The 118 firms in our sample were almost evenly divided into four categories of sales change over the seven-year period: (1) lost sales volume, (2) increased less than $120K in real terms, (3) increased between $120K and $500K in real dollars, and (4) increased more than $500K in 1983 dollars. Only one firm in five consistently increased sales in every year.

More than half of the 85 firms whose sales increased over the period made 50 to 100 percent of their gain in their single best year.

Similar to the pattern in sales, the firms in our sample were approximately evenly split among four classes of change in net worth over the seven-year period: (1) lost net worth between 1985 and 1991, (2) increased less than $27K in real terms, (3) increased between $27K and $97K, and (4) increased more than $97K. Only one firm in six posted consistent increases in net worth every year.

More than 60 percent of the 86 firms that registered an increase in net worth over the period gained half to all of their increase in a single year.

Correlations between annual sales and profits averaged 0.254 for the years 1985 through 1991. The correlations were significant beyond the 0.05 level for the six years from 1986 on. Despite the significance of the relationship, annual sales volume explained less than 6.5 percent of the variance in annual profits for these firms.

Correlations between annual profit and net worth in a particular year were trivial and insignificant for the first three years under study, but averaged more than 0.6 from 1988 through 1991. These latter relationships were significant beyond the 0.001 level.

In general, growth in output volume does pay.
For the firms we studied, the correlation between changes in
sales volume and changes in net worth was 0.45 (r^{2} =
.21, p < .001). Of the 73 firms whose sales volume increased,
55 posted increases in net worth (see
Exhibit 1).

The data in Exhibit 2 indicate that three out of four firms experiencing volume increases also increase net worth. Turning to examine firms that have increases net worth, we find that 75 percent of those experienced volume increases.

One explanation consistent with these observations may be that entrepreneurs have some sense of the relationship between cost and revenue curves shown in Exhibit 1. Sales volume may increase when those increases will pay off, and shrink when such action appears more suitable than going for the next "stairstep" of growth (e.g., opening a new facility). In fact, only 11 percent of the firms in our sample had lower net worth in 1991 than in 1985. (All figures are reported in 1983 dollars, to remove effects of inflation.)

Results revealed mixed support for our
hypotheses. As predicted in H1, increases in sales volume
accompanied increases in net worth of businesses. For the sample
as a whole, the correlation between sales increases and rises in
net worth was 0.45 (r^{2} = 0.21, p < .001). Beta
values for the whole sample was .05, i.e., a dollar of sales
increase yielded five cents increase in net worth.

Correlations between increases in volume of
output and increases in net worth over the seven-year period were
highest for the one-third of our sample that had the lowest sales
in 1985 (<$185k): r = 0.86 (r^{2 }= .74, p < .01).
The top third of our sample in terms of 1985 (>$600k) sales
showed a positive, but lower correlation: r = 0.47 (r^{2 }=
0.22, p < .01). The middle third of our businesses actually
posted a negative relationship between sales increases and net
worth: r = -0.50 (r^{2 }= 0.25, p < .01).

Values of beta in the correlation/regression equations followed the same order: beta for the smallest business was 0.21; the largest, 0.05; and mid-size, -0.17. In other words, the smallest business gained 21 cents in net worth for each dollar of sales increase; the largest, 5 cents in net worth per dollar of sales; and mid-size businesses actually lost 17 cents in net worth for every dollar of sales increase. These results do not follow the ranking hypothesized in H2. This observation suggests the existence of numerous "local optima."

These observations suggest that growth in volume does indeed depend on where--in terms of the framework in Exhibit 1--the firm begins to grow. Growth in volume pays off dramatically for firms whose volumes are closest to the left-hand side of the horizontal axis in Exhibit 1; next, for businesses towards the right-hand side; and negatively, for businesses in the middle. We recognize that the equal thirds into which we split our sample may not match with specific positions on the horizontal axis in Exhibit 1. Nonetheless, observed results are consistent with differences in payoff from growth in volume within different volume ranges.

We found no differences among firms in different industry sectors, and could therefore not support H3. This lack of differentiation among fledgling firms with respect to industry has appeared in other of our studies, which have argued that newer businesses form an undifferentiated population, and that only as businesses become more mature do they begin to exhibit characteristics common to particular industry sectors.

Although 53 businesses did improve their operating efficiency as indicated by profit-to-asset ratios, 19 made no improvement and 46 actually experienced declines in 1991 compared to 1985. For the sample as a whole, median return on assets was close to 12 percent in both 1985 and 1991. Size of business appeared to make no difference in operating efficiency. Fewer than half of the businesses we studied increased their returns on assets. We could not, therefore, accept H4 as applying to this sample.

Descriptive measures for our sample as a whole show are tabulated in Exhibit 2. Sales, net worth, profits, assets and debt all increased from 1985 to 1991. In 1985, median values were lower than means for all measures except profits, for which the median value was slightly higher than the mean. By 1991, however, median values were lower than mean values for all measures. The fact that percentage increases in median values exceeded percentage increases in mean values results from the low median values in 1985. These results appear in graph form in Exhibit 4. In sum, the distributions of all these indicators for the sample as a whole was skewed to the right; a small number of "high achievers" raised the averages.

Entrepreneurs appear to manage output levels to increase net worth, rather than simply continuing to increase sales levels. Fewer than half the firms in our sample posted increases in both output and net worth. An equal number maintained or increased their net worth without increasing sales.

These results are consistent with what one might expect from microeconomic theory, which states that businesses have optimum output levels to produce maximum profits. We have extended that statement to argue (1) that businesses may face multiple "local optima," i.e., optimum volumes within particular ranges to maximize profits; and (2) that increases in volume should be associated with increases in net worth over time.

Managers of fledgling independent businesses appear to act as profit maximizers in a manner consistent with this extended theory. Although we do not know whether those managers could articulate the theory, we believe that they recognize the "stairstep" nature of costs and the decreasing rate of growth in revenues, and therefore manage--increasing, holding or decreasing--the output levels of their businesses accordingly. Additional research would be necessary to develop this interpretation.

We recognize that, although our sample is broadly representative of industry types, and covers a fairly long period (seven years) for entrepreneurial research, we are reporting results from businesses that have not only survived, but willingly participated in a follow-up study several years after the initial contact with research institutions, and provided financial data for a seven-year period. Additional analysis of data from several hundred respondent firms that responded but did not provide complete financial data will help us to determine what (if anything) is different or special about these 118 firms. Additional examination of the history, strategy and operating characteristics of firms that did grow may help us to define more precisely the circumstances relating growth in output and increases in net worth.

In summary, growth is only essential in the beginning stages of entrepreneurial success. The above study has shown that continued growth in sales of a firm tends to pay its owners, as measured by increased net worth. Such increases are not necessarily proportionate to growth in sales; and net worth to owners could also increase without sales growth.

What others does growth affect? Both owners and non-owners benefit from growth through greater capability, opportunity and esteem. Nearby communities benefit from sustained employment of its citizens, for which a more probable source is an ongoing flow of new local firms.

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