financial management practices and financial characteristics

Abstract


After a decade of reforming policy, building and developing the multi-sector market
economy, Small and Medium Enterprises (SMEs) in Vietnam have developed strongly
and contributed to creating employment, increasing GDP, and raising the nation’s volume
of exports. However, SMEs have found difficulties on the way to development due to
lack of management experience and financial resources, and due to uncertainty within the
business environment. As a result, SMEs often faced obstacles during their operations.
This thesis examines the relationship between financial management and profitability of
SMEs to determine whether financial management practices and financial characteristics
impact on SME profitability.
Objectives of the thesis are (1) to investigate and describe features of financial
management practices and financial characteristics of SMEs in Vietnam, (2) to develop
and test a model of SME profitability, and (3) to contribute knowledge of the
relationships between financial management and characteristics to improve SME
profitability by using tools of efficient financial management.
In terms of structure, the thesis has six chapters. The thesis begins by defining the
research problem and questions, and providing a justification for the research study.
Chapter one also reviews the research background, and presents definitions of terms,
significance and scope of the study. Chapter two examines the economic background,
business structure and the development of SMEs in Vietnam. This chapter also reviews
previous research related to financial management for SMEs in Vietnam to identify gaps
between financial management for SMEs in Vietnam and financial management for
SMEs worldwide.

Chapter three reviews financial management including financial management
practices, financial characteristics and profitability of SMEs around the world, especially
in the developed economies such as the United States of America (USA), the United
Kingdom (UK), Australia and Canada. This review emphasizes profitability and the
impact of financial management practices and financial characteristics on SME
profitability. Objectives of this chapter are to review previous research related to the
areas of financial management practices, financial characteristics, and profitability of

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SMEs and to build a model of the impact of financial management practices and financial
characteristics on SME profitability.
Chapter four discusses aspects of the research methodology including research
design, data collection and data analysis methods, and hypothesis testing to support the
model. Objectives of this chapter are: (1) to justify the research methodology of this
study, (2) to explain 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.
Data analysis and findings are presented in chapter five. This chapter presents
descriptive findings of financial management practices, financial characteristics and SME
profitability and findings of the research study related to testing the model of SME
profitability. Objectives of this chapter are (1) to systematically present the descriptive
findings of the research study, (2) to interpret significance of these findings based on data
analysis, (3) to present the results of testing the model of SME profitability, and (4) to
explain how the model, developed from a literature review, was supported by data
analysis. Finally, the thesis ends with chapter six where conclusions are summarized and
applications of the research findings are indicated for the financial management
practitioners.
The thesis provides descriptive findings of financial management practices and
financial characteristics and demonstrates the simultaneous impact of financial
management practices and financial characteristics 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 characteristics. With the
exception of debt ratios, all other variables including current ratio, total asset turnover,
working capital management and short-term planning practices, fixed asset management
and long-term planning practices, and financial and accounting information systems were
found to be significantly related to SME profitability.
With the findings as presented above, this research study provides many
implications for financial management practices and contributes to knowledge of
financial management of SMEs. The model of SME profitability can be used as guidance
for actions to improve the profitability of SMEs in Vietnam.

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Glossary of terms and abbreviations


AFTA ASEAN Free Trade Agreement
ANOVA Analysis of variance
APEC Asia Pacific Economic Cooperation
ASEAN Association of South East Asian Nations
CED Committee of Economic Development
CF Cash flows
CUR Current ratio
DER Debt ratio
E.q Equation
EBT Earning before tax
EBIT Earning before interest and taxes
EFF Efficiency of financial management practices
EOQ Economic order quantity
FAIS Financial and accounting information system
FALP Fixed asset management and long-term planning practices
FDI Foreign direct investment
FSSB Financial Studies of the Small Business
GDP Gross domestic products
GSO General Statistical Office
IFC International Financial Corporation
IRR Internal rate of return
MIRR Modified internal rate of return
MPDF Mekong Project Development Facilities
NOI Net-operating-income
NPV Net present value
PRO Profitability
RE Retained earnings
ROA Return on assets

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ROE Return on equity
ROI Return on investment
ROS Return on sales
SBA The Small Business Administration (United State of America)
SBV The State Bank of Vietnam
SME Small and medium enterprise
SMENET Small and Medium Enterprise Net
SPSS The Statistical Package for Social Science
TA Total assets
TAT Total asset turnover
UK United Kingdom
USA United States of America
USM Unlisted Securities Market
VCCI Vietnamese Chamber of Commerce and Industry
VIDB Vietnam Investment and Development Bank
VN Vietnam
VND Vietnam dong
Vietcombank Vietnam Bank for Foreign Trade
WTO World Trade Organization
WCSP Working capital management and short-term planning practices











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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 OF THE 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 of the country 19
2.2.2 The Vietnam economy 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

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2.4 SMALL AND MEDIUM ENTERPRISE FINANCE IN VIETNAM 51
2.4.1 Types of finance 52
2.4.2 Use of finance 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 CHI MINH 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 of financial management 71
3.3.4 The specific areas of financial 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 OF SMEs 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 of profitability 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

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3.9 CONCLUSIONS 131

CHAPTER FOUR: RESEARCH METHODOLOGY

4.1 INTRODUCTION 132
4.2 APPRAISAL OF PRIOR RESEARCH METHODOLOGIES 134
4.3 RESEARCH DESIGN 137
4.3.1 Classification of research 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 OF THE RESEARCH STUDY 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

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5.4.4 Test for the difference of average profits between efficient and inefficient financial
management groups of 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 management practices 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 RESEARCH STUDY 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
Appendix 1
Appendix 2
Appendix 3
Appendix 4
















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List of tables
Table Page
2.1 Changes in economic structure, 1986 – 1991 27
2.2 State-budget revenue, 1986 – 89 28
2.3 State-budget revenue, 1991 – 93 29
2.4 Financial institutions in Vietnam, 1995 30
2.5 GDP index by economic sector and rate of inflation 31
2.6 Index of exchange rate of USD/VND 32
2.7 GDP index by economic industry 32
2.8 Agriculture development over the years 33
2.9 Industry development over the years 34
2.10 Export and import value by major countries 35
2.11 Population by sex and areas 38
2.12 Population growth rates and structure 39
2.13 Labor force by economic sector 39
2.14 Labor force by the state and non-state sector 40
2.15 Unemployment rate of labour force in 1998 40
2.16 Number of businesses by economic sector and average capital 43
2.17 Number of businesses and employees on July 1, 1995 44
2.18 Definitions of SMEs in Asian countries 46
2.19 Number of enterprises in manufacturing industry by scale of employees and total
capital 49
2.20 Business operation problems of SMEs in Vietnam 50
2.21 The kind of SME support programs 51
2.22 Some financial characteristics of SMEs in Vietnam 54
2.23 Business structure of SMEs in Ho Chi Minh City 57
2.24 Size of businesses in Ho Chi Minh City 57
3.1 Summary of the quantitative definitions of small business 65
3.2 Forms of SME ownership in the USA 65
3.3 Legal status of small firms in the UK 66

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3.4 Summary of advantages and disadvantages of each form of ownership 67
3.5 Responsibility for the bookkeeping and accounting task 78
3.6 Responsibility for preparation and use of financial information 78
3.7 The results of survey of computer software application 79
3.8 The most important applications of computer software 79
3.9 The most important applications of computers 80
3.10 Percentage of awareness and utilization of costing systems 81
3.11 Evaluate the adequacy of accounting records 82
3.12 Accounting information prepared externally or internally 82
3.13 Summary of research areas related to the accounting system practices of SMEs 83
3.14 Use of financial statement techniques by small manufacturers in Quebec 84
3.15 Responsibility for financial statement interpretation 85
3.16 Proportion of respondents indicating use of selected financial ratios 86
3.17 Percentage of use of financial ratios 87
3.18 Percentage of preparing accounting information both internally and externally 88
3.19 Summary of the main research areas related to the financial reporting and analysis89
3.20 Cash surplus investment practices 90
3.21 Instruments of short-term investment used 91
3.22 Awareness and utilization of credit control systems 92
3.23 Methods used by small and large enterprises to determine inventory level 92
3.24 Working capital management: Frequency (%) of using or reviewing 93
3.25 Summary of working capital management practices 95
3.26 Percentage of firms using capital project selection methods 96
3.27 The extent of use of formal methods of the capital investment evaluation 96
3.28 Primary method of investment analysis 97
3.29 Percentage use of different methods by small, medium, and large enterprises 97
3.30 Percentage of kinds of screening rate used to evaluate the capital projects 98
3.31 Methods of determining the required rate of return as using discounted cash flow 99
3.32 Summary of fixed asset management practices 99
3.33 Viewpoint guiding firms’ financing decisions 102
3.34 Factors influencing percentage of bank debt usage 103

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