Ảnh hưởng của quản lý tài chính và một số khía cạnh tài chính đến lợi nhuận của doanh nghiệp vừa và nhỏ thương mại và dịch vụ trong tỉnh thái nguyên

luận văn, khóa luận, chuyên đề, đề tài, báo cáo,

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

2013

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

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:

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

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

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

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 4.22: 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

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

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

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) How do financial management practices and financial aspects affect SME

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

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

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

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

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:

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 asset s, 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

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

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

- 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,

- 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

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

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

- 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

- 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

In general, previous researchers strongly agreed in the use of these two ratios as measures of liquidity and to determine financial aspects of small enterprises

2.5.2.2 Financial leverage

Leverage is the next variable often used by most researchers to determine financial

aspects of the small enterprises Michael Diegelmann, Henryk Deter (2007) indicated that

financial leverage is the extent to which fixed-income securities (debt and preferred stock) are used in a firm’s capital structure

When financial leverage is used to identify financial aspects of the firm, it is often measured by the following ratios:

1 Equity ratio = Equity/Total asset

2 Long-term debt ratio = Long-term debt/Total capital

3 Lon-term debt to equity ratio = Long-term debt/Common stock equity

4 Debt ratio = Total debt/Total assets

5 Debt-to-equity ratio = Total debt/Total equity

2.5.2.3 Activity

A ratio of activity is considered the third variable to determine financial aspects of the firm Michael Diegelmann, Henryk Deter (2007) measure activity by the following ratios:

1 Inventory ratio = Inventory/Sales

2 Receivables ratio = Accounts receivable/Sales

3 Fixed assets ratio = Fixed assets/Sales

4 Total asset turnover = Sales/Total assets

2.5.2.5 Profitability

Profitability ratios are viewed as another variables to identify and measure financial aspects of SMEs According to Michael Diegelmann, Henryk Deter (2007) , profitability is a crucial indicator for determining the financial position of the firm The firm is considered

financially weak when its profitability is sliding or the profitability is weak compared to other firms in the industry In their study, they also used return on assets as the indicator to reflect profitability

Dorsman, Wim Westerman, Mehmet Baha Karan, Özgür Arslan (2011) measured profitability by three ratios: return on total assets, return on net assets, and return on equity According to them return on total assets is the best measure of a firm’s efficient use of assets because it is independent of financing methods While return on equity is a measure of the profit return to shareholders

In summary, depending on the purpose of their study the researchers in the literature use different ratios to measure financial aspects of a firm

- Liquidity measured by current and/or quick ratios, cash ratio

- Financial leverage measured by debt (long-term and short-term) ratio, debt-to-equity ratio, and/or equity-to-total asset ratio,

- Activity measured by total asset turnover, receivables turnover, and/or inventory turnover, and

- Profitability measured by return on sales, return on assets and/or return on equity

2.6 SME PROFITABILITY

2.6.1 Importance of profitability

Profitability is one of the most important objectives of financial management because one goal of financial management is to maximize the owner’s wealth (H Kent Baker, Gary Powell 2009) Thus, profitability is very important in determining the success or failure of a business At the establishment stage, a business may not be profitable because of investment and expenses for establishing the business When the business becomes mature, profits have

to be produced

2.6.2 Defining and measuring profitability

One of the most difficult attributes of a firm to conceptualize and measure is profitability Michael Diegelmann, Henryk Deter (2007) In a general sense, accounting profits are the difference between revenues and costs However, the problem with accounting-based measures of profitability is that they ignore risk In the economic sense, a firm is profitable only if its profitability is greater than investors can achieve independently

in the capital market

- Profit margins are computed by dividing profits by total operating revenue and thus express profits as a percentage of total operating revenue

- Return on assets is the ratio of income to average total assets, both before tax and after tax, and measures managerial performance

- Return on equity is defined as net income divided by average stockholders’ equity, and shows profit available for stockholders

2.6.3 Factors influencing on profitability

This subsection reviews the factors affecting SME profitability Its objectives are (1) to identify which factors affect SME profitability and (2) to isolate those factors that are caused

by financial management practices and financial aspects

Based on the profitability measures presented by Michael Diegelmann, Henryk Deter (2007) , the main factors influencing profitability include revenue, costs and capital In general, revenue is determined or influenced by marketing, sales management and new product development, whereas cost and capital are mainly affected the financial management practices

Generally, there are many factors affecting SME profitability However, from the viewpoint of financial management, DuPont analysis is considered a standard model to analyze the factors affecting on SME profitability According to Michael Diegelmann, Henryk Deter (2007) , a virtue of DuPont analysis is its simplicity Three fundamental ratios

derive one summary ratio: return on equity (ROE) Their relationships are illustrated by the following equations:

Return on equity = (Net profit margin) x (Total asset turnover) x (Leverage) (2.1) Net income/equity = (Net income/sales) x (Sales/assets) x (Assets/equity) (2.2)

The ratios that determine ROE reflect three major performance dimensions of interest

to all loan analysts: income statement management, or how much profit a company can generate per sales dollar; and two aspects of balance sheet management, how well assets can generate sales and the amount of solvency risk The ratios also indicate that there are several paths that a business can use to gain a return for its owners:

Margin, volume, and leverage All represent areas of financial management and are affected by financial management practices

While DuPont analysis technically only includes the three ratios discussed above, the framework can be extended to incorporate most major financial ratios (Michael Diegelmann, Henryk Deter (2007) It helps to think of the ratios as analogous to parts of a tree The trunk

is ROE and there are three major branches: profit margin, total asset turnover, and assets to equity

To overcome this problem, the number of ratios is broken-down into smaller groups while permitting a more complete separation of operations and financial leverage (Eq 2.3)

Net income/equity = (operating income/sales) x (EBT/operating income) x

(Net income/EBT) x (sales/assets) x (assets/equity) (Eq.2.3)

Equation 2.3 provides new insights into profit margin and leverage The first of the three new ratios, operating margin, relates operating income to sales Because operating income is before any deduction for interest, this ratio measures the underlying profitability of the business and, except for the impact of leasing, is independent of how the firm is financed The second ratio divides earnings before taxes by operating income This ratio measures the income statement effect of financial leverage As financial leverage and interest expense increase, this ratio decreases To see this, consider a situation where there is no interest expenses or non-operating income Earnings before taxes and operating income would be

identical and the value of the ratio would be one The last new ratio is net income divided by earnings before taxes This measures the effect of taxes and is actually equivalent to one minus the effective tax rate

2.7 RELATIONSHIPS BETWEEN FINANCIAL MANAGEMENT AND SME PROFITABILITY

Concerned with the relationships between working capital management practices and

SME profitability, Lorenzo Preve, Virginia Sarria-Allende (2010) provide some relevant

- Firstly, most empirical evidence comes from developed economies such as the USA,

UK, Canada and Australia Evidence seems to lack evidence from emerging economies, especially from the transiting economies such as Vietnam

- Secondly, most researchers in the literature only focus on investigating and describing financial management practices, whereas few examine the impact of financial management practices on SME profitability

It will be difficult to convince financial management practitioners of the importance of financial management until evidence on the impact of financial management practices on SME profitability is provided and the relationship between the two variables are discovered

In addition to financial management practices, the literature also provided the valuable findings related to financial aspects of SMEs Four variables including liquidity, financial leverage, activity and profitability are popularly used by previous researchers to identify and measure financial aspects of SMEs

Many studies on financial aspects of SMEs have been conducted by researchers over several decades However, there still exist gaps in the literature on financial aspects of SMEs, which need to be examined

• Firstly, it appears that financial aspects of SMEs in developing countries, especially in the transiting economies such Vietnam has not been investigated with empirical data

• Secondly, to date there is no study, which examines the relationship or the impact of three variables: liquidity, financial leverage, and activity on profitability

2.9 CONCEPTUAL FRAMEWORK

Figure 2.1: The impact of financial management on SME profitability

INDEPENDENT VARIABLES

Financial management practices:

Accounting information system

Working capital management

Fixed asset management

Average of:

Return on sales Return on assets Return on equity

Chapter 3

METHODOLOGY

Chapter 3 discusses aspects of the research methodology including research design,

data collection and data analysis methods, and hypothesis testing to support the model

The objectives of this chapter are: (1) to justify the study’s research methodology, (2)

to explain the research methodology used in the study, and (3) to demonstrate how research design, and data collection and analysis can be utilized in this study to answer the research questions outlined in the chapter 1 This chapter is structured into ten sections Section 3.1 discusses and explains how the research design can be appropriately utilized in this study to

answer the research questions Section 3.2, 3.3 shows overview the locale of study and business structure and SMEs in Thai Nguyen province Section 3.4, 3.5, 3.6 provide how to determine the the sample size and subject of the study Section 3.7 concentrates on defining and measuring the variables, and developing the model, which will be tested by empirical data Section 3.8, 3.9 and 3.10 respectively presents methods of data collection, data transformation, and data analysis

3.1 RESEARCH DESIGN

This study is designed to investigate the impact of the financial management practices and financial aspects on SME profitability Thus causal research was implemented

In this research, both survey and secondary data methods are used in combination

Survey was chosen as a research technique in this study to investigate financial management practices of SMEs in Thai Nguyen province Questionnaires were designed and directly delivered to SMEs to collect data related to financial management practices

The secondary data method was used to examine the financial aspects of SMEs The variables such as liquidity ratios, financial leverage ratios, activity ratios, and profitability

ratios are derived from financial statements These financial statements are available from taxation departments of Thai Nguyen province and sometimes from businesses directly

3.2 LOCALE OF THE STUDY

Thai Nguyen borders six provinces: Bac Kan, Vinhphuc, Tuyen Quang, Lang Son, Bac Giang, Ha Noi Thai Nguyen also borders the Vietnamese capital of Hanoi to the south Thai Nguyen is the gateway for socio-economic exchange with the Red River delta The exchange

is carried out via road, rail and waterways in the province Main water features include the Cong River and Nui Coc Lake

3.3 BUSINESS STRUCTURE AND SMES IN THAI NGUYEN PROVINCE

According to the Thai Nguyen of Department of Investment and Planning, at the time

of 2011, there are 1.854 trading and service businesses (consisting of 770 private enterprises,

676 limited liability companies, 408 joint stock companies) operating in Thai Nguyen province over VND 21.540,5 billion in total capital, and over 48.638 employees

In terms of business size, almost all of these businesses are small and medium enterprises with the average total capital of VND 6,234billion for private enterprises, VND 7,030 billion for limited liability companies and VND 26, 431 billion for joint stock companies

With an average total capital and number of employees as mentioned earlier, most businesses in Thai Nguyen province are considered small and medium enterprises (Thai Nguyen of Department of Investment and Planning 2011)

3.4 SAMPLING DESIGN AND TECHNIQUES

This research used probability-sampling method Based on the probability sampling method, there are four main sampling techniques: simple random sampling, systematic

sampling, stratified sampling, and cluster sampling Simple random sampling was chosen in this study

3.5 DETERMINATION OF SAMPLE SIZE

Simple random sampling technique with the fraction of 16 was used to draw a sample of

120 (Slovin's formula n=N/(1+Ne2)=1854/(1+1854*0.92)≈120 where e =0.9 is std.Error) SMEs located in Thai Nguyen City for data collection via personal interview

Table 3.1 Number and percentage of SME sample and population

Business Type

Number Percentage Number Percentage

Source: Thai Nguyen of Department of Investment and Planning (2011)

3.6 SUBJECT OF THE STUDY

This study examined the impact of financial management practices on profitability of private SMEs Therefore, only forms of private businesses that have set up a relatively complete system of financial management practices including practices of accounting information system, working capital management, fixed-asset management, liquidity ratios, financial leverage ratios and activity ratios were included in this study

3.7 RESEARCH INSTRUMENT

3.7.1 Dependent variables

This study examines the impact of financial management practices and financial aspects on SME profitability Generally, profitability is viewed as the dependent variable In this study, profitability of SMEs was also indirectly measured by three indicated variables including return on sales (ROS), return on assets (ROA), and return on equity (ROE)

- Return on sales (ROS) is computed by dividing profits by total operating revenue and thus it expresses profits as a percentage of total operating revenue or sales

- Return on assets (ROA) is the ratio of income to average total assets, both before tax and after tax It measures managerial performance

- Return on equity (ROE) is defined as net income divided by average stockholders’ equity It shows the profit available to share for the stockholders

In this study, profitability of SMEs was measured by three ratios: ROS, ROA, and ROE

3.7.2 Independent variables

In this study, the independent variables involved include variables used to define the efficiency of financial management practices and variables used to define financial aspects of SMEs

3.7.2 1 Independent variables related to financial management practices

1) Accounting information systems

In this study, accounting information systems included all systems of recording transactions, bookkeeping, cost accounting, and use of computers in financial record keeping for management decision-making However, this study was concerned with not only the context but also measurement of efficiency of accounting information systems The

efficiency of an accounting information system was measured by 8 items on the five-point scales on which the respondents were asked to rate where the positions of their businesses were for each item as described below:

Lists questions related to accounting information systems that owners or managers were asked to answer Based on their ratings, interviewers circled the appropriate number on the scale corresponding to each of 8 items

(1) How do you regard about accounting information system in your enterprise? (1= Low regard to 5 = Very regard)

(2) How frequent in preparing accounting reports in your enterprise? (1=Not frequent

at all to 5 =Very frequent)

(3) How does your enterprise update the business transactions? (1= Not updated at all

The extent of efficiency of an accounting information system was measured by the sum

of the values of eight of these indicated variables, which have a possible range of 8 to 40 The more points a business recorded, the higher the efficiency of its accounting information

system, and the accounting information system of a business was said to be “efficient” if its sum of points of 8 items as mentioned above is greater than the average point of 24

2) Working capital management

Working capital management includes three components: cash management, receivable management, and inventory management

a) Cash management practices

In this study, the efficiency of cash management practices was considered in terms of cash forecasting or budgeting, target cash balance determining, and cash surplus investing

Respondents were asked to rate the position of their businesses on the five-point scale corresponding to each item as presented by following:

(1) How do you regard about cash management practices in your enterprise? (1= Low regard to 5 = Very regard)

(2) How frequent does your enterprise in preparing cash budgets in your enterprise? (1=Not frequent at all to 5 =Very frequent)

(3) How involved is the manager in preparing cash budgets? (1= Not involvement to 5

(8) How computerized are cash management practices in your enterprise? ( 1= Low computerization to 5 = High computerization

The extent of efficiency of cash management practices was measured by the sum of the

values of eight of these indicated variables, which have a possible range of 8 to 40 The more

points a business recorded, the higher the efficiency of its cash management practices, and

the cash management practices of a business was said to be “efficient” if its sum of points of

8 items as mentioned above is greater than the average point of 24

b) Receivable management practices

In this research, the efficiency of receivable management was defined and measured by the frequency of review and extent of reasonability of debtors’ credit period, debtors’ discount policy, bad debts and doubtful debts Respondents were requested to indicate on five-point scales the frequency of review and extent of acceptability of debtors’ credit period, debtors’ discount policy, bad debts and doubtful debts

Respondents were asked to rate the position of their businesses on the five-point scale corresponding to each item listed by following and the interviewer circled the appropriate number depending on their answers

(1) How does your enterprise regard receivables management practices? (1= Low regard to 5 = Very regard)

(2) How regularly does your enterprise review debtors’ credit period? (1=Not regularly

at all to 5 = Very regularly)

(3) How reasonable is debtors’ credit period in your enterprise? (1= Not reasonable at all to 5 = Very reasonable)

(4) How regular does your enterprise review debtors’ discount policy? (1=Not regularly at all to 5 = Very regularly)

(5) How reasonable is debtors’ discount policy in your enterprise? (1= Not reasonable

at all to 5 = Very reasonable)

(6) How regular does your enterprise review percentage of bad debts? (1=Not regularly at all to 5 = Very regularly)

(7) How reasonable is the percentage of bad debts in your enterprise? (1= Not reasonable at all to 5 = Very reasonable)

(8) How computerized are receivable management practices in your enterprise? ( 1= Low computerization to 5 = High computerization

The extent of efficiency of receivable management practices was measured by the sum

of the values of eight of these indicated variables, which have a possible range of 8 to 40 The more points a business recorded, the higher the efficiency of its receivable management practices, and the receivable management practices of a business was said to be “efficient” if its sum of points of 8 items as mentioned above is greater than the average point of 24

c) Inventory management practices

Respondents were asked to answer the questions listed in Figure following and based

on their ratings the interviewer circled the appropriate number on the scale corresponding to each item

(1) How does your enterprise regard inventory management practices? (1= Low regard

(5) How acceptable is inventory level of your enterprise? (1= Very unacceptable to 5 = Very acceptable)

(6) How are inventory budgets of your enterprise useful in providing information for making decisions? ( 1= Not useful at all to 5=Very useful)

(7) How does your enterprise apply theories of inventory management in determining the inventory level? (1= Very poorly to 5 = Very well)

(8) How computerized are inventory management practices in your enterprise? ( 1= Low computerization to 5 = High computerization

The extent of efficiency of inventory management practices was measured by the sum

of the values of eight of these indicated variables, which have a possible range of 8 to 40 The more points a business recorded, the higher the efficiency of its inventory management practices, and the inventory management practices of a business was said to be “efficient” if its sum of points of 8 items as mentioned above is greater than the average point of 24

3) Fixed-asset management practices

Respondents were asked to rate the position of their businesses on the scale

corresponding to each item listed by Figure 3.6

(1) How does your enterprise regard fixed asset management practices? (1= Low

regard to 5 = Very regard)

(2) How does your enterprise regard assessing capital project before making

investment decisions? (1= Low regard to 5 = Very regard)

(3) How regularly does your enterprise review capital projects? (1=Not regularly at all

to 5 = Very regularly)

(4) How acceptable is capital budgeting utilized in your enterprise? (1= Very unacceptable to 5 = Very acceptable)