Luận văn Financial management and profitability of small and medium enterprises

A THESIS SUBMITTED TO THE GRADUATE COLLEGE OF MANAGEMENT IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE DEGREE OF DOCTOR OF BUSINESS ADMINISTRATION AT SOUTHERN CROSS UNIVERSITY, N.S.W., AUSTRALIA Certificate I certify that the substance of this thesis has not already been submitted for any degree and is not currently being submitted for any other degree or qualification. I also certify that, to the best of my knowledge, any help received in preparing this thesis, and all sources used have been acknowledged in this thesis. Signature: Kieu Minh Nguyen ______________________ Date: ___________________________________________ ii Acknowledgements I owe a debt of gratitude to many people who helped me complete this thesis. I would like to acknowledge the help of all. First of all I would like to express my deepest acknowledgement to my supervisor, Professor Geoffrey Grant Meredith from the Graduate College of Management (SCU), for his valuable advice and recommendations. I acknowledge Dr. Lyndon Brooks, his assistants from the Graduate Research College (SCU), and Mr. Tho Dinh Nguyen from the School of Marketing (UTS) for their support with statistical techniques and data analysis. I also acknowledge Ms. Rosemary Graham from the International Office (SCU) for her comments on English in earlier drafts of my thesis. 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 Dr. Pham Van Nang, Dr. Le Bao Lam, and Dr. Le Thanh Ha from Ho Chi Minh City University of Economics for their introduction to contacts with the small and medium enterprises (SMEs) community located in Ho Chi Minh City. I also wish to thank Mr. Nguyen Trong Hanh, Vice Director of Department of Taxation, Mr. Du Quang Nam, Vice Director of Statistical Office – Ho Chi Minh City; and Mr. Tran To Tu, Managing Director of Investment Consulting Corporation for providing secondary data related to the current practices of SMEs in Vietnam. I would like to thank the following organizations which supported me in completing my thesis and degree: the Swiss Agency for Development and Cooperation (SDC), the Swiss – AIT – Vietnam Management Development Program (SAV), the Mekong Project Development Facility (MPDF), the Small and Medium Enterprise Promotion Centre (Vietnam Chamber of Commerce and Industry – VCCI), HCM City University of Economics, HCM City Statistical Office, HCM City Department of Investment and Planning, HCM City Department of Taxation. Specially, I would like to extend my sincere gratitude to the Government of Switzerland and Dr. Hans Stoessel, Director of SAV for granting the scholarship which enabled me to participate in a doctoral degree at Southern Cross University, New South Wales, Australia. iii I would particularly like to thank the following friends for their support related to data collection: Mr. Doan Thanh Tuan, Ms. To Ngoc Huong, and Mr. Bui Hai Binh from Truong Doan Company Limited, Mr. Hoang Trong from Ho Chi Minh City University of Economics, Mr. Vo Sy Nhan from Ho Chi Minh City Department of Investment and Planning, 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. My greatest debt of gratitude is to my wife, Mrs. Que Thi Tran, who was patiently waiting me during my study in Australia. This thesis could not have been written without her daily encouragement. iv 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 v 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. vi 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 vii 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 viii 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 ix 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 x 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