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Evidence in the literature repeatedly points towards failure to understand cash flow shortages as a major problem of small business operators. Theoretically, they should be able to use financial statements prepared by their accountants as planning and control tools. However, because of accountants' use of the accrual system, rather than cash, and the meticulous detail that tends to make statements too complicated for the untrained user, many operators simply do not attempt to use these statements.

The 1980s have brought a new awareness of the negative effects of holding excessive inventories. High interest rates and the popularity of Japanese management techniques such as just‐in‐time inventory systems have focused attention on the need to reduce extra inventories. However, traditional measures of inventory quantities, such as turnover of days' sales, do not reveal the true impact of the inventory investment. In this paper a new measure of inventories, the cost of capital on excess inventories (CCEI) is proposed, along with recommendations for management use of the tool and suggestions for implementation.

Many businesses are faced with liquidity problems for various reasons. This is especially true for small businesses, since most must operate with fewer sources of both short and long term financing than larger firms. Where less financing is available, more assets must be held in liquid form to meet daily transactions and emergency requirements. Larger firms, that have better access to both the money and capital markets, can afford to hold fewer current assets and meet cash requirements just as quickly and efficiently through borrowing.