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CONCLUSIONS

Based on the study results, we can learn a great deal about high-growth, high-potential firms. Some of the findings that can be gleaned from the financial data and the NCER survey results are as follows:

Based on the NCER database of EOY firms, entrepreneurial businesses are distinctly different than their publicly-traded firm counterparts in several ways. First, they make more effective use of the firm's invested capital, which when combined with comparable profit margins, results in higher rates of returns on the firm's invested capital. Second, they have a much greater propensity to use debt financing than do their larger public counterparts. As a consequence, they have higher average returns on the common equity investment, which brings with it the complementary increase in financial risk. Finally, they have significantly more capacity to maintain high rates of growth, owing both to their being more profitable and their propensity to retain and reinvest a much higher fraction of their earnings.

From the survey data, we can determine that entrepreneurial firms make significant use of their board members. These individuals represent a diversity of constituents, comprising a mixture of outside versus inside members, as well as a mixture of family and non-family members. They are actively involved in monitoring firm's historical performance, but not so much in its planning function. We also observe significant ownership interests in the firm by management, as well as a surprising interest by the employees.

We believe the study provides entrepreneurs with a practical basis-beyond mere anecdotal support-for comparing themselves with high-growth entrepreneurial firms. For this reason, we believe that the research has a future. It is our hopes to continue in this inquiry, even to having personal interviews with the owners of several of the firms sampled. In this way, our understanding should be greatly enhanced from what we can know by merely looking at averages and medians.

REFERENCES

Aggarwal, Rajesh, and Andrew Samwick (1997), Executive compensation, strategic competition, and relative performance evaluation: Theory and evidence, Working paper, Dartmouth College.

Bhide, Amar (1994), How entrepreneurs craft strategies that work, Harvard Business Review, 7, (2): 150-161.
Brickley, A., J. L. Coles, and R. L. Terry (1994), Outside directors and the adoption of poison pills, Journal of Financial Economics, 35 (June): 371-390.

Byrd, John W., and K. A. Hickman (1992), Do outside directors monitor managers? Evidence from tender offer bids, Journal of Financial Economics, 32 (October): 195-221.

Finegan, Patrick T. (1991), Maximizing share value at the private company, Journal of Applied Corporate Finance. 4 (1): 6-21/

Gibbons, Robert, and Kevin J. Murphy (1990), Relative performance evaluation for chief executive officers, Industrial and Labor Relations Review, 10: 473-479.

Gibbons, Robert, and Kevin J. Murphy (1992), Optimal incentive contracts in the presence of career concerns, Journal of Political Economy, 100: 468-505.

Hermalin, B.E., and M. S. Weisbach (1988), The determinants of board composition, RAND Journal of Economics, 19 (Winter): 589-606.

Jensen, Michael, and Kevin J. Murphy (1990), Performance pay and top management incentives, Journal of Political Economy , 98: 225-264.

Lee, I., S. Rosenstein, N. Rangan, and W. N. Davidson III (1992), Board composition and shareholder wealth: The case of management buyouts, Financial Management, 27 (Spring): 58-72.

Rosenstein, S., and J. G. Wyatt (1990), Outside directors, board independence, and shareholder wealth, Journal of Financial Economics, 26: 175-191.

Shulman, Joel M., and Raymond A.K. Cox (1985), An integrative approach to working capital management, Journal of Cash Management, 5 (6): 64-67.

APPENDIX : Evaluating Firm Liquidity

Shulman and Cox (1985) propose a refined view of firm liquidity in which they define net working capital as the amount of permanent capital (long-term debt and equity) used to finance the company's working capital. The more long-term financing sources used to finance working capital, the more liquid the company, other things being the same. In this way, net working capital would be viewed as follows:

Furthermore, net working capital can be broken into two components including working-capital requirements and net liquid balances. That is,

Working capital requirements represent the spontaneous uses and sources of funds over a firm's operating cycle which are computed as follows:

Over the operating cycle, working capital requirements will expand as sales increase and contract as sales decline. The net liquid balance in turn is the amount of liquid resources available to finance a firm's working capital requirements. This number can be calculated as follows

Thus, the more a firm's net liquid balance, the greater the amount of liquid resources the firm has to finance its working capital requirements. If the increase in working capital requirements is seasonal, it is then appropriate to draw down the net liquid balance. However, if the increase in working capital requirements is permanent due to a higher level of operations, then the increase in working capital requirements should be financed with a permanent source of funds, thereby not depleting the firm's level of liquidity.

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