Tài liệu Impact of financial management on the profitability of small and medium trade and service enterprises in thai nguyen province

IMPACT OF FINANCIAL MANAGEMENT ON THE PROFITABILITY OF SMALL AND MEDIUM TRADE AND SERVICE ENTERPRISES IN THAI NGUYEN PROVINCE A Dissertation Presented to The Faculty Graduate School Southern Luzon State University Lucban, Quezon In Partial Fulfillment of the Requirements for the Degree Doctor of Business Administration by PHAM ANH NGOC (RANDY) 2013 ACKNOWLEDGEMENTS I acknowledge Dr. Joanna Paula A. Ellaga and her assistants from the Southern Luzon State University (SLSU) I also acknowledge Mrs. Le Thi Xuan from the Faculty of Foreign Languages of Thainguyen of Economics and Financial (TCEF) for her comments on English in earlier drafts of my disertation. In the process of data collection for this research, many people contributed to the task and I am particularly grateful for their contributions. I am greatly indebted to Mr Nguyen Quoc Huy and Accounting Faculty of TCEF for their introduction to contacts with the small and medium enterprises (SMEs) community located in Thainguyen city. I also wish to thank to Department of Taxation, Department of Investment and Planning for providing secondary data related to the current practices of SMEs in Thaingyen province. I would particularly like to thank the following friends for their support related to data collection: Mrs. Ha Thi Hương and all teachers of Finance Faculty of TCEF and all my students who worked as fieldworkers for data collection. Finally, to my parents and my wife, I wish to extend my loving thanks for their encouragement. ii ABSTRACT This dissertation examines the relationship between financial management and profitability of SMEs to determine whether financial management practices and financial aspects impact on SME profitability. Specific Objectives of the disertation are: 1. To determine the profile of the respondents in terms of the following 1.1. The form of business organization affiliated with 1.2. Position in the company 1.3. Highest educational attainment 1.4. Attendance to financial management-related trainings 2. To Identify the financial management practices of the company in terms of the following areas: 2.1. Accounting information system 2.2. Working capital management 2.3. Fixed asset management 3. To assess the company in terms of the following financial aspects: 3.1. Liquidity 3.2. Financial leverage 3.3. Activity 4. To know the relationship of financial management practices and financial aspects to the company’s profitability in terms of the following: 4.1. Return on sales 4.2. Return of assets 4.3. Return on equity 5. To develop a model for the SME’s profitability iii 6. To propose solutions to improve the company’s and SME’s profitability In this research, both survey and secondary data methods are used in combination. Survey was chosen to investigate financial management practices. The secondary data method was used to examine the financial aspects. Respondents in this study can be: Owner, Manager, Chief-accountant of SMEs located in Thai Nguyen City. The disertation provides descriptive findings of financial management practices and financial aspects and demonstrates the simultaneous impact of financial management practices and financial aspects on SME profitability. In addition, the research study provides a model of SME profitability, in which profitability was found to be related to financial management practices and financial aspects. With the exception of debt ratios, all other variables including cash ratio, total asset turnover, accounting information systems, working capital management and fixed asset management were found to be significantly related to SME profitability. iv TABLE OF CONTENTS ACKNOWLEDGEMENTS....................................................................................................... ii ABSTRACT............................................................................................................................. iii LIST OF TABLE .................................................................................................................... vii INTRODUCTION..................................................................................................................... 1 1.1. BACKGROUND OF THE STUDY ........................................................................... 1 1.2. STATEMENT OF THE OBJECTIVES ..................................................................... 2 1.3. HYPOTHESIS........................................................................................................... 4 1.4. SIGNIFICANCE OF THE STUDY ........................................................................... 4 1.5. SCOPE AND LIMITATIONS OF THE STUDY ....................................................... 5 1.6. DEFINITION OF TERMS......................................................................................... 6 Chapter 2................................................................................................................................... 8 REVIEW OF RELATED LITERATURE AND STUDIES........................................................ 8 2.1. QUALITATIVE DEFINITIONS OF SMES............................................................... 8 2.2. QUANTITATIVE DEFINITIONS OF SMES............................................................ 9 2.3. FINANCIAL MANAGEMENT FOR SMES ........................................................... 10 2.4. FINANCIAL MANAGEMENT PRACTICES ......................................................... 13 2.5 FINANCIAL ASPECTS ........................................................................................... 17 2.6 SME PROFITABILITY............................................................................................ 19 2.7. RELATIONSHIPS BETWEEN FINANCIAL MANAGEMENT AND SME PROFITABILITY .......................................................................................................... 22 2.8. THE MODEL OF IMPACT OF FINANCIAL MANAGEMENT ON SME PROFITABILITY .......................................................................................................... 22 2.9. CONCEPTUAL FRAMEWORK............................................................................. 23 Chapter 3................................................................................................................................. 24 METHODOLOGY .................................................................................................................. 24 3.1. RESEARCH DESIGN ............................................................................................. 24 v 3.2. LOCALE OF THE STUDY..................................................................................... 25 3.3 BUSINESS STRUCTURE AND SMES IN THAI NGUYEN PROVINCE............... 25 3.4 SAMPLING DESIGN AND TECHNIQUES ............................................................ 25 3.5 DETERMINATION OF SAMPLE SIZE .................................................................. 26 3.6 SUBJECT OF THE STUDY..................................................................................... 26 3.7. RESEARCH INSTRUMENT .................................................................................. 27 3.8. DATA GATHERING PROCEDURE ...................................................................... 36 3.9. DATA PROCESSING METHOD............................................................................ 37 3.10. STATISTICAL TREATMENT.............................................................................. 37 Chapter 4................................................................................................................................. 39 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA................................. 39 4.1. DESCRIPTIVE OF THE RESEARCH STUDY ...................................................... 39 4.2 ASSOCIATIVE ANALYSIS OF THE RESEARCH STUDY................................... 62 Chapter 5................................................................................................................................. 71 SUMMARY, FINDINGS, CONCLUSIONS AND RECOMMENDATIONS......................... 71 5.1 SUMMARY ............................................................................................................. 71 5.2 FINDINGS ............................................................................................................... 73 5.3 CONCLUSIONS ...................................................................................................... 76 5.4 RECOMMENDATIONS .......................................................................................... 77 BIBLIOGRAPHY ................................................................................................................... 79 APPENDIX 1.......................................................................................................................... 82 APPENDIX 2: SURVEY INSTRUMENT............................................................................... 83 SURVEY OF FINANCIAL MANAGEMENT PRACTICES ................................................. 83 OF SMEs IN THAI NGUYEN CITY ...................................................................................... 83 APPENDIX 3: REGRESSION ................................................................................................ 95 APPENDIX 4: CORRELATIONS........................................................................................... 97 vi LIST OF TABLE Table 1.1: Classifying enterprise by total capital and number of laborers .............................. 6 Table 3.1. Number and percentage of SME sample and population..................................... 26 Table 4.1: Structure of SMEs in the sample by form of ownership..................................... 40 Table 4.2: Structure of respondent by the position .............................................................. 40 Table 4.3: Structure of respondent by the highest educational attainment............................ 41 The level education ............................................................................................................ 41 Table 4.4: Structure of respondent by the frequency of attendance to .................................. 41 Table 4.5: Responsibility – accounting information system................................................. 43 Table 4.6: Using computer in accounting information system ............................................. 44 Table 4.7: Weighted Mean Distribution on Accounting information system........................ 45 Table 4.8: Preparing cash budgets....................................................................................... 46 Table 4.9: Cash balance determination................................................................................ 47 Table 4.10: Weighted Mean Distribution on Cash management practices ........................... 49 Table 4.11: Sales on credit and credit polices...................................................................... 50 Table 4.12: Frequency of reviewing receivable levels and bad debts................................... 51 Table 4.13: Weighted Mean Distribution on Receivable management practices .................. 52 Table 4.14: Frequency of reviewing inventory levels and preparing inventory budgets ....... 53 Table 4.15: Weighted Mean Distribution on Inventory management practices .................... 54 Table 4.16: Frequency of evaluating investment projects and reviewing efficiency of using fixed assets after investing.................................................................................................. 56 Table 4.17: Weighted Mean Distribution on Fixed asset management practices .................. 57 Table 4.18: Descriptive statistics of financial ratios of trading and service SMEs................ 58 Table 4.19: Descriptive findings of SME cash ratios........................................................... 59 Table 4.20: Descriptive findings of SME Debt-to-equity ratio ............................................ 60 Table 4.21: Descriptive findings of SME activity ratio ....................................................... 60 vii Table 4.22: Overview of SME profitability......................................................................... 61 Table 4.23: Correlation matrix of PRO and independent variables ...................................... 63 Table 4.24: SME profitability regression model using profitability as dependent variable .. 65 Table 4.25: Descriptive finding of relationship between profitability and cash ratio....................... 67 Table 4.26: Relationship between SME profitability and the efficiency of financial management practices ........................................................................................................ 68 T able 4.27: Regression model of SME profitability after removing debt ratio .................... 70 viii Chapter 1 INTRODUCTION This chapter provides a general introduction to the research study. The purpose is to establish foundations for following chapters and the study as a whole, by providing a general picture of the study. This chapter is structured into ten sections Section 1.1 examines the research background where the research problem is identified. Section 1.2 defines the research problem, presents a statement of the problem and expands the research problem in two subsections 1.2.1 and 1.2.2. Subsection 1.2.1 presents research objectives that the study covers in the process of solving the research problem defined. Subsection 1.2.2.addresses the research questions that will be respectively answered in chapters of the study Section 1.3 provides hypothesis of this study. Section 1.4 and section 1.5 points out the significance and scope of the study. Lastly, section 1.6 presents definition of terms 1.1. BACKGROUND OF THE STUDY Vietnam was a strong command-economy system in the mid-1980s. The difficulties from years of war and the inefficiency of the command-economy system had led the Vietnam economy to crisis. Face with stagnant growth, shortage of food, deficit budgets, increase in inflation and trade imbalances, the Government of Vietnam started an economic renovation policy in 1986. According to Vietnam Chamber Of Commerce And Industry (VCCI), since the government introduced the series of economic reform, the private sector has rapidly grown in terms of the number of businesses, capital and employees. From the base of zero in 1991, the number of private businesses, limited companies and joint stock companies had quickly risen to 543.963 in 2011 and almost all are small and medium enterprises (SMEs). SMEs have 1 contributed considerably to growing GDP and creating jobs for labour-age people as follows (VCCI): Total of capital was 6.000.000 billion VND Providing a large number of diversified products, occupying 40 percent of GDP Creating jobs for 26 million people, Mobilizing temporarily unused resources such as land, capital labour and management skills to develop production, and Increasing export volume and lessening trade deficits. Originating from recognition of the increasingly important role and contribution of SMEs as well as the recent promotion and supporting policy on developing SMEs, this research study the Impact of Financial Management on the Profitability of Small and Medium Trade and Service Enterprises in Thai Nguyen Province. 1.2. STATEMENT OF THE OBJECTIVES The problem that SMEs in Thai Nguyen province face appears to be that inefficient financial management has adversely affected their profitability (Thai Nguyen Young Businesses's Union 2010). Therefore, the problem to be addressed in this research is to investigate effects of Financial aspects and financial management practices on SME profitability, and then, to determine the best measures for improving SME profitability in Thai Nguyen province by using efficient financial management tools. 1.2.1. Research objectives In solving the research problem and answering the research questions mentioned previously, this study has the following objectives: 1) To determine the profile of the respondents in terms of the following 1.1) The form of business organization affiliated with 2 1.2) Position in the company 1.3) Highest educational attainment 1.4) Attendance to financial management-related trainings 2) To Identify the financial management practices of the company in terms of the following areas: 2.1) Accounting information system 2.2) Working capital management 2.3) Fixed asset management 3) To assess the company in terms of the following financial aspects: 3.1) Liquidity 3.2) Financial leverage 3.3) Activity 4) To know the relationship of financial management practices and financial aspects to the company’s profitability in terms of the following: 4.1) Return on sales 4.2) Return of assets 4.3) Return on equity 5) To develop a model for the SME’s profitability 6) To propose solutions to improve the company’s and SME’s profitability 1.2.2. Research questions The research problem defined above leads to the following research questions: 1) How important are financial management practices and financial aspects to SME profitability? 2) What are the relationships between financial management practices, financial aspects and SME profitability? 3 3) How do financial management practices and financial aspects affect SME profitability? 4) What action can improve profitability of SME in Thai Nguyen province? 1.3. HYPOTHESIS Cash ratio is a measure to define liquidity. High cash ratios tend to high liquidity and low profitability due to reduced revenue from financial activities. Debt is viewed as a factor that increases financial expenses and reduce profitability. Total asset turnover is the ratio between sales and total assets. Increasing sales is a way to increase profitability. Effective financial management can save expensive of the business. This lead to following hypothesis: H1: Profitability of SMEs is negatively related to the cash ratio. H2: Profitability of SMEs is negatively related to the debt ratio. H3: Profitability of SMEs is positively related to total asset turnover. H4: Profitability of SMEs is positively related to the efficiency of financial management practices. 1.4. SIGNIFICANCE OF THE STUDY Completing this study brings together aspects of theory and practice. For theory, this study is an expansion of previous studies on financial management of SMEs by focusing on examining the impacts of financial management on SME profitability. In addition, utilizing data from Thai Nguyen province contributes to the literature of SME financial management. In practice, results will indicate relationships between financial management and SME profitability and will assist owner-managers and financial managers to improve performance and profitability of their businesses by managing financial matters efficiently and effectively. Contributions of this research is the use of statistical techniques to identify some relationships not previously emphasized by researchers . This study provides details of the relationships between financial management practices, financial aspects and profitability of SMEs in Thainguyen province. 4 In considering significant aspects of the financial management practices, this study concentrated on internal factors of SMEs but did not capture much external environment factors. The implications of this study for the further research could include the following: Findings on financial aspects of SMEs could be applied to the further comparative research of differences in financial aspects between SMEs and large enterprises in Thainguyen province. This study’s findings of relationships between cash ratio, total asset turnover and SME profitability could lead to expanded research to the large companies, state and foreign companies in Thainguyen province. The model of SME profitability developed in this study could be applied as the basis for the further research on building competitive strategies for SMEs 1.5. SCOPE AND LIMITATIONS OF THE STUDY Using data from Thai Nguyen province to test theories of financial management helps to confirm and expand the scope of theoretical applications. This research is designed as a causal research in which a sample of 120 SMEs Trade and Service Enterprises in Thai Nguyen Province are drawn from a list of over 2000 SMEs for personal interview in 2011. The context of financial management practices in this study includes the following areas: Accounting information systems, Working capital management, and fixed asset management. Financial aspects in this study includes: Liquidity measured by cash ratio; Financial leverage measured by Debt-to-equity ratio; Activity measured by Total asset turnover ; Profitability measured by average of return on sales, return on assets and return on equity. 5 1.6. DEFINITION OF TERMS Small and medium-sized enterprises are business establishments that have registered their business according to law and are divided into three levels: very small, small and medium according to the sizes of their total capital (equivalent to the total assets identified in an enterprise’s accounting balance sheet) or the average annual number of laborers (total capital is the priority criterion), concretely as follows: Table 1.1: Classifying enterprise by total capital and number of laborers Very small Small-sized enterprises Medium-sized enterprises enterprises Number of Number of Total capital laborers Number of Total capital laborers laborers Between over I. Agriculture, Between over 10 persons or VND 20 billion fewer or less forestry and Between over VND 20 billion 10 persons and fishery 200 persons and and VND 100 200 persons 300 persons billion Between over II. Industry Between over 10 persons or VND 20 billion fewer or less and Between over VND 20 billion 10 persons and construction 200 persons and and VND 100 200 persons 300 persons billion Between over Between over III. Trade and 10 persons or VND 10 billion service fewer or less Between over VND 10 billion 10 persons and 50 persons and and VND 50 50 persons 100 persons billion Source: Decree 56/2009/ND-CP SMEs include many forms of business organization such as private enterprises, limited companies, joint stock companies, cooperatives and business households or family businesses. However, this study only focuses on the forms of business that set up a formal 6 system of financial management. Based on this criterion, private enterprises, limited companies, and joint stock companies are the objects of this study. Financial management in this study is limited to a framework of three specific areas: (1) accounting information system, (3) working capital management, (4) fixed asset management. Financial management objectives refer to two main objectives: profitability and liquidity. Efficient financial management in this research is defined as financial management that achieves financial management objectives without wasting financial resources. Conversely, inefficient financial management is not to achieve financial management objectives or achieve the objectives but wasting or without minimizing financial resource utilization. Manager refers to the person who is hired to run and manage the business whereas owner-manager refers to the person who plays the role of both owner and manager. Financial aspects of the enterprise are represented by financial ratios, derived from financial statements. In this study, financial aspects are measured by three variables including: (1) liquidity (cash ratio), (2) financial leverage (debt to equity) and (3) business activity (total asset turnover). SME profitability is an abstract concept. This research limits the measures of SME profitability at the following ratios: (1) return on sales, (2) return on assets, and (3) return on equity. 7 Chapter 2 REVIEW OF RELATED LITERATURE AND STUDIES The objectives of this chapter are to review previous research related to the areas of financial management practices, financial aspects, and profitability of SMEs and to build a model of the impact of financial management practices and financial aspects on SME profitability. This chapter is structured into nine main sections. Section 2.1, 2.2 reviews definitions of SMEs, both qualitative and quantitative. Section 2.3, 2.4 and 2.5 respectively review the previous studies on financial management practices, financial aspects and SME profitability conducted by previous researchers in the developed economies. Section 2.7 concentrates on examining the relationships between financial management practices, financial aspects and SME profitability. Section 2.8 provides the model of impact of financial management on SME profitability. Lastly, section 2.9 develops a model of the impact of financial management practices and financial aspects on SME profitability and conceptual framework 2.1. QUALITATIVE DEFINITIONS OF SMES Qualitative definitions define small and medium enterprises based on their qualitative aspects. In the USA, based on four key factors identified by the 1947 Committee of Economic Development (CED), the authorities define a small firm to be one which: 1) Has independent management 2) Has capital supplied and ownership held by an individual or small group 3) Has an area of operation which is localized in one community, and 4) is small in relation to other firms in the industry. In the UK, the qualitative definitions adopted by the Bolton Committee identified three major aspects of small business: 8 Firstly, in economic terms, a small firm is one that has a relatively small share of the market, and is unable to influence the price or quantity of goods or servicing. Secondly, an essential aspects of a small firm is that it is managed by its owner or part owner in a personalized way, and not through the medium of a formal management structure. Thirdly, it is also independent in the sense that it does not form part of a larger enterprise and that the owner-managers should be free from outside control in making their principal decisions (Maria Manuela Cruz-Cunha, Joao Varajão 2011). 2.2. QUANTITATIVE DEFINITIONS OF SMES Quantitative definitions define small and medium enterprises based on their quantitative aspects. Unfortunately, quantitative aspects may be difficult to measure. Firstly, there are a variety of ways in which enterprise size can be measured, including (1) number of employees, (2) sales revenue or turnover, (3) total assets, and (4) net worth. The first of these is the most widely used measure of size in qualitative definitions of small enterprise around the world, although the second and the third also find significant use (Maria Manuela Cruz-Cunha, Joao Varajão 2011). Secondly, the quantitative aspects of small enterprises vary from industry to industry and from country to country. For example, an enterprise, which is small in one industry such as cement manufacture, may be regarded as large in another industry such as trading or tourism. Similarly, an enterprise, which is considered small by the USA standards, may be relatively large in other countries such as Thailand, Malaysia or Vietnam. The quantitative definitions of SMEs, especially their quantitative aspects, are very important because they provide the bases for carrying out research and gathering statistical information. They also provide quantitative standards for the comparative studies between SMEs in one country and SMEs in another country. 9 2.3. FINANCIAL MANAGEMENT FOR SMES 2.3.1. Defining financial management Eugene F. Brigham, Michael C. Ehrhardt (2008) defines financial management based on mobilizing and using sources of funds: Financial management is concerned with raising the funds needed to finance the enterprise’s assets and activities, the allocation of theses scare funds between competing uses, and with ensuring that the funds are used effectively and efficiently in achieving the enterprise’s goal. According to Eugene F. Brigham, Michael C. Ehrhardt (2008), modern financial management involves planning, controlling and decision making responsibilities embracing: - Various types and sources of finance an enterprise may employ, how these may be accessed, and how to choose among them. - Alternative ways in which finance raised may be used in an enterprise and how to select those that are likely to prove most profitable. - Different means of ensuring that finance entrusted to specific activities realizes the returns that were anticipated on its allocation to them. 2.3.2. Objectives of financial management Like many other management sciences, financial management, firstly, establishes its goal and objectives. Objectives of financial management are foundations or bases for comparing and evaluating the efficiency and effectiveness of financial management. The final goal of financial management is to maximize the financial wealth of the business owner (C. Paramasivan, Paramasivan C., Subramanian T 2009). This general goal can be viewed in terms of two much more specific objectives: profitability and liquidity. Profitability management is concerned with maintaining or increasing a business’s earnings through attention to cost control, pricing policy, sales volume, stock management, and 10 capital expenditures. This objective is also consistent with the goal of most businesses (Julie Meehan, Mike Simonetto, Larry Montan, Chris Goodin (2011). Liquidity management, on one hand, ensures that the business’s obligations (wages, bills, loan repayments, tax payments, etc.) are paid. The owner wants to avoid any damage at all to a business’s credit rating, due to a temporary inability to meet obligation by: anticipating cash shortages, maintaining the confidence of creditors, bank managers, pre-arranging finance to cover cash shortages. On the other hand, liquidity management minimizes idle cash balances, which could be profitable if they are invested Leonard M. Matz (2011). 2.3.3. Major decisions of financial management Generally, previous authors had no differences in opinions of major decisions in financial management. H. Kent Baker, Gary Powell (2009) indicated three kinds of decisions the financial manager of a firm must make in business: (1) the budgeting decision, (2) the financing decision, and (3) decisions involving short-term finance and concerned with the net working capital. Similarly, P. K. Jain (2007) also indicated three main financial decisions including the investment decisions, financing decisions and dividend decisions. Sudhindra Bhat (2008) suggested another way of identifying the major decisions of financial management is to look at the balance sheet of a business. There are many decisions regarding items on the balance sheet. However, they are classified into three main types: investment decisions, financing decisions and profit distribution decisions - Investment decisions: (1) relate to the amount and composition of a business’s investment in short-term assets (cash, stock, debtors, etc.) and fixed assets (equipment, premises, facilities, etc.), and (2) relate to the achievement of an appropriate balance between the two classes of assets. 11 - Financing decisions: (1) relate to the types of finance used to acquire assets, and (2) relate to the achievement of an appropriate balance between short-term and long-term sources, and between debt and equity sources. - Profit distribution decisions: (1) relate to the proportion of profit earned that should be retained in a business to finance development and growth, (2) and the proportion, which may be distributed to the owner. 2.3.4. Specific areas of financial management Most authors and researchers approach the specific areas of financial management in different ways depending upon their emphasis. This section reviews the specific areas of financial management, which have regularly been raised and discussed by the recent authors and researchers such as Sudhindra Bhat (2008) and Great Britain (2011). Great Britain (2011) emphasizes objectives of financial management including liquidity, profitability and growth. Therefore, the specific areas that financial management should be concerned with are liquidity management (cash flow budgeting, working capital management), profitability management (profit analysis, profit planning), and growth management (capital resource planning and decisions). Sudhindra Bhat (2008) examines specific areas of financial management including all areas that relate to items on the balance sheet of the business. The specific areas financial management covers consist of managing working capital, managing long-lived assets, managing sources of finance, planning financial structure, and planning and evaluating profitability. In summary, financial management is concerned with many specific areas. Probably the balance sheet of a business may demonstrate how to recognize these areas including: - Current asset or working capital management, - Fixed asset or long-lived asset management, 12