For the SME firms in the ICT sector, both firm size, equity to assets leverage factor, and payables turnover working capital factor have a positive influence on the financial performance
Context leading to the study
In Vietnam, small and medium enterprises (SME) account for nearly 98% of the total number of enterprises operating in the economy They are crucial to economic expansion, job development, poverty alleviation, and raising worker incomes SMEs are also the source of commercial innovation and the link that connects the outcomes of scientific and technological research to real-world applications Following the Covid-19 outbreak, Vietnam's small and medium-sized businesses once more had to deal with issues like rising interest rates, inflation, and the high cost of raw materials Surprisingly, though, several small and medium-sized businesses have shown resilience in the face of adversity in addition to continuing to run efficiently
The Covid-19 pandemic with its unpredictable fluctuations is the cause of disruptions in the global supply chain, but at the same time, it is also the factor that creates clear changes in the ICT and Logistics industry The activities of the ICT and logistics sector, which is the "backbone" of the supply chain, are also undergoing significant change in the context of the increasingly active cross-border e-commerce and the digital transformation occurring more and more from government agencies to manufacturing, service, and supply enterprises More than 35,000 businesses, about 90% of which are small and medium-sized businesses, are currently involved in Vietnam's booming logistics sector Besides that, businesses all around the nation must expedite the need for digital transformation in order to employ information and communication technology (ICT) advancements to solve work and improve living, since the COVID-19 epidemic has had a significant impact on many economic operations As a result, even during the epidemic season, the ICT sector is now a developing one Along with the surge in technology investment packages, the digital transformation trend in Vietnam and globally also benefits small and medium-sized businesses in the information technology sector
Therefore, I take the two industries of ICT and Logistics in my study as they are two critical ones that may reflect aspects of a national economy and for data availability as well First, the ICT sector includes all means of communication, hardware, and network information, such as software, telephones, media, audio processing, network, and monitoring functions Through the use of electronic devices like laptops, tablets, and smartphones, ICT helps to create a globally connected society, remove language barriers, and enable effective interaction and communication between people Besides, ICT also brings benefits to business, such as automating production, controlling and storing data, and exploring data for potential customers Second, the logistics sector is the industry providing all industrial warehouses and transportation supporting the production of the main finished products, such as components, accessories, spare parts, packaging products, and raw materials The logistics sector is essential to raising the competitiveness of key industrial goods and quickening the process of deeper and wider industrialization
Investors and authorities are always interested in assessing a company's sustainability The economic aspect of a company's sustainability is reflected in its financial performance The fields of operations, financial management, and information systems have all done extensive research on the multidisciplinary subject of performance measurement In addition, sustainability is a hot topic right now Investors and politicians require a two-pronged study In order to evaluate investment opportunities in various markets, a cross-industry comparative analysis is first required This is done in order to determine whether industry has a better environment, more opportunities for profitability, and is less hazardous than others Second, in order to read statistics and forecast the state and future directions of the industries, managers and investors need to become well-versed in the elements influencing operations and financial performance across industries That capacity is essential while making choices
The two sectors, ICT and logistics, attract investors who specifically fund SMEs and start-ups since they are important to the nation's economic and social development (i.e., productivity, employment prospects, food safety, and state budget) Thus, this is the reason I selected the topic Factors affecting the financial performance of companies: a case study of listed small and medium enterprise (SME) companies in Vietnam for my thesis.
Objective of study
The primary objective of this research is to explore factors that affect the financial performance of firms with case study of listed small and medium enterprises (SME) in the two industries of ICT and Logistics The secondary objective is to compare the SME firms’ performance between the 2 industries to provide references for investors to make informed decisions.
Questions of study
The research addresses two major questions:
(i) Comparatively, what are the factors affecting the financial performance of
SME companies in the two industries of ICT and Logistics?
(ii) What are the comparative performances of companies in these two industries?
The structure of thesis
The thesis is organized into five chapters, in addition to the introduction and references Chapter 1 provides an overview and the objective of the thesis study Chapter
2 provides the importance of financial performance measurement for sustainability management of SME companies and the general theory of factors affecting an SME firm’s financial performance Chapter 3 provides research methodology and an analytical framework to guide the analysis, the hypotheses, and the data samples Chapter 4 presents research results and discusses the implications of findings Chapter 5 concludes the summary and implications of findings, recommendations, and identifying the limitations of the study
According to Artiacha, Leea, Nelsonb, & Walker (2010) and Labuschagne, C Brent,
& Erck (2005), corporate sustainability is a business and investment strategy that aims to use the business practices that make the business perform the best in order to meet the needs of the enterprise and its stakeholders today and balance them with those of future stakeholders From a conceptual standpoint, business sustainability primarily emphasizes consideration of three basic aspects: (i) social, (ii) environmental, and (iii) economic (Waddock, 1997; Goyal, Rahman, & Kazm, 2013) That involves sustainable development “that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987) Normative models look at how sustainability practices increase business profitability and shareholder value in order to understand the economic aspect of sustainability In order to create effective corporate sustainability strategies, researchers in this field concentrate on (i) performance measurement and (ii) the impact of corporate sustainability performance on company performance (Atkinson G , 2000)
Since SMEs make up nearly 98% of all firms and the majority of the private sector GDP, wealth and employment generation, and social and environmental consequences, they are vital to the health and stability of the global economy The natural ecosystem is under tremendous strain, and it is acknowledged that limited resources are rapidly running out SMEs are currently under more and more pressure to assess and control their environmental effect They play a crucial role in the supply chain, as suppliers and customers alike are calling for more sustainable management, particularly for SMEs looking to land contracts with bigger businesses or the government
Fortunately, there is mounting evidence that sustainability activities, like lowering a SME's carbon footprint, can also boost their bottom line, according to a report by the Association of Chartered Certified Accountants (ACCA) titled "Embedding
Sustainability in SMEs." In all industrial sectors, SMEs of all sizes, profit and non-profit, public and private, stand to gain a great deal from implementing sustainable business practices Cost savings, lower risk, favorable brand association, and the ability to satisfy supplier, investor, and customer demand for ecologically friendly goods and services can more than offset the upfront costs of incorporating sustainability into the main business plan and disclosing it The initial expenditure is therefore more of an investment.
The significance of measuring financial performance for sustainability
Addressing the concerns of stakeholders, including shareholders, CEOs, staff members, customers, former and current international organizations, regulators, and others, is the goal of financial performance management Engaging stakeholders can help improve sustainability performance since investors appear to respond favorably (at least in the short term) to more trustworthy sustainability performance information (Goyal, Rahman, & Kazmi, 2013) Sustainability Performance Measurement and Assessment (SPMA), a component of financial performance management, aids in managing value creation for stakeholders and gives them pertinent information (quoted in Goyal, Rahman, & Kazmi, 2013) SME firms can increase their business value in two ways by managing, measuring, and reporting sustainability (Schneider, Wilson, & Rosenbeck,
2010) The first method is benchmarking, which involves comparing a company's performance to its goals and the performance of its competitors The second method is using transparency and communication with a range of internal and external stakeholders, both established and new, to show stewardship of the resources they manage and the value they create
Small and medium-sized businesses (SMEs) may believe that sustainability is only important for large corporations and that the costs of running a small firm outweigh the advantages Additionally, their accountants, both those who work for the company (accountants in business) and those who provide services to the company (accountants in practice), will tell you that persuading SMEs to adopt sustainability is a difficult task However, SMEs can gain from new opportunities, cheaper costs, and decreased risk if they incorporate sustainability into their main business plan Additionally, their accountants, who usually work for small- and medium-sized firms (SMPs), might be very important to their path.
Framework to measure the firm’s financial performance in the corporate
corporate sustainability performance in SMEs
An evaluation of the company's performance becomes necessary when sustainability is incorporated into the creation of corporate strategies Indicators that provide information about sustainability are deemed significant for stakeholders and their interactions with the business Information about sustainability is categorized into groups that are pertinent to particular stakeholders, such as (i) information about products for consumers, (ii) information about business value for investors, and (iii) information about employees' health These organizations assist managers by generating value for many stakeholders and supplying data for decision-making (Hửrisch, Freeman,
Corporate management in SMEs must use corporate sustainability performance measurement to track the company's advancement Corporate sustainability in SMEs evaluation has been the subject of numerous works of literature (Goyal, Rahman, & Kazmi, 2013; Artiacha, Leea, Nelsonb, & Walker, 2010) According to a literature study by Goyal, Rahman, and Kazmi (2013), a composite sustainability index that concurrently integrates the social, environmental, and economic aspects of sustainability should be part of a framework to assess corporate sustainability performance Different approaches employ a combination of financial and non-financial measurement units Ilinitch, Soderstrom, and Thomas et al (1998) provide a scoring framework to estimate corporate environmental sustainability in non-financial units, while Atkinson (2000) proposes a framework that assesses businesses' financial contributions to sustainable development According to Atkinson (2000) and Ilinitch, Soderstrom, and Thomas (1998), these approaches look at corporate sustainability in the framework of the business case, where sustainability policies are seen as win-win solutions for businesses on both the financial and environmental performance fronts Financial ratios (profitability ratios, cash flow ratios), levels of profit available to shareholders (ROE), profit levels for assets (ROA), and leverage ratios are examples of financial indicators that are used as stand-ins for performance evaluation Net profit / average capital employed, net profit / total income or revenue, net profit / total costs, return on investment, EBIDTA margin, sales, and return on equity are among the most often utilized ratios (Lebas, 1995) Although it is unclear whether a successful capital investment securing the long-term viability of businesses results in higher profits, profit is a better indicator to measure economic sustainability because it provides information regarding the returns on investments made by businesses (Artiacha, Leea, Nelsonb, & Walker, 2010) A company with higher performance will be more stable, able to respond to changes and adjust to them, and will produce more effectively and efficiently to guarantee a profit (Dessler, 2005; Striteska
Some economists suggested calculating thresholds into a composite financial index so that management may assess how well his company is performing by comparing its financial sustainability to that of the industry in which it operates Analysts may find this index a useful tool for comprehending the reasoning behind evaluating a company's high sustainability performance.
Relation between Corporate Sustainability and Finance Performance
The relationship between three important factors has been the focus of research on corporate sustainability performance (CSP) in SMEs: (i) the level of corporate sustainability performance; (ii) corporate financial performance; and (iii) the nature and extent of corporate sustainability disclosure (Al-Tuwaiji, Christensen, & Hughes, 2004)
As a result, CSP gauges how much a company integrates governance, social, environmental, and economic considerations into its operations and, eventually, how these variables affect the company and society
Because investing in corporate sustainability performance would yield financial gains that outweigh its expenses, several scholars assert that it has a positive relationship with financial success (McGuire, Sundgren, & Schneeweis, 1988) Better SME financial performance would probably result from corporate sustainability performance's advantages, which include increased employee morale, goodwill, better connections with bankers, investors, and the government, as well as easier access to money (McGuire, Sundgren, & Schneeweis, 1988) In contrast to the research stream, another one contends that there is no correlation between CSP and financial performance According to Ullmann (1985), a variety of intervening factors are likely to have an impact on the relationship between CSP and financial performance Many academics have found little theoretical justification for a direct relationship between CSP and financial performance in SMEs because it is very difficult to regulate these intervening factors According to this viewpoint, businesses that invest in CSP might not see an increase in productivity and performance (Ullmann, 1985).
Factors affecting the SME firm’s financial performance
Firm size factor
It has long been known that a SME firm's performance is influenced by its size Because scale has a multifaceted impact on a firm's operations, it is a significant factor in evaluating its business performance As a result, business size is seen to be a key factor in determining profitability Large businesses frequently gain from economies of scale, increased access to resources, and market dominance, all of which can contribute to better business success Smaller companies can be more flexible, nimble, and able to take advantage of niche markets; therefore, the link between their size and performance is not linear The relationship between firm size and efficiency is further influenced by market conditions, industry dynamics, and context-specific factors
Yadav (2022) conducted research that examines the impact of business size on corporate profitability An SME enterprise's scale significantly increased profitability, according to the study, which used the COMPUSTAT Global database and a panel dynamic fixed effects model for nearly 12,001 unique non-financial listed and active firms from 1995 to 2016 for 12 industrial and emerging Asia-Pacific economies The influence of scale has numerous causes Research has shown that firm size and financial success are related These studies include those by Amaljali et al (2012), Liargovas and Skandalis (2010), Lee (2009), and Amato (2007) More specifically, bigger businesses with stronger economies and more promise ought to make more money Additionally, when bidding on or negotiating a particular project, larger organizations with greater financial strength and reputation should have an advantage.
Leverage ratio factor
One of the many financial indicators used to examine a SME company's capital structure is the leverage ratio This funding may come from debt in the form of loans or equity Because SME businesses frequently utilize both debt and equity to finance their operations, leverage ratios are significant Assessing a SME company's capacity to settle its debts when they become due can be aided by knowing how much debt it has
Lee (2008) looked into how a company's success in South Korea was affected by its equity ownership structure Two primary aspects of ownership concentration, that is, the allocation of shares held by majority shareholders and ownership identity, particularly that of foreign and institutional investors, were examined in Lee's study From 2000 to 2006, Lee gathered panel data, using return on assets (ROA) as a stand-in for financial performance
According to research by Yaning Qiu (2023) that looks at how Chinese logistics companies, the majority of which are small and medium enterprises, performed as businesses during the COVID-19 crisis in relation to leverage, liquidity, and cash flows from operations The study uses multiple regression analysis to gather data from listed logistics companies in 2020–2021 The return on equity and return on assets are used to gauge a company's performance The findings indicate that while leverage has a detrimental effect on a company's performance, liquidity and cash flows from operations have a beneficial effect This study will add to the body of knowledge and help business managers address the COVID-19 pandemic
Dabi et al (2023) looked at how capital structure affected the financial performance and sustainability of 51 microfinance organizations (SMEs) in Ghana The study examined how return on assets (ROA) related to debt to equity, equity to assets, and debt to total assets The study also included control variables like inflation, real GDP growth, risk, firm size, and deposit-to-loan ratio Using the fixed effect model, the study found that equity to assets and debt to total assets significantly and negatively affect ROA.
Management efficiency factor
Inventory turnover is a measure of a SME company's inventor activity or liquidity (Lawrence Gitman , 2015), and inventory turnover ratio is a measurement of a SME company's liquidity and efficacy in managing its inventory (Van Horne, J.C and Wachowicz, J.M., 2008) A low ratio indicates a large amount of unsold inventory, whereas a high ratio indicates prompt sales of inventory due to effective inventory management by the company A corporation makes more profit when its merchandise sells quickly
Inventory turnover as a performance metric in manufacturing operations was studied by Kwak (2019) In order to compare the performance of top and bottom organizations as indicated by Altman's Z score technique, this study examined the factors influencing inventory turnover by segment and its link with other financial measures The study, which used data from 421 Korean manufacturing enterprises between 2010 and 2018, discovered that inventory turnover ratios were favorably connected with capital intensity for the manufacturing sector and adversely correlated with gross margin and debt cost; however, the results differed by segment
Heba Srour and Ahmed Azmy (2021) investigate how inventory management, as measured by inventory turnover, affects the SME company's profitability as measured by return on equity and return on assets The Egyptian stock exchange market provided the data EViews 12 was used for both multiple regression and descriptive statistics analysis in this investigation The study's findings, which were determined to be statistically significant at the 5% level, show a positive association between inventory turnover and both ROA and ROE.
Working capital factor
The SME company's profitability and ROA are directly impacted by working capital issues such as the turnover of receivables, inventory, and payables (Delen et al., 2013)
The payables turnover ratio has a considerable negative impact on ROA, according to Hien Tran, Malcolm Abbott, and Chee Jin Yap (2017), indicating that other ratios may also have an impact on a SME company's profitability Despite this, payables turnover is still a crucial component of profitability, maybe due to improved cash flow and lower transaction and maintenance expenses
Lufthansa Judge Priansyah and Mutiara Tresna Parasetya (2024) claim that accounts for payable turnover gauges how quickly a business pays its suppliers for products or services that were purchased on credit The average accounts payable and the cost of goods sold are compared to determine this ratio A speedier accounts payable cycle or a shorter payment period is indicated by a greater ratio SME businesses can assess how well they handle their short-term obligations to suppliers by looking at accounts payable turnover A low ratio indicates a comparatively lengthy debt payback time, which could make the business more vulnerable Payables turnover and business profitability have been proven to be positively correlated in a number of prior empirical studies (Oranefo,
P C., & Egbunike, C F., 2023) The study of Amponsah-Kwatiah and Asiamah (2020), which discovered a favorable correlation between payables turnover and SME business profitability, further supports this Profitability may rise if a company's payables turnover is quicker, which means that suppliers will receive payments sooner
Prior empirical research has repeatedly demonstrated a significant and positive correlation between debt turnover and SME business performance The study by Seung Wook Jang and Woo Chul Ahn (2021) was cited Their goal is to help the logistics sector grow steadily by examining the differences in financial structures in the Korean logistics sector and how these financial structures affect management effectiveness The ratio of net gain to total assets is the definition of profitability The same writers also served as the guides for accounts receivable turnover and payable turnover, which show how well the business managed credit sales and debt, respectively
More precisely, net sales and the typical collection time are compared to determine the billing cycle According to Lufthansa Judge Priansyah and Mutiara Tresna Parasetya
(2024), this ratio shows how frequently revenue is generated via billing turnover over a given period of time Increased rotation of receivables results in more effective receivables management, which boosts the organization's income and profitability.
Liquidity factor
The ability of a corporation to meet its short-term financial obligations, or liquidity, is essential to its operations and long-term financial stability Research has shown that a SME company's liquidity and performance are positively correlated; this suggests that SME companies with greater liquidity are better equipped to manage expenses, take advantage of investment opportunities, and weather economic downturns However, a shortage of liquidity may result in financial issues and impair the operation of the company
The current ratio, quick ratio, cash ratio, efficiency ratio, profitability ratio, and ROA and ROE have a weakly significant relationship and together have a significant impact on the growth of profits for industrial companies in the Korean logistics industry that are listed on the 724 logistics companies between 2008 and 2018, claim Seung Wook Jang and Woo Chul Ahn (2021) Mathiraj, Shetty Deepa Thangam Geeta, N Nagalakshmi, and M Vinoth (2019) found that the liquidity ratio (including the current, quick, and cash ratios), solvency ratio, and profitability ratio all have a beneficial effect on the financial performance of India Logistics firms.
Conclusion
The table below displays the variables influencing financial performance based on earlier research
Table 2-1: Measures reflecting financial performance of a firm
ROA A financial ratio known as "return on assets" (ROA) shows how lucrative a business is in comparison to its total assets
A company's total assets are the sum of its long-term and current assets
(Atkinson G , 2000; Goyal, Rahman, & Kazm, 2013) Management efficiency
Inventory turnover is a crucial financial metric that reveals how efficiently a company manages its inventory Inventory turnover measures the number of times a company sells and replaces its inventory within a specific period, typically a year
Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory
(Van Horne, J.C and Wachowicz, J.M., 2008; Lawrence Gitman , 2015; Kwak,
A financial indicator called the equity-to- assets ratio calculates the percentage of a company's assets that are financed by equity Put more simply, it shows what proportion of a company's assets are owned by its shareholders
Equity to Assets Ratio = Total Equity / Total Assets
A company's short-term debt to its creditors and suppliers is known as accounts payable How well a business pays its suppliers and short-term debts is shown by the accounts payable turnover ratio
The frequency with which a business collects its average amount of accounts receivable is measured by the accounts receivable turnover ratio It is a measure of how well a business manages its line of credit process and collects unpaid bills from customers
Cash ratio A liquidity ratio called the cash ratio assesses how well a business can meet its short-term obligations using just cash and cash equivalents Since it does not include other current assets like inventories and accounts receivable, it is regarded as the strictest liquidity metric
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
The analytical framework to guide the analysis
The framework to analyze the financial performance of SME firms in ICT and logistics sectors is based on theoretical frameworks and prior empirical studies There are five factors that influence a firm's financial performance: (i) firm size; (ii) management efficiency; (iii) liquidity; (iv) leverage; (v) working capital status The following chart displays the framework for analyzing the financial performance of SME enterprises in ICT and logistics sectors
The relationship between variables is presented in the figure below
Figure 3-1: Analytical Framework to assess sustainability
The table below provides a summary of the measures that represent the factors used for this analysis
The firm capability Size (total assets)
Leverage Equity to Asset ratio
Firm capability Size (Total assets) Natural logarithm of total asset value
Considering earlier research, in this thesis research, I propose to build the multivariate regression model as follows:
- Cash, Equity, Inventory, Pay, Receivable, Size are independent variables
- i: is the i th year of the factor
- u 𝑖𝑡 is the error term representing all other factors affecting ROA
In which Cash, Equity, Inventory, Pay, Receivable and Size are coefficients of the independent variables, which are key financial ratios for the SME company If Cash, Equity, Inventory, Pay, Receivable and Size > 0, these coefficients have a positive impact, which indicates that an increase in the corresponding ratio is associated with a higher ROA If Cash, Equity, Inventory, Pay, Receivable, and Size