IMPACT OF FINANCIAL MANAGEMENT AND FINANCIAL ASPECTS ON THE PROFITABILITY OF SMALL AND MEDIUM TRADE AND SERVICE ENTERPRISES IN THAI NGUYEN PROVINCE A Dissertation Presented to The Faculty Graduate School Southern Luzon State University Lucban, Quezon In Partial Fulfillment of the Requirements for the Degree Doctor of Business Administration by PHAM ANH NGOC (RANDY) 2013 Chapter INTRODUCTION BACKGROUND OF THE STUDY According to Vietnam Chamber Of Commerce and Industry (VCCI), SMEs have contributed considerably to growing GDP and creating jobs for labour-age 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 and Financial Aspects on the Profitability of Small and Medium Trade and Service Enterprises in Thai Nguyen Province STATEMENT OF THE OBJECTIVES This study has the following objectives: 1) To determine the profile of the respondents in terms of the following position : Owner, manager, chief- accounting 2) To Identify the financial management practices of the company in terms of the following areas: Accounting information system, Working capital management, Fixed asset management 3) To assess the company in terms of the following financial aspects: Liquidity, Financial leverage, Business activity 4) To know the relationship of financial management practices and financial aspects to the company’s profitability 5) To develop a model for the SME’s profitability 6) To propose solutions to improve the company’s and SME’s profitability This study has four research questions 1) How important are financial management practices and financial aspects to SME’s profitability? 2) What are the relationships between financial management practices, financial aspects and SME profitability? 3) How financial management practices and financial aspects affect SME’s profitability? 4) What action can improve profitability of SME in Thai Nguyen province? HYPOTHESIS This study has four hypotheses H1: SME’s Profitability is negatively related to the cash ratio H2: SME’s Profitability is negatively related to the debt ratio H3: SME’s Profitability is positively related to total asset turnover H4: SME’s Profitability is positively related to the efficiency of financial management practices SIGNIFICANCE OF THE STUDY This study examines the impacts of financial management practise and finance aspacts on SME’s profitability Results will indicate relationships between financial management, finance aspacts and SME’s profitability and will assist managers to improve their profitability SCOPE AND LIMITATIONS OF THE STUDY This research is designed as a causal research in which a sample of 120 SMEs Trade and Service Enterprises in Thai Nguyen Province 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; Business activity measured by Total asset turnover; Profitability measured by average of return on sales, return on assets and return on equity DEFINITION OF TERMS - Small and medium-sized - Financial management - Financial management objectives - Efficient financial management - Manager - Financial aspects - SME’s profitability Chapter 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 and financial aspects 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 INDEPENDENT VARIABLES DEPENDENT VARIABLES Financial management practices: Accounting information system Working capital management Fixed asset management Financial aspects: SME profitability ratios is → Average of: Return on sales Return on assets Return on equity Cash ratio debt-to-equity Total asset turnover Chapter METHODOLOGY RESEARCH DESIGN This study is designed to investigate the impact of the financial management practices and financial aspects on SME profitability in Thai Nguyen province 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 to investigate financial management practices of SMEs The secondary data method was used to examine the financial aspects of SMEs SAMPLING DESIGN AND TECHNIQUES Simple random sampling technique was used to draw a sample of 120 SMEs located in Thai Nguyen City for data collection via personal interview (Slovin's formula n=N/(1+Ne2)=1854/(1+1854*0.9 2)≈120 where e =0.9 is std.Error, N=1854) RESEARCH INSTRUMENT Dependent variables Profitability is viewed as the dependent variable and was measured by three indicated variables including return on sales (ROS), return on assets (ROA), and return on equity (ROE) Independent variables The independent variables include variables used to define the efficiency of financial management practices and financial aspects of SMEs There are three independent variables related to financial management practices 1) Accounting information systems (AIS) 2) Working capital management (WCM) 3) Fixed-asset management (FAM) There are three independent variables related to financial aspects - Cash ratio (CAR) - Debt ratio (DER) - Total asset turnover (TAT) Model development for this study as follows: PRO = f(CAR, DER, TAT, AIS,WCM,FAM) where: PRO: Profitability = Average of ROS, ROA, and ROE ROS: Return on sales (Net profit/Sales) ROA: Return on assets (Net profit/Total assets) ROE: Return on equity (Net profit/Equity) CAR: Cash ratio (Cash/Current liabilities) DER: Debt to equity ratio (Total debt/Equity) TAT: Total asset turnover (Sales/Total assets) AIS: The efficiency of Accounting information system WCM: The efficiency of Working capital management (Average of Cash management practices, Receivable management practices and Inventory management practices) FAM: The efficiency of Fixed-asset management DATA GATHERING PROCEDURE The secondary data in financial statement were used to derive the financial ratios measuring liquidity, financial leverage, business activity and profitability of SMEs Primary data was collected by questionnaire and respondents are owner, manager or chief - accountant of SMEs DATA PROCESSING METHOD SPSS and Excel software will help this data transformation easily and quickly STATISTICAL TREATMENT The correlation matrix would be used to present the measures of association among the variables Weighted mean was utilized to describe the perception of respondents on the influence of financial management variables - Multiple regression analysis is used to investigate simultaneous effects of cash ratio (CAR), debt ratio (DER), total asset turnover (TAT) and efficiency of financial management practice (AIS, WCM, FAM) on SME profitability (PRO) Chapter PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA THE PROFILE OF THE RESPONDENTS - The form of ownership includes: Joint stock companies, Limited companies, Private enterprise - The position of respondent in the company are Owner, Manager or Chief-accountant - The highest educational attainment of respondents are mainly Bachelor degree and lower - Almost respondents attendance to financial management – related trainings but frequency is not usually ASSOCIATIVE ANALYSIS OF THE RESEARCH STUDY 1) Correlation matrix as shown in Table 4.23 is used to determine whether relationships between financial aspects, financial management practices and profitability Table 4.23: Correlation matrix of PRO and independent variables PRO CAR DEB TAT AIS WCM FAM PRO 1.000 -0.946 0.072 0.822 0.861 0.865 0.856 CAR -0.946 1.000 -0.008 -0.769 -0.809 -0.845 -0.789 DEB 0.072 -0.008 1.000 0.150 0.051 0.007 0.044 TAT 0.822 -0.769 0.150 1.000 0.682 0.571 0.612 AIS 0.861 -0.809 0.051 0.682 1.000 0.755 0.784 WCM 0.865 -0.845 0.007 0.571 0.755 1.000 0.836 FAM 0.856 -0.789 0.044 0.612 0.784 0.836 1.000 Correlation is significant at the 0.01 level (2-tailed) - The relationships between profitability and accounting information system, working capital management practices and fixed asset management practices are significantly positive with respective correlation coefficients r = 0.861; 0.865; and 0.856 - Correlation between profitability and total asset turnover with r = 0.822 and between profitability and cash ratio is significantly negative with correlation coefficients r = - 0.946 2) Multiple regression analysis was used to determine whether independent variables (CAR, DER, TAT, AIS, WCM, FAM ) simultaneously impact the dependent variable (PRO) Table 4.24: SME profitability regression model using profitability as dependent variable Unstandardized Coefficients Model Std B Error StandardizedCoefficients t Sig 0.190 850 Beta 0.054 0.286 CAR -2.094 0.266 -0.390 -7.873 000 DEB 0.076 0.083 0.018 0.917 739 TAT 1.092 0.149 0.236 7.319 000 AIS 0.011 0.003 0.133 3.647 000 WCM 0.010 0.003 0.166 3.808 000 FAM 0.013 0.003 0.160 4.135 000 (Constant) Model Summary Model R 979 a R Adjusted R Square Square 0.959 0.957 Std Error of the Estimate 0.08134 ANOVA(b) Sum of Model Squares df Mean Square Regression 17.446 2.908 Residual 0.748 113 0.007 Total 18.194 119 F Sig 439.525 000(a) a Predictors: (Constant), FAM, DER, TAT, AIS, WCM, CAR b Dependent Variable: PRO (%) In summary, the results of multiple regression analysis in Table 4.24 revealed that SME profitability was influenced by financial aspects and financial management practices at the significance level of 0.0001, and 95.9 percent of variation in SME profitability (R2 = 0.959) can be accounted for variance in financial aspects and financial management practices Specifically: - Cash ratio is negatively related to SME profitability at a significance level of 0.0001 and with the standardized correlation coefficient of – 0.390 - Debt ratio was not found to be related to SME profitability - Total asset turnover is positively related to SME profitability at a significance level of 0.0001 and with the standardized correlation coefficient of 0.236 - All variables of financial management practices (AIS, WCM, and FAM) are positively related to SME profitability at a significance level of 0.0001 and with the standardized correlation coefficients of 0.133, 0.166 and 0.160 respectively After removing the debt ratio and rerunning the program, the results of multiple regression analysis are shown in Table 4.27 T able 4.27: Regression model of SME profitability after removing debt ratio Model Unstandardized Standardized Coefficients Coefficients Std B (Constant) t Sig 0.189 850 Beta Error 0.054 0.286 CAR -2.057 0.263 -0.383 -7.830 000 TAT 1.121 0.146 0.240 7.706 000 AIS 0.011 0.003 0.133 3.692 000 WCM 0.010 0.003 0.166 3.834 000 FAM 0.013 0.003 0.161 4.168 000 Model Summary Model R 0.979a R Square Adjusted R Square Std Error of the Estimate 0.957 0.08128 0.959 ANOVA(b) Model Sum of Squares df Mean F Sig Square Regression 17.441 3.488 Residual 0.753 114 0.007 Total 18.194 119 527.997 000(a) a Predictors: (Constant), FAM, DER, TAT, AIS, WCM, CAR b Dependent Variable: PRO (%) Table 4.27 reveals that all statistical parameters including F-value, t-test statistics and standard error of estimate have been significantly improved after removing the debt ratio from the multiple regression equation Chapter SUMMARY, FINDINGS, CONCLUSIONS AND RECOMMENDATIONS SUMMARY This research model indicated that variation in SME profitability of Thai Nguyen province could be explained by the changes in: 1) Cash ratio 2) Total asset turnover 3) Efficiency of accounting information system 4) Efficiency of working capital management 5) Efficiency of fixed asset management FINDINGS 1) The position of respondent in company is mainly chief – accountant (90.8 percent) 2) The highest educational of respondent is Bachelor degree and lower (95 percent) 3) Accounting information system with an average weighted mean of 3.27 4) Cash management with an average weighted mean of 3.29 5) Receivable management with an average weighted mean of 3.16 6) Inventory management with an average weighted mean of 3.41 7) Fixed asset management with an average weighted mean of 3.16 8) Carh ratio with a mean of 0.67 9) Debt to equity with a mean of 0.60 10) Total asset turnovers with an average of 0.55 times 11) 79 of 120 SMEs surveyed (65.8%) were profitable and the remainder (34.2%) were not profitable 12) Accounting information system, working capital managerment, fixed asset management were found to be significantly related to SME profitability with Pearson’s correlation coefficients of 0.861; 0.865 and 0.856 respectively at a 0.01 significance level 13) SME profitability was found to be negatively related to cash ratio with the correlation coefficient of minus 0.946 at a 0.01 significance level 14) SME profitability was found to be positively related to total asset turnover with a correlation coefficient of 0.822 at a significance level of 0.01 15) SME profitability was not found to be significantly related to debt ratio 10 16) After removing the debt ratio and rerunning the program, the model of SME profitability was revised by the following changes: PRO = -2.094CUR+1.092TAT+0.011AIS+0.010WCM+0.013FAM CONCLUSIONS Based on the findings, the researcher came up with the following conclusions: 1) Almost SMEs use employed accountants in their businesses 2) Chief-accountant still plays an important role in controlling financial position 3) Almost SMEs have frequently applied computers in their accounting 4) Experience is viewed as more important than theory in practicing cash management 5) Selling products or services on credit is a common trend for SMEs in Thainguyen province 6) Determine inventory levels based on owner/manager’s experience 7) SMEs always evaluate capital investment projects before making decisions on investment 8) SMEs of Thainguyen province is difficult in liquidity 9) SMEs in Thainguyen province have not extreme difficulty in finding outside financing sources from commercial banks 10) Efficiency in utilizing total assets by SMEs was very low in 2011 11) The more efficient financial management practices, the higher profitability 12) SMEs with higher cash ratios tend to less profitable 13) SMEs with high total asset turnover are expected to produce more profit 14) SME profitability was not found to be significantly related to debt ratio RECOMMENDATIONS Based from the findings of the study, the following are recommended: 1) Efficiency of financial management could lead to high profits Therefore raising the efficiency of financial management is considered an effective tool for improving and increasing profitability of SMEs Specifically, the model indicates the the following financial management components are positively correlated to SME profitability: - Efficiency of accounting information systems - Efficiency of working capital management including cash management, receivable management, inventory management Specifically, SMEs need to apply theory of inventory and theory of target cash balance Those are low in efficiency - Efficiency of fixed asset management 11 2) High cash ratios tend to high liquidity and negatively affect to profitability due to cash in hand not generate profitability If SMEs change cash in hand into cash in bank then they still maintain liquidity and earn interest from bank therefore increasing profitability of SMEs However, this does not mean the cash ratio should be continuously lowered to raising profitability because such actions will adversely affect liquidity 3) High total asset turnover leads to higher profitability for SMEs Total asset turnover is defined as the ratio between net sales and total assets Therefore increasing net sales or decreasing total assets will cause total asset turnover to increase Selling assets are not necessary for business operations SMEs need to efforts to increase the efficiency of utilizing total assets and increase total asset turnover In addition, efforts of marketing, sales management, new product development and the likes will increase net sales, as a result, increase total asset turnover and profitability 4) Change discrimination between SMEs and large companies, between state and nonstate SMEs in granting loans State and large companies are always landed capital with preferential interest rates lower than other businesses This leads to unfair competition and SMEs take more risks when it enter the market 5) Provide training programs about financial management skills for the owners and managers of SMEs in working capital management field because experience is viewed as more important than theory in this now 6) Findings on financial management practices and financial aspects of SMEs help teaching and training organization personnel to understand the behavior of SMEs in the field of financial management This will be basis for developing more appropriately training programs for owners and managers of SMEs 12 [...]... enter the market 5) Provide training programs about financial management skills for the owners and managers of SMEs in working capital management field because experience is viewed as more important than theory in this now 6) Findings on financial management practices and financial aspects of SMEs help teaching and training organization personnel to understand the behavior of SMEs in the field of financial. .. SME profitability was not found to be significantly related to debt ratio RECOMMENDATIONS Based from the findings of the study, the following are recommended: 1) Efficiency of financial management could lead to high profits Therefore raising the efficiency of financial management is considered an effective tool for improving and increasing profitability of SMEs Specifically, the model indicates the the... computers in their accounting 4) Experience is viewed as more important than theory in practicing cash management 5) Selling products or services on credit is a common trend for SMEs in Thainguyen province 6) Determine inventory levels based on owner/manager’s experience 7) SMEs always evaluate capital investment projects before making decisions on investment 8) SMEs of Thainguyen province is difficult in. .. removing the debt ratio and rerunning the program, the model of SME profitability was revised by the following changes: PRO = -2.094CUR+1.092TAT+0.011AIS+0.010WCM+0.013FAM CONCLUSIONS Based on the findings, the researcher came up with the following conclusions: 1) Almost SMEs use employed accountants in their businesses 2) Chief-accountant still plays an important role in controlling financial position... tend to high liquidity and negatively affect to profitability due to cash in hand do not generate profitability If SMEs change cash in hand into cash in bank then they still maintain liquidity and earn interest from bank therefore increasing profitability of SMEs However, this does not mean the cash ratio should be continuously lowered to raising profitability because such actions will adversely affect... following financial management components are positively correlated to SME profitability: - Efficiency of accounting information systems - Efficiency of working capital management including cash management, receivable management, inventory management Specifically, SMEs need to apply theory of inventory and theory of target cash balance Those are low in efficiency - Efficiency of fixed asset management. .. profitability for SMEs Total asset turnover is defined as the ratio between net sales and total assets Therefore increasing net sales or decreasing total assets will cause total asset turnover to increase Selling assets are not necessary for business operations SMEs need to efforts to increase the efficiency of utilizing total assets and increase total asset turnover In addition, efforts of marketing,... 9) SMEs in Thainguyen province have not extreme difficulty in finding outside financing sources from commercial banks 10) Efficiency in utilizing total assets by SMEs was very low in 2011 11) The more efficient financial management practices, the higher profitability 12) SMEs with higher cash ratios tend to less profitable 13) SMEs with high total asset turnover are expected to produce more profit 14)... sales management, new product development and the likes will increase net sales, as a result, increase total asset turnover and profitability 4) Change discrimination between SMEs and large companies, between state and nonstate SMEs in granting loans State and large companies are always landed capital with preferential interest rates lower than other businesses This leads to unfair competition and SMEs... practices and financial aspects of SMEs help teaching and training organization personnel to understand the behavior of SMEs in the field of financial management This will be basis for developing more appropriately training programs for owners and managers of SMEs 12