impact of financial management on the profitability of samll 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
ii

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.
iii

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
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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.

v

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
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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

vii

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
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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
1

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
2

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

3

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?
4

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.
5

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.
6

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
enterprises
Small-sized enterprises Medium-sized enterprises

Number of
laborers
Total capital
Number of
laborers
Total capital
Number of
laborers
I. Agriculture,
forestry and
fishery
10 persons or
fewer
VND 20 billion
or less
Between over
10 persons and
200 persons
Between over
VND 20 billion
and VND 100
billion
Between over
200 persons and
300 persons
II. Industry

and
construction
10 persons or
fewer
VND 20 billion
or less
Between over
10 persons and
200 persons
Between over
VND 20 billion
and VND 100
billion
Between over
200 persons and
300 persons
III. Trade and
service
10 persons or
fewer
VND 10 billion
or less
Between over
10 persons and
50 persons
Between over
VND 10 billion
and VND 50
billion
Between over

50 persons and
100 persons
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
7

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.
8

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:
9

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.
10

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
11

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.
12

- 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,
13

- Funding management,
- Financial budgeting and planning,
- Leverage and capital structure,
- Financial analysis and evaluating performance of the business, and
- Profit distribution (dividends and retained earnings policy).
2.4. FINANCIAL MANAGEMENT PRACTICES
2.4.2 Accounting information system
Leslie Turner, Andrea Weickgenannt (2008) measured the efficiency of an accounting
information systems with three indicators: (1) extent to which financial information is
prepared, (2) extent of owner/manager involvement in the interpretation and use of financial
information, and (3) suitability of the information and services provided by outside
accountants. This instrument requested participants to state their perception of the usefulness
of each of aspects of information. Perception of usefulness of information represented the
extent to which these aspects of information were available that would have a direct impact
on performance. The extent of efficiency of accounting information systems was measured
by the following indicators:
- Attitude of owner/manager to accounting information systems

- Frequency of accounting information preparation
- Promptness of accounting information system in reflecting business transactions
- Owner/manager involvement in preparing accounting information
- Owner/manager involvement in the interpretation and use of accounting information
- Reasonableness of accounting information systems
- Usefulness of accounting information in decision-making
- Extent of computerization of accounting information
14

2.4.3 Working capital management
a) Cash management practices
In their survey, Ian Lienert (2009) reported on the cash management practices of 122
small businesses in petroleum marketing. Cash management, in their survey, consisted of
three basic components: cash forecasting, investing temporary cash surplus, and controlling
cash inflows and outflows. John Tennent (2012) conducted a study to gain insights into how
small Canadian firms manage their cash resources. They used five indicators: cash forecasts,
cash balance, basis for determining cash balance, and cash surplus investment to measure
cash management practices. Jennifer R. Luong (2009) used the following indicators to
measure practices of cash management: (1) the interval of time for cash budgeting (daily,
weekly, monthly, quarterly, semi-annually, annually or never), (2) techniques used to
determine the target balance, and (3) the forms of idle cash investment for profitable
purpose. The extent of efficiency of cash management practices was measured by the
following indicators:
- Attitude of owner/manger to cash management
- Frequency (weekly, monthly, quarterly, annually or never) of preparing cash budget
- Owner/manager involvement in preparing cash budget
- Owner/manager involvement in interpreting and using cash budget
- Usefulness of cash budget in providing information for making decisions
- Application of cash management theories to determine cash balance
- Reasonability of target cash balance determination

- Computerization of cash budget preparation
b) Receivable management practices
Muhammad Waqas Younas (2011) examined the working capital management and
capital budgeting practices of a sample of small firms. In their survey, respondents were
15

requested to indicate (on a scale 1= “never use/review”, to 5 = “use/review very often”) the
frequency with which they reviewed their debtors’ credit period, debtors’ discount policy,
bad debts and doubtful debts based on the following items:
- Attitude of owner/manger to receivable management
- Frequency of reviewing debtors’ credit period
- Reasonability of debtors’ credit period
- Frequency of reviewing debtors’ discount policy
- Reasonability of debtors’ discount policy
- Frequency of reviewing bad debts
- Reasonability of bad debts
- Computerization of receivable management
c) Inventory management practices
In examining inventory management practices, R. S. Saxena (2009) focused on
reviewing stock turnover, stock levels, stock re-order levels and using the economic order
quantity model. They used five-point scales to measure the degree of frequency of
reviewing/using these indicators. This research used nine-point scales, which is similar to the
scales developed by Max Müller (2011), to measure the efficiency of inventory management
practices via the following indicators:
- Attitude of owner/manager to inventory management
- Frequency of reviewing inventory turnover
- Frequency of reviewing inventory level
- Reasonableness of inventory turnover
- Reasonableness of inventory level
- Usefulness of inventory budget in providing information for making decisions

16

- Utilizing inventory management theories
- Computerization of inventory management
2.4.4 Fixed asset management
Alfred M. King (2011) defined fixed-asset management including non-financial and
financial considerations in fixed-asset acquisition, quantitative techniques for capital project
evaluation, investment hurdle rate determination, and handling risk and uncertainty in this
context. This research examined the efficiency of fixed-asset management in terms of
financial management. In this study, the efficiency of fixed-asset management was defined
as the efficiency of capital budgeting practices and fixed-asset utility after acquisition. This
was considered before and after making investment decisions. Before making investment
decisions, the efficiency of fixed-asset management was evaluated via the efficiency of
capital-budgeting practices. After making investment decisions, the efficiency of fixed-asset
management was evaluated via the efficiency of fixed-asset utility. Particularly, the
efficiency of fixed-asset management was measured by the following indicators on five-
point scales:
- Attitude of owner/manager to fixed-asset management practices •
- Attitude of owner/manager to assessing capital project before making investment
decisions
- Frequency of using capital budgeting techniques before making investment decision
- Reasonability of capital budgeting used
- Sophisticated extent (payback period, discounted payback period, net present value,
internal rate of return or modified internal rate of return) of capital budgeting techniques
used
- Reasonability of utilizing fixed assets
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- Usefulness of fixed assets acquired
- Computerization of fixed asset management practices.

2.5 FINANCIAL ASPECTS
2.5.1 Identifying financial aspects
This subsection mainly discusses the concept of financial aspects of SMEs. It reviews
definitions of financial aspects that were mentioned and used by previous researchers. A. B.
Dorsman, Wim Westerman, Mehmet Baha Karan, Özgür Arslan (2011) are viewed as the
key researchers who study financial aspects. In defining financial aspects, states:
“Financial aspects of enterprise, often in the form of accounting ratios, derived from
financial statements provide useful information for numerous purposes. This information can
be used to quantify the position of small business in terms of their profitability, liquidity, and
leverage and to compare them with other or large enterprises”.
Dorsman, Wim Westerman, Mehmet Baha Karan, Özgür Arslan (2011), who studied
financial aspects of acquired firms, conducted factor analysis on several ratios and reduced
the number of ratios into the following six factors: leverage, profitability, activity, liquidity,
dividend policy and earning ratio identifying financial aspects.
2.5.2 Measuring variables of financial aspects
2.5.2.1 Liquidity
Most researchers view liquidity as one of the variables to define financial aspects.
Liquidity refers to the overall level of cash and near cash assets (such as debtors and stock)
held and cash inflows and outflows that add to and subtract from the sum of these assets
(Richard Bull 2008). When used for determining financial aspects, liquidity is often
measured as ratios. There are two kinds of ratios used by most researchers :
1. Cash ratio = Cash/ Current liabilities
2. Quick ratio = (Current assets – Inventory) / Current liabilities