A model for predicting small firm performance

Abstract

Purpose – This study aims to develop an ordered probit model to explain and predict small business relative performance in Chile, South America. Design/methodology/approach – The design is survey research. The sample includes 403 small businesses classified as 158 failed firms, 101 mediocre firms and 144 successful firms within all economic sectors. The model variables are: internet, starting with adequate working capital, managing good financial and accounting records, planning, owner formal education, professional advice, having partners, parents owning a business, and marketing efforts. Findings – The eight-variable model, tested with ordered probit, is a significant predictor of the level of performance at the 0.000 level. Also, six of the eight variables are significant predictors at the 0.05 level: internet, starting with adequate working capital, managing good financial and accounting records, owner, professional advice, having partners, parents owning a business, and marketing efforts. Two of the variables – i.e. planning and formal education – were not significant. ANOVA test of differences were run for each of the eight variables based on the level of performance were also run and results reported. Practical implications – The model does in fact predict relative performance, so the model can be used to improve the probability of success. Thus, an entrepreneur can use the model to gain a better understanding of which resources are needed to increase the probability of success, and those who advise entrepreneurs can help them use the model. Investors and creditors can use the model to better assess a firm's potential for success. There is an extensive public policy implications discussion regarding how to use the model to assist entrepreneurial ventures so that society can benefit in direct and indirect ways via the allocation of limited resources toward higher potential businesses. Entrepreneurs and small business educators can use the model's variables to influence future business leaders, public policy makers, and their practices. Originality/value – This study improves the Lussier 15 variable success versus failure prediction model by adding the use of the internet and taking out highly correlated variables. While Lussier and others ran logistic regression with only two levels of performance, this study uses the more robust ordered probit model with three levels of performance. It presents public policy with implications for Chilean institutions to promote entrepreneurship. Finally, it contributes to the literature because, to date, no empirical success versus failure studies have been found that were conducted in Chile or any small, open economies in Latin America