Why do small business people make such poor financial managers?

The research from the field of behavioral economics goes a long way to explain it.

We frame losses and gains differently. From numerous studies done over the last 30 years we now know people are not the 'rational economic agents' postulated by orthodox economic theory but instead use a variety of psychological techniques when making choices.

The most striking example is we hold losses longer than is optimal and we cut winners short.

So when I develop a financial management plan for a small business there is a strong need to factor in the reality that small business people will hold to a system of financial management that is obviously not producing the necessary outcomes rather than change.

The fear of loss is greater than the expected return from improvement.

In my experience there is no more frustrating experience than trying to convince a client he needs to change his management of the business financial systems. Even though the business is in the position of liabilities exceeding assets, technically insolvent and therefore in breach of the directors responsibilities under the Corporations Act, the owner will still cling to 'we are comfortable with things the way they are'.

And this is even after the client has engaged me to help improve the financial management!