Balance Sheet and Small Business

17

RATIO ANALYSIS FEATURING THE DUPONT METHOD:
AN OVERLOOKED TOPIC IN THE FINANCE MODULE OF
SMALL BUSINESS MANAGEMENT AND ENTREPRENEURSHIP COURSES
Submitted by
Thomas J. Liesz
University of Idaho
[phone] (office) [e-mail] Steven J. Maranville
University of Houston-Downtown
One Main Street
Houston, TX 77002-1001
[phone] [e-mail] Submitted to

Small Business Institute Journal
The authors wish to acknowledge the valuable comments of two SBIJ reviewers

Small Business Institute Journal, Volume 1, 2008

18
RATIO ANALYSIS FEATURING THE DUPONT METHOD:
AN OVERLOOKED TOPIC IN THE FINANCE MODULE OF
SMALL BUSINESS MANAGEMENT AND ENTREPRENEURSHIP COURSES

INTRODUCTION
Many business students, along with a lot of small business management instructors, tend to shy away from quantitative analysis.

The qualitative aspects of a business – such as

generating novel product ideas and creating marketing campaigns– are far more “fun” than record keeping and financial analysis. However, there is much evidence that a lack of financial control is often a quick path to business failure.
According to Dun & Bradstreet’s Business Failure Records (1994), “poor financial practices” is second only to “economic conditions” as a cause of business failures. Further, studies have been published as far back as 80 years ago (see Meech (1925)), as well as more recently (such as those published by Bruno, Leidecker, and Harder (1987); Gaskill, Van Auken, and Manning (1993); Lauzen (1985); and Wood (1989) that specifically cite poor financial control as a chief cause of unsuccessful businesses. Firer (1999), and more recently Kelly
(2005), stress the importance of monitoring the “financial health” of a small business.
Consequently, it is vital that students of small business management and entrepreneurship become skilled at performing financial analyses. Students would benefit from a relatively simple tool for not only

References: Blumenthal, R. G. ‘Tis the gift to be simple: Why the 80-year-old Du Pont model still has fans, CFO Magazine, January, 1998, pp Brigham, E. F. and Houston, J. F. Fundamentals of Financial Management, Concise Third Edition, Harcourt Publishers, 2001. Devine, K. and Seaton, L. An examination of quarterly financial ratio stability: implications for financial decision making, Journal of Applied Business Research, Winter, 1995, pp Dun & Bradstreet, Business Failure Record , New York, 1994. Gaskill, L., Van Auken, H and Manning, R. A factor analytic study of the perceived causes of small business failure, Journal of Small Business Management, 1993, 31, pp Gitman, L. J. Principles of Financial Management, 8 th Edition, Addison Wesley Publishers, 2000. Harrington, D. and Wilson, B. Corporate Financial Analysis , Business Publications, Inc. 1986. Hawawini, G. and Viallet, C. Finance for Executives, South-Western College Publishing, 1999. Isberg, S. C. Financial analysis with the Du Pont ratio: A useful compass , Credit & Financial Management Review, Second Quarter, 1998, pp Kelly, S.. Company health check, Accountancy Ireland, Vo. 37, No. 4, August, 2005, pp. 52-53. Lauzen, L. Small business failures are controllable , Corporate Accounting, Summer, 1985, pp. Small Business Institute Journal, Volume 1, 2008 34 Meech, S. P. Financial standards , The University Journal of Business, Vol. 3, No. 2, March, 1925, pp Milbourn, G. and Haight, T. Providing students with an overview of financial statements using the Dupont analysis approach , The Journal of American Academy of Business, March, 2005, pp. Osteryoung, J. and Constand, R. Financial ratios in large public and small private firms , Journal of Small Business Management, July, 1992, pp Paper P8, May, 2006, pp. 48-49. Slater, S. and Olson, E. A value-based management system, Business Horizons, September/October, 1996, pp Small Business Institute Journal, Volume 1, 2008