of the government or companies that issued securities and are listed on a stock exchange (IDCEO, 2005)

Private workforce: The workforce for all services provided by employees who are

not considered employees of the government or companies that issued securities and are listed on a stock exchange (IDCEO, 2005)

Small Business Association, (SBA): A federal agency that is set up to maintain and

strengthen the economy by helping, counseling, assisting, and protecting the interest of small businesses

Statement of Financial Accounting Standards, (SFAS): Pronouncements issued by

the FASB and provide explanations, rules and guidelines to prepare, report, and present financial statements in conformity with GAAP

Assumptions

• The restauranteurs responding to the survey questionnaire gave complete and genuine information

• Accounts receivable is not significant to restauranteurs

• Inventory is used within a relatively short period of time because of the nature

of the business

• All credit card sales are considered cash sales

• Restauranteurs are driven by profit motives

• Proper cash management enhances liquidity and longevity of family-owned restaurants

• Family-owned restauranteurs do not use the cash management strategies of

• The survey relied on reports of behavior and not on observation

• The survey questionnaire required pilot testing

• This study might be limited by the subjectivity of the researcher who

functions as an instrument of inquiry

• Only the variables of cash management, liquidity, and longevity were

considered based on data that were collected

• All variables not specified in this dissertation were considered beyond the scope of this study

Delimitations

I examined the relationship between cash management and liquidity of owned restaurants on Chicago’s Northshore, Illinois, and determined whether proper cash management can help enhance the longevity of family-owned restaurants Using

family-systematic sampling, an adequate sample for the purposes of the study was selected from the target population of family-owned restaurants on Chicago’s Northshore A self-

administered questionnaire was sent to the participants to collect the data for this study

Significance of the Study

The significance of this study was twofold I explored and assessed the

relationship between cash flow management, liquidity, and business longevity, on

Chicago’s Northshore in Illinois, to get a better understanding of how cash management contributes to the cash flows of family-owned restaurants While large companies are able to acquire the required financial expertise, and pay more attention to financial

strategies than small businesses, efficient companies succeed regardless of size Love, 2006; Parker, 2004) The difficulty with small businesses is that managers have a

(Fuller-do it yourself mentality, and lack the knowledge to effectively manage cash (Fuller-Love, 2006; McLoughlin, 2005) Simmonds (2007) corroborated this and added that family businesses success depends on their ability to institute financial management controls Consequently, cash flows become critical to their survival (Jordan, 2007; Opiela, 2006), and many small companies fail because of poor cash management (Fuller-Love, 2006; Osgood, 2009; SBA, 2004)

The statement of cash flows is most important to small business owners (Hancock Bank, 2006; Jordan, 2007) This is because cash flows measure the financial health of a company (Leff, 2003) Holland (1999) demonstrated the importance of cash flows by equating it to the circulation of blood in the human body The author showed that cash is the fluid that keeps a business functioning, and argued that irregular cash flows can have dire consequences Fuller-Love (2006), Hancock Bank (2006), McLoughlin (2005), and SBA (2004) corroborated this and added that a lack of cash weakens a business, can lead

to liquidity problems, and ultimately to business failure This showed the importance and

critical nature of proper cash management if small businesses are to continue as a going concern

This research may provide owners and managers with insights into the importance

of cash management on the liquidity and longevity of family-owned restaurants, which might increase wealth creation Also, it may provide insights that government has a vested interest in the survival and growth of small businesses, based on their

contributions to the economy and governmental programs, which trickles back to the communities Citizens benefit directly from these small businesses in the form of job creation, which provide economic sustenance to them and their families (IDCEO, 2005)

It is hoped that proper cash management skills might improve the survival rate of owned businesses, and might help them to improve cash flows, liquidity, and longevity Prospective and other entrepreneurs might even benefit by engaging in more effective cash management strategies, which could help increase financial vigilance It also could help employees to carry out their assigned tasks more effectively by instituting cash flow management practices as a routine function

family-Illinois Department of Revenue (2007) reported that 76% of the state’s revenue came from taxation Sales tax from small businesses accounted for 23.6%, Illinois’ second largest source of revenue In addition, the federal government contributed 15.5%

of its revenue that was derived from small businesses The Internal Revenue Service (2007) reported that of the 84% income it received from taxation, in 2006, 92% was spent

on support programs for the elderly, retired, and disabled individuals; national defense, veteran, and foreign affairs; physical, human, and community services including

agriculture, natural resources, environment, transportation, education, job training, and community development; and social programs, including unemployment and temporary assistance for the needy Therefore, if these businesses fail both the economy and its citizens will have to find alternative sources of revenue to survive

A literature review showed that there is limited research on the effects of cash management on both non-family firms, and family-owned restaurants Prior studies focused mainly on the generic term entrepreneurship and small and minority-owned businesses (Hormozi, 2004; McMullen, Plummer, & Acs, 2007) No research was found

on the effects of poor cash management on the liquidity and longevity of family-owned restaurants Research in this area might provide valuable information about proper cash management, and how it can help family-owned restaurants to remain in business as going concerns

Although there is more literature on corporate cash management policies of publicly owned companies, those policies differ from those of small firms in at least five areas

1 Large companies are owned by public shareholders, who dictate the

companies’ cash management policies in an effort to create wealth (Caselli, Di Guili, & Gatti, 2006; Parker, 2004)

2 Large companies employ accounting personnel to manage company finances, and the board of directors reviews and discusses cash management policies before they become effective (Elan, Schnoor, & Bison, 2008; Ireland et al., 2001)

3 Large companies have a capital structure that makes it easier to dilute

ownership of the company by issuing equity securities Equity and debt securities also are used to ease cash flows problems (Gompers, 2002; Parker, 2004; Warren, Reeve, & Fees, 2005)

4 GAAP dictate that large companies use the accrual basis of accounting, which requires the preparation of the four basic financial statements (Harrison & Horngren, 2008; Kimmel, Weygandt, & Kieso, 2007; Warren et al., 2005)

5 Large companies prepare budgets as needed (Carlson & Palaveev, 2004; Hauser, 2004)

In a family-owned business, the ownership is concentrated within the family unit (Sirmon & Hitt, 2003; Steier et al., 2004), and there is no separation of duties (Chrisman, Chua, & Zahra, 2003; Kellermans & Eddleston, 2006) Chrisman, Chua, and Litz (2004) argued that company resources are diverted, because managers' personal goals might be inconsistent with the objective of the business Carney (2005) and Chrisman, Chua, and Sharma (2005) noted that family firms’ governance and strategic management encourage certain types of behavior including the norms of accountability, which are inconsistent with wealth creation This implies that the cash management practices of family firms are different, and deductively are not in the best interest of the business Harrison and

Horngren (2008), Kimmel et al (2007), and Warren et al (2005) stated that small

businesses use the cash basis of accounting, and do not utilize investment opportunities properly Revenue is recognized when cash is collected, and expenses when paid SBA (2007) confirmed this, and posited that many small business owners do not understand

financial statements and depend on third parties to interpret them Zafft (2002) concluded that if family firms need to represent wealth and preserve the legacy of family-owned businesses, corporate governance should become a family affair Based on these

differences, the cash flow practices of family-owned businesses are different from those

of large companies

Social Change Implication

In regard to the social change implication of this study, proper cash management

of family-owned restaurants on Chicago’s Northshore may contribute to social change by:

• Avoiding unemployment and economic hardship for both employees and owners of the company;

• Helping family-owned restaurant owners do their jobs more effectively and efficiently by assessing the relationship between cash management practices, liquidity, and longevity; and

• Preventing federal, state, and local governments from losing valuable tax dollars that would slow their economies and increase unemployment if these businesses do not survive

Kuratko, Ireland, and Hornsby (2001) asserted that exploitation of competitive advantages is an important element of entrepreneurial success These advantages,

according to Carney (2005) and Chrisman et al (2005), include corporate governance and strategic management, which embodies the operational structure and finances of the firm Such competitive advantages, if properly used, can help family-owned businesses

increase their survival, longevity, and profitability by contributing to wealth creation (Kellermanns & Eddleston, 2006) Not all small business owners know and understand how to use financial information, and how cash flows affect their businesses (IDCEO, 2007; Simmonds, 2007) This lack of knowledge reduces their chances of survival It also could reduce cash flows and liquidity Although 74% of new jobs are generated in

companies with fewer than 500 employees, and 22% in firms with fewer than 20

employees (SBA, 2008; Simmonds, 2007), an increase in performance and financial management might possibly increase entrepreneurial wealth creation, employment rate, business survival, and longevity

I showed that proper cash management strategies could enable family-owned businesses to retain their employees and remain in business The IDCEO (2004) asserted that many business owners depend on advisors to interpret and explain the results of the financial statement Although their input is valuable, business owners need to educate themselves so that they can read and understand the financial statements (Brown, 2007; Holland, 2006) This knowledge will help them to understand the vital role money plays

in the everyday business decision; determine if the business is making a profit or losing money; calculate the current and future financial needs; and to make sure the business has positive cash flows for short-term needs (SBA, 2007) These problems need to be

addressed because the restaurant industry contributes significantly to a country’s

economy, and those of the communities they serve They continue to be one of the

cornerstones of society

Rationale of the Study

Establishing a set of corporate financial management practices as a panacea for non-family and family-owned businesses have brought some concerns regarding the differences that exist between them Entrepreneurial theories address business

management in general, although some focus is placed on small businesses The owned businesses exhibit distinctive characteristics that affect the economic decisions and performances of the firm (Chrisman et al., 2006; Pearson et al., 2008) Careful harnessing of resources because of family unification of ownership, control, and

family-discretion in the use of those resources, form an umbrella of uniqueness (Carney, 2005; Kellermanns & Eddleston, 2006) These qualities expose the limitation of current

entrepreneurial theories, which had until recently ignored family-owned businesses as a distinct area of study

The establishment of family-owned business theories is a shift from the general belief that all businesses are similar in terms of governance and structure (Chrisman et al., 2006) According to Heck et al (2008) and Vought et al (2008), the United States Association of Small Business and Entrepreneurship (1994) argued that differences between non-family and family-owned businesses must be explored both by scholars, researchers, and practitioners Such an exploration will help to highlight differences in managerial practices that are important to family-owned firm’s survival and growth (Steier et al., 2004) With the emergence of financial management strategies, the family-owned firm’s literature uses descriptive organizational behavior as a substitute for

strategic models in an attempt to ignore or discount family factors from business, and