Performance Measurement, Difficulties in Measuring Small Business Performance

Trying to measure performance, in general, is a difficult task for scholars; the difficulties intensify when the subject is the measurement of small business performance. In this article, which is the third in the series, an overview of the major obstacles for measuring small business performance is presented.

Time is a substantial factor that needs to be taken into consideration when trying to measure performance in small business, because measuring the profitability of small businesses in their first years of operation can be misleading. Mcdougall, Robinson and denisi (1992) state, that small businesses are usually not expected to generate any profit in their early years of operation. Biggadike (1979) define a milestone of eight years in operation, in average, before new venture is expecting to generate profits.

Growth rate is not equal in all businesses; moreover it varies substantially between businesses and across industries. Cooper (1979) has related to the potential influence of rapid growth, and noted that operational losses or poor profits in small businesses with growth orientation can’t be used as an indicator for management failure, if the cause for the result is heavy investments in new markets or products. If at different industries we’re expecting different growth rate, then as Miller and Tolouse (1986) states, the industry in which the business is operating in is affecting the level of business performance in general as well as the small business performance.

Accounting measures consider as objective and more accurate then nonobjective measures, but even if such objective measures can be obtain it is very hard to interpret them in small businesses (Covin and Slevin, 1989, 1990). This statement reinforced by Rappaport (1981) and Stewart (1991) findings of weak correlation between accounting measures related to small business performance and the small business value. Dess and Robinson (1984) argue that the reason for the difficulty in interpreting objective data such as accounting measures may be due to different accounting rules for different types of corporation like proprietary limited company and partnership. Covin and Slevin (1990) relate to the small business owners’ salaries as another potential cause for problem, which is unique for small businesses. In many of the small businesses the owner salaries takes substantial share of the business profitability.