Luận văn Financial management and profitability of small and medium enterprises

Table of Contents

CERTIFICATE. ii

ACKNOWLEDGEMENTS. iii

ABSTRACT. v

GLOSSARY OF TERMS AND ABBREVIATIONS. vii

TABLE OF CONTENTS. ix

LIST OF TABLES. xiii

LIST OF FIGURES. xvii

CHAPTER ONE: INTRODUCTION TO THE STUDY

1.1 INTRODUCTION .1

1.2 RESEARCH BACKGROUND .3

1.3 RESEARCH PROBLEM .4

1.3.1 Research questions .6

1.3.2 Research objectives .6

1.4 METHODOLOGY.7

1.5 JUSTIFICATION FOR THE STUDY .8

1.6 DEFINITIONS OF TERMS USED IN THE STUDY .10

1.7 SIGNIFICANCE AND SCOPE OF THE STUDY.13

1.8 ANALYTICAL MODEL FOR THE STUDY .13

1.9 STRUCTURE OFTHE STUDY .15

1.10 CONCLUSIONS .16

CHAPTER TWO: THE ECONOMIC STRUCTURE AND SMEs IN VIETNAM

2.1 INTRODUCTION .17

2.2 VIETNAM: BACKGROUND INFORMATION.19

2.2.1 Overview ofthe country .19

2.2.2 The Vietnameconomy .23

2.2.3 The Vietnam population and labour.38

2.3 VIETNAM BUSINESS STRUCTURE .40

2.3.1 Types of business in Vietnam.41

2.3.2 Overview of enterprises in Vietnam.43

2.3.3 Small and medium enterprises in Vietnam .44

2.3.4 Policies for supporting SMEs.50

2.4 SMALL AND MEDIUM ENTERPRISE FINANCE INVIETNAM .51

2.4.1 Types offinance.52

2.4.2 Use offinance .53

2.4.3 Financial management for SMEs.54

2.4.4 Problems in financial management.55

2.5 BUSINESS STRUCTURE AND SMEs IN HO CHIMINH CITY .56

2.6 CONCLUSIONS.58

CHAPTER THREE: FINANCIAL MANAGEMENT AND PROFITABILITY OF SMEs

3.1 INTRODUCTION .59

3.2 DEFINITIONS OF SMEs.61

3.2.1 Qualitative definitions.61

3.2.2 Quantitative definitions .64

3.2.3 The forms of ownership of SMEs.65

3.3 FINANCIAL MANAGEMENT FOR SMEs .67

3.3.1 Defining financial management.68

3.3.2 Objectives of financial management.69

3.3.3 Major decisions offinancial management .71

3.3.4 The specific areas offinancial management .72

3.4 FINANCIAL MANAGEMENT PRACTICES.76

3.4.1 The context of financial management practices .76

3.4.2 Accounting information systems .77

3.4.3 Financial reporting and analysis .83

3.4.4 Working capital management .89

3.4.5 Fixed asset management .95

3.4.6 Capital structure management.100

3.5 FINANCIAL CHARACTERISTICS OFSMEs .104

3.5.1 Identifying financial characteristics .104

3.5.2 Measuring financial characteristics.107

3.5.3 Previous findings related to financial characteristics .111

3.6 SME PROFITABILITY.119

3.6.1 Importance ofprofitability.119

3.6.2 Defining and measuring profitability.120

3.6.3 Factors influencing profitability .123

3.7 RELATIONSHIPS BETWEEN FINANCIAL MANAGEMENT AND SME PROFITABILITY .126

3.8 MODEL OF THE IMPACT OF FINANCIAL MANAGEMENT ON SME PROFITABBILITY .128

3.9 CONCLUSIONS.131

CHAPTER FOUR: RESEARCH METHODOLOGY

4.1 INTRODUCTION .132

4.2 APPRAISAL OF PRIOR RESEARCH METHODOLOGIES .134

4.3 RESEARCHDESIGN .137

4.3.1 Classification ofresearch design .137

4.3.2 Selecting research design or paradigm .140

4.3.3 Selecting research methods or techniques .141

4.4 VARIABLE DEFINITIONS, SURVEY INSTRUMENT AND MODEL DEVELOPMENT .144

4.4.1 Variable measurements and survey instrument .144

4.4.2 Model development.162

4.4.3 Hypothesis statements .165

4.5 DATA COLLECTION METHODS .168

4.5.1 Secondary data collection.169

4.5.2 Primary data collection .170

4.6 DATA TRANSFORMATION .174

4.7 DATA ANALYSIS METHODS.175

4.7.1 General consideration.175

4.7.2 Descriptive statistics .176

4.7.3 Bivariate analysis .177

4.7.4 Multivariate analysis.178

4.8 CONCLUSIONS.183

CHAPTER FIVE: DATA ANALYSIS AND FINDINGS

5.1 INTRODUCTION .184

5.2 LINKS BETWEEN DATA ANALYSIS AND RESEARCH OBJECTIVES AND QUESTIONS .186

5.3 DESCRIPTIVE FINDINGS OFTHE RESEARCHSTUDY .187

5.3.1 Sample descriptions and SME characteristics .187

5.3.2 Descriptive findings of financial management practices.190

5.3.3 Descriptive findings of financial characteristics .206

5.3.4 Descriptive findings of profitability of SMEs.211

5.4 ASSOCIATIVE ANALYSIS AND FINDINGS OF THE RESEARCH STUDY.215

5.4.1 Factor analysis and principal components of financial management practices .216

5.4.2 Bivariate analysis and findings.221

5.4.3 Multiple regression analysis and findings .225

5.4.4 Test for the difference of average profits between efficient and inefficient financial

management groupsof SMEs.234

5.5 CONCLUSIONS.236

CHAPTER SIX: CONCLUSIONS AND IMPLICATIONS

6.1 INTRODUCTION .237

6.2 CONCLUSIONS RELATED TO RESEARCH QUESTIONS AND TESTING THE MODEL.239

6.2.1 Conclusions related to financial managementpractices .239

6.2.2 Conclusions related to financial characteristics.247

6.2.3 Conclusions of SME profitability.249

6.2.4 Summary of research question answers.255

6.3 IMPLICATIONS OF THE RESEARCHSTUDY.258

6.3.1 Implications for financial management practices of SMEs .258

6.3.2 Contributions to knowledge of this research into financial management for SMEs .262

6.4 LIMITATIONS OF THE RESEARCH STUDY.263

6.5 IMPLICATIONS FOR THE FURTHER RESEARCH.264

Bibliography.266

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vestigator will do from writing the hypotheses and their operational implications to the final analysis of the data. 4.3.1 Classification of research design According to Emory (1985) research design is a complex concept that may be viewed from different perspectives. McMahon (1998) reviewed classifications of research conducted by Gay and Diehl (1992) in which classifications of research designs are based on the broad strategy, orientation, emphasis and approach of research. In their classifications, research designs consisted of the following: Historical research – which involves studying, understanding and explaining past events • • • Descriptive research – which involves collecting and examining data in order to answer questions concerning the status or condition of the research subject at some point of time. Associative research – which attempts to determine whether, and to what degree, a relationship exist between the status or condition of the research subjects at some point of time and other factors which cannot be manipulated by the researchers. 137 Chapter Four: Research Methodology Causal-comparative (or ex post facto) research – which attempts to establish the cause of the status or condition of the research subjects at some point of time on the basis of knowledge of factors which cannot be manipulated by the researchers. • • • • Experimental research – which attempts to establish the cause of the status or condition of the research subjects at some point of time on the basis of knowledge of factors that can be manipulated by the researchers. Based on the manipulation of independent variables, Davis and Cosenza (1988) classified research into ex post facto design and experimental design. In ex post facto design, the researchers cannot manipulate the independent variables or factors whereas in experimental design they can. Based on the degree of understanding, ex post facto design can be classified into two subtypes, field study and survey, whereas experimental design can be classified into field experiment and laboratory experiment. Based on the degree of problem crystallization, Emory (1985) classified research as exploratory or formal. Exploratory studies tend to be loosely structured with an objective of learning what the major research tasks are to be whereas the goal of a formal research design is to test the hypotheses or answer the research questions posed. Because there are a variety of different research approaches, it is helpful to categorize types of research. This thesis is concerned with types of research applied in business. Business research can be classified on the basis of either technique or function (Zikmund, 1997, p. 37). Based on technique, business research can be classified into three main types: experiments, surveys, and observational studies. Based on the purpose or function, the business research can be classified into (1) exploratory, (2) descriptive, or (3) causal research. Exploratory research is conducted with the expectation that subsequent research will be required to provide conclusive evidence. Exploratory research could be used for clarifying ambiguous problems. Descriptive research seeks to determine the answers to who, what, when, where and how questions. Its major purpose, as designed, is to describe characteristics of a population or a phenomenon. 138 Chapter Four: Research Methodology Causal research is conducted to identify cause-and-effect relationships among variables where the research problem has already been defined. Its major objective is to identify the cause-and-effect relationships between variables (Zikmund, 1997). • In summary, there are a number of different design approaches, but unfortunately there is no simple classification system that defines all the variations to be considered (Emory, 1985). Table 4.1 summarizes classification of research designs based on seven different perspectives, indicated by Emory (1985), in which (*) represents the type of research design selected in this study. Table 4.1: Classification of research designs Classification criteria Types of research designs Degree of problem crystallization • Exploratory research – to develop hypotheses or questions for further research • Formal research *– to test the hypotheses or answer the research questions posed The method of data collection • Observation – The researcher monitors and records information about subjects without questioning them. • Survey *– The researcher interrogates subjects and collects their responses. Researcher’s control of variables • Experimental design – The researcher attempts to control or manipulate the variables in the study. • Ex post facto design *– Investigators have no control over the variables in sense of being able to manipulate them. The purpose of the study • Descriptive research *– concerned with answering who, what, where, when or how much questions • Casual research *– concerned with learning why, i.e., how one variable affects another The time dimension • Cross-sectional research* – carried out once • Longitudinal research – repeated and studied changes over time The topical scope • Statistical study* – emphasis on breadth of coverage and interested in the frequency of certain characteristics or instances • Case study – emphasis on the detailed analysis a limited number of events or conditions and their relationships The research environment • Field study* • Laboratory study Source: Adapted from Emory (1985) (*) Selected for this research 139 Chapter Four: Research Methodology Based on the summary of research classifications as presented in Table 4.1 (page 139), subsection 4.3.2 explains how the most appropriate research design was selected for this study. 4.3.2 Selecting research design or paradigm Subsection 4.3.1 reviewed the classification of research types. This subsection explains how the research paradigms are appropriately selected and utilized in this study. There are two main research paradigms labeled positivist and phenomenological (Hussey and Hussey, 1997). Selection of research type or paradigm is based on the theoretical framework of research design and methodological appraisal of prior research examined in subsection 4.3.1 and section 4.2 (page 134) As indicated by Zikmund (1997), descriptive research seeks to determine the answers to who, what, when, where and how questions. Its major purpose, as designed, is to describe characteristics of a population or a phenomenon. According to Emory (1985), the essential difference between descriptive and causal studies lies in their objectives. If the research is concerned with finding out who, what, where, when, or how much, then the study is descriptive. If it is concerned with learning why, that is, how one variable affects another, it is causal. Chapter 1 states the main research questions that this study is seeking to answer include: • How important are financial management practices and financial characteristics to SME profitability? • What are the relationships between financial management practices, financial characteristics and SME profitability in Vietnam? • How do financial management practices and financial characteristics affect on SMEs profitability? In seeking answer to these questions, the characteristics of financial management practices and financial characteristics of SMEs in Vietnam has been investigated and described. As such, descriptive research is more appropriate than exploratory research 140 Chapter Four: Research Methodology because exploratory research is usually conducted to clarify and define the nature of a problem whereas descriptive research is designed to describe characteristics of a population or phenomenon. This study is also seeking to explain how financial management practices and financial characteristics affect SME profitability. Thus this study is concerned with learning “why”, that is, how “financial management practices and financial characteristics” variables affect the “SME profitability variable”. This concern required a causal design to identify the cause-and-effect relationships between efficient financial management practices and profitability of SMEs. Thus causal research is implemented in combination with descriptive research in this study. 4.3.3 Selecting research methods or techniques Based on the methods of data collection, Emory (1985) classified research into two types: observation and surveys. However, Zikmund (1997) expands this classification into four basic types: surveys, experiments, observation and secondary data studies. Survey is a research technique in which information is gathered from a sample of people by use of a questionnaire (Zikmund, 1997, p. 49). • • • • Experiment holds the greatest potential for establishing cause-and-effect relationships. The use of experimentation allows investigation of changes in one variable while manipulating other variables under controlled conditions (Zikmund, 1997, p. 49). Observation allows the researcher to monitor and record information about subjects without questioning them (Emory, 1985). Secondary data study is a research technique by using previously collected data or secondary data. Secondary data are data gathered and recorded by someone else prior to the current needs of the researcher (Zikmund, 1997, p.143). In terms of research technique, this research utilizes both survey and secondary data methods. Survey was chosen as a research technique in this study to investigate and describe financial management practices of SMEs in Vietnam. The argument for 141 Chapter Four: Research Methodology choosing survey was based on two major reasons. Firstly, survey provides a quick, efficient and accurate means of assessing information about the population. Secondly, survey is more appropriate where there is a lack of secondary data. In this case, secondary data of financial management practices of SMEs in Vietnam is not available; thus, conducting a survey to gain information about financial management practices was necessary. Surveys may be further classified by the communication medium used into mail, telephone survey and personal interview (Emory, 1985, Zikmund, 1997). Mail survey is a self-administered questionnaire sent to respondents through the mail. • • • Telephone survey is a method of survey in which respondents are contacted by telephone to gather responses to survey questions. Personal interview are direct communications wherein interviewers in face-to- face situations ask respondents questions. In Vietnam, there are difficulties in collecting data, especially data regarding financial information. Therefore, selection of appropriate methods to communicate with respondents was very important in the surveys. This selection may be based on (1) the possibility of communicating with respondents, (2) the advantages and disadvantages of the most typical surveys as summarized in Table 4.2, and (3) the budget allocated for the research. Table 4.2 (page 143) shows that each of survey methods (personal interview, telephone interview and mail survey) has both advantages and disadvantages in terms of different perspectives. However, item non-response, possibility for respondent misunderstanding, and respondent cooperation or participation are probably the most important factors for success of a survey. Therefore, this study used “personal interview” as a technique to obtain information about financial management practices from the respondents – key managers or owner-managers. 142 Chapter Four: Research Methodology Table 4.2: Summary of advantages and disadvantages of the most typical surveys Personal interview Telephone interview Mail survey Speed of data collection Moderate to fast Very fast Slow, researcher has no control over questionnaire return Geographic flexibility Limited to moderate High High Respondent cooperation Excellent Good Moderate Versatility Quite versatile Moderate Highly standardized format Questionnaire length Long Moderate Varies depending on incentive Item non-response Low Medium High Possibility for to be respondents misunderstood Lowest Average Highest Degree of interview influence on answer High Moderate None Supervision of interviewers Moderate High Not applicable Anonymity of respondent Low Moderate High Ease of call-back or follow-up Difficult Easy Easy, but take time Cost Highest Low to moderate Lowest Special features Visual materials may be shown or demonstrated, extended; probing possible Simplified field- work and supervision of data collection Respondent may answer questions at own convenience; has time to reflect on answer Source: Adopted from Zikmund (1997) Arguments for selection of personal interview as a mean of communicating with respondents in this study are based on the following advantages of personal interview compared with other survey methods: Item non-response – Social interaction between interviewer and respondent increase the likelihood that a response will be given to all items on the questionnaire. As a result, item non-response is lowest for personal interview. • • Possibility for respondent misunderstanding – Personal interview provides an opportunity to probe. If a respondent’s answer is brief or unclear, the interviewer may be able to probe for a clearer or more comprehensive explanation. As a result, the possibility for respondent misunderstanding is lowest. 143 Chapter Four: Research Methodology High participation – The presence of an interviewer generally increases the percentage of people willing to complete the interview. As a result, response rate is high. • In addition to using “personal interview” to obtain primary data related to financial management practices, the secondary data method was used to examine the financial characteristics of SMEs. The variables such as liquidity ratios, financial leverage ratios, activity ratios, and profitability ratios were derived from financial statements. These financial statements were available from taxation departments of Vietnam and sometimes from businesses. 4.4 VARIABLE DEFINITION, SURVEY INSTRUMENT, AND MODEL DEVELOPMENT This section discusses variable definitions and measurements, and develops a model representing the relationships between variables. 4.4.1 Variable measurements and survey instrument This study is designed to develop a model and test the hypotheses of association between financial management practices, financial characteristics and SME profitability. Before developing the hypotheses to test these associations, variables had to be defined and measured clearly. Pedharzur and Schmelkin (1991, p. 177) defined a variable as any attribute or property in which organisms (objects, events, people) vary. In developing a causal model and testing the hypotheses of association, there are two kinds of variables involved: dependent and independent variables. An independent variable is the presumed cause, whereas a dependent variable is the presumed effect (Pedharzur and Schmelkin, 1992, p.177). Following is a more detail consideration of the dependent and independent variables, which are defined and utilized in this study. 144 Chapter Four: Research Methodology 4.4.1.1 Dependent variables Zikmund (1997, p.87) defines a dependent variable as a criterion or a variable that is to be expected or explained. This study examines the impact of financial management practices and financial characteristics on SME profitability. Generally, profitability is viewed as the dependent variable. However, profitability is an abstract concept and a latent variable, it cannot be measured directly. To overcome this obstacle, researchers often use indicated variables to indirectly measure profitability. Chapter 3 discussed variables used by previous researchers to measure profitability. For example, Burns (1985) measured profitability using three indicated variables: return on total assets, return on net assets and return on equity. Hutchinson, Meric and Meric (1988) used two indicated variables: return on sales and return on equity to measure profitability, while Cohen (1989) suggested four variables: asset earning power, return on equity, net profit on sales and return on investment. Generally, depending upon their own purpose, researchers in the literature review used different indicated variables to measure profitability. However, three variables: return on sales (ROS), return on assets (ROA) and return on equity (ROE) were the most popularly used by the researchers and authors such as Ross, Westerfield, and Jaffe (1999), Meric et al. (1997), and Burns (1985) to measure profitability. 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. 145 Chapter Four: Research Methodology As such in this study, profitability of SMEs was measured by three ratios: ROS, ROA, and ROE. These measurements are frequently used in developed economies and Vietnam. 4.4.1.2 Independent variables Zikmund (1997, p.87) defined an independent variable as a variable that is expected to influence the dependent variable. In this study, the independent variables involved include variables used to define the efficiency of financial management practices and variables used to define financial characteristics of SMEs. 1. Independent variables related to financial management practices As indicated in chapter 3, in reviewing the context of financial management practices, McMahon (1998) defined concepts of financial management practices including accounting information system, financial reporting and analysis, working capital management, fixed-asset management, financial structure management, financial planning and control. However, McMahon (1998) study and most previous studies were designed with an emphasis on descriptive rather than explanatory research. Thus, only descriptive perspectives of these concepts were considered, while measuring perspectives have not been considered. This study emphasizes the relationships between the efficiency of financial management practices and SME profitability in which the efficiency of financial management is viewed as an independent variable. In such circumstances, measuring this variable is very important. However, the efficiency of financial management practices is a complex and multi-dimension construct. In term of context, financial management practices consists of the following components (McMahon, 1998). Accounting information systems DeThomas and Fredenberger (1985) 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 146 Chapter Four: Research Methodology financial information, and (3) suitability of the information and services provided by outside accountants. Gul (1991) used a modified version of a 20-item scale developed by Chenhall and Moris (1986) to measure management accountant systems. This instrument requested participants to state their perception of the usefulness of each of characteristics of information. Perception of usefulness of information represented the extent to which these characteristics of information were available that would have a direct impact on performance. 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 nine-point scales on which the respondents were asked to rate where the positions of their businesses were for each item as described below: 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 Figure 4.2 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. 147 Chapter Four: Research Methodology Figure 4.2: Survey instrument for measuring accounting information system Low regard High regard 1. How does your business regard its accounting information system? 1 2 3 4 5 6 7 8 9 Not frequent at all Very frequent 2. How frequent does your business prepare its accounting reports? 1 2 3 4 5 6 7 8 9 Not updated at all Very updated 3. How does accounting information system in your business update the business transactions? 1 2 3 4 5 6 7 8 9 Low involvement High involvement 4. What is the owner/manager involved in preparing accounting information? 1 2 3 4 5 6 7 8 9 Low involvement High involvement 5. What is the owner/manager involved in interpreting and using accounting information? 1 2 3 4 5 6 7 8 9 Very unacceptable Very acceptable 6. How acceptable is your business’s accounting information system? 1 2 3 4 5 6 7 8 9 Not useful at all Very useful 7. How useful is your business’s accounting information in making decisions? 1 2 3 4 5 6 7 8 9 Low Computerization High computerization 8. How computerized is your business’s accounting information system? 1 2 3 4 5 6 7 8 9 Source: Developed for this study 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 72. 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 40. Financial reporting and analysis McMahon (1998) stated financial reporting and analysis includes the nature, frequency and purpose of financial reporting, audit, analysis and interpretation of financial statements, and use of physical and financial performance benchmarks. For the purpose of this study, financial reporting and analysis included the preparation, interpretation, 148 Chapter Four: Research Methodology analysis and use of financial statements to serve for making decisions of business and management. McMahon and Davies (1994), firstly, ascertained the relationship between financial reporting and financial analysis, then, examined significant associations between these practices and achieved growth rates and financial performance. In their study, financial reporting and analysis practices were derived from the three following questions, which the respondents were asked to answer: • Which financial statements do you use regularly to monitor financial position and performance? • How frequently do you prepare your financial statements? • Do you use financial ratios when reading your financial statements? Their study first employed a simple index of the historical financial reporting practices of the participating enterprises based on responses to the first of three questions mentioned above. The starting point was five dichotomous variables indicating preparation of particula

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