Financial Management and Proitability of Small

Southern Cross University
ePublications@SCU
heses
2001
Financial management and proitability of small

and medium enterprises
Kieu Minh Nguyen
Southern Cross University
Publication details
Nguyen, KM 2001, 'Financial management and proitability of small and medium enterprises', DBA thesis, Southern Cross University,
Lismore, NSW.
Copyright KM Nguyen 2001
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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
4.6 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
xi
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
xii
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
xiii
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 analysis 89
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
xiv
3.35 Summary of literature review of financial characteristic variables ...........................106
3.36 Summary of measurement of financial characteristic variables ................................110
3.37 Financial ratios used in the study of Meric and Meric (1997)...................................117
3.38 Comparison of liquid ratios between Korean and USA firms ...................................118
3.39 Summary of measurement of SME profitability........................................................123
4.1 Classification of research designs..............................................................................139
4.2 Summary of advantages and disadvantages of the most typical surveys...................143
4.3 Model classification ...................................................................................................163
4.4 Number and percentage of SME sample and population...........................................174
4.5 Summary of multivariate techniques for the analysis of dependence........................181
5.1 Structure of SMEs in the sample by type of industry and form of ownership...........187
5.2 Sample distribution by form of ownership within industry .......................................189
5.3 Business characteristics of SMEs in the sample ........................................................189
5.4 Characteristics of accounting system organization....................................................190
5.5 Responsibility – accounting information system.......................................................191
5.6 Using computer in accounting information system ...................................................192
5.7 Kinds of financial statements prepared......................................................................193
5.8 Frequency of preparing and analyzing financial statements......................................193
5.9 Responsibility – preparing and analyzing financial statements.................................194
5.10 Kinds of financial analysis and ratios used................................................................194
5.11 Preparing cash budgets ..............................................................................................196
5.12 Cash balance determination .......................................................................................196
5.13 Cash surplus or shortage ............................................................................................197
5.14 Sales on credit and credit polices...............................................................................198
5.15 Frequency of reviewing receivable levels and bad debts...........................................199
5.16 Percentage of bad debts compared to sales................................................................199
5.17 Frequency of reviewing inventory levels and preparing inventory budgets..............200
5.18 Basis of determining inventory levels and using EOQ Model ..................................201
5.19 Frequency of evaluating investment projects and reviewing efficiency of using
fixed assets after investing .........................................................................................202
5.20 Methods used to evaluate investment projects...........................................................203
xv
5.21 Frequency of preparing and reviewing financial budgets..........................................204
5.22 Kinds of financial budgets prepared ..........................................................................204
5.23 Responsibility – preparing financial budgets.............................................................205
5.24 Frequency of comparing between budgeted and actual results .................................205
5.25 Descriptive statistics of financial ratios .....................................................................207
5.26 Test for difference of means of financial ratios between two groups........................208
5.27 Comparison of current ratios .....................................................................................208
5.28 Descriptive findings of SME current ratios ...............................................................209
5.29 Descriptive findings of SME debt ratios....................................................................210
5.30 Descriptive findings of SME activity ratio ................................................................211
5.31 Overview of SME profitability ..................................................................................213
5.32 Relationship between profitability and types of business..........................................213
5.33 Relationship between profitability and business characteristics................................214
5.34 Total variance explained and three principal components of financial management
practices .....................................................................................................................217
5.35 Factor analysis results for measuring financial management practices .....................219
5.36 Three principal components of financial management practices...............................218
5.37 Correlation matrix of PRO, ROS, ROA, and ROE....................................................222
5.38 Correlation matrix of PRO and independent variables ..............................................223
5.39 Correlation matrix of ROS and the independent variables ........................................224
5.40 SME profitability regression model using profitability as dependent variable .........226
5.41 Descriptive finding of relationship between profitability and current ratio ..............227
5.42 Relationship between SME profitability and the efficiency of financial
management practices................................................................................................230
5.43 Regression model of SME profitability after removing debt ratio ............................231
5.44 SME profitability regression model using return on sales as dependent variable .....232
5.45 Descriptive statistics of profitability of two groups of SMEs....................................235
5.46 Independent group test of mean profit difference......................................................235
6.1 Summary of conclusions related to financial management practices ........................246
6.2 Summary of conclusions related to financial characteristics of SMES .....................249
6.3 Summary of research questions and answers.............................................................257
xvi
List of figures
Figure Page
1.1 Structure of chapter 1.................................................................................................2
1.2 Fields of the research problem...................................................................................5
1.3 Analytical model for the research ..............................................................................14
1.4 Structure of the study .................................................................................................15
2.2 Political structure of Vietnam ....................................................................................23
2.3 Business structure in Vietnam ...................................................................................41
2.4 Breakdown of business by size ..................................................................................42
2.5 SME financial management practices and the gap ....................................................56
3.2 The central position and role of financial management.............................................68
3.3 The relations among objectives of financial management.........................................70
3.4 A model of financial management.............................................................................74
3.5 Interaction between theories and practices of financial management .......................75
3.6 Financial ratios linked to return on equity .................................................................125
3.7 Model of the impact of financial management on SME profitability........................130
4.2 Survey instrument for measuring accounting information system ............................148
4.3 Survey instrument for measuring financial reporting and analysis ...........................150
4.4 Survey instrument for measuring cash management practices ..................................152
4.5 Survey instrument for measuring receivable management practices.........................154
4.6 Survey instrument for measuring inventory management practices..........................156
4.7 Survey instrument for measuring fixed asset management .......................................157
4.8 Survey instrument for measuring financial planning.................................................159
4.9 Analytical model for the research study ....................................................................165
4.10 Structure of SMEs in Vietnam and the target population ..........................................171
4.11 A classification of multivariate methods ...................................................................179
xvii
5.2 Distribution of sample by industry ............................................................................188
5.3 Distribution of sample by ownership.........................................................................188
5.4 Relationship between profitability and debt ratio......................................................229
6.2 The revised model of SEM profitability ....................................................................254
xviii
Chapter One:
Introduction to the Study
1.1 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 as presented
by figure 1.1 (page 2).
Section 1.1 provides a general introduction to the chapter and section 1.2
examines the research background where the research problem is identified. Section
1.3 defines the research problem, presents a statement of the problem and expands the
research problem in two subsections 1.3.1 and 1.3.2. Subsection 1.3.1 addresses the
research questions that will be respectively answered in chapters of the study.
Subsection 1.3.2 presents research objectives that the study covers in the process of
solving the research problem defined.
Section 1.4 briefly discusses the general aspects of research methodology such
as selecting from alternative types of research and research design, whereas the details
of research methodology will be discussed in chapter 4. Section 1.5 provides some
justifications for the study including the rationale and arguments for the study.
Section 1.6 explains the context of specialized terms used in the study and
section 1.7 points out the significance and scope of the study. Section 1.8 presents the
analytical model of the study fully developed in chapter 3. Section 1.9 describes
overall structure of the thesis, and finally section 1.10 summarizes conclusions drawn
from the research. Figure 1.1 provides a visual representation of the structure of the
chapter.
Chapter One: Introduction to the Study
Figure 1.1: Structure of chapter 1
1.1 Introduction
1.2 Research background
1.3 Research problem
1.3.1 Research questions 1.3.2 Research objectives
1.4 Methodology
1.5 Justification for the study
1.6 Definitions of terms used in the study
1.7 Significance and scope of the study
1.8 The analytical model for the study
1.9 Structure of the study
1.10 Conclusions
Source: Developed for the thesis
2
1.2 RESEARCH BACKGROUND
In the mid-1980s, Vietnam could be characterized as having a strong command-

economy system. However, difficulties from 30 years of war and the inefficiency of
the command-economy system had led the national economy to the brink of disaster.
Faced with stagnant growth, a severe shortage of food, deficit budgets, increases in
inflation and chronic trade imbalances, the Government of Vietnam initiated an
economic renovation policy in December 1986.
Economic reform has taken place in many areas but typically has focused on
four main areas (Le, 1992). The first was to change from a centrally planned and
controlled economy to a market economy regulated by the government. The second
involved a shift from the policy of giving priority to the state and collective sectors to
the policy of developing multi-sector businesses and promoting private businesses.
The third was to change investment policy that had formerly emphasized heavy
industries into policies of priority for development of food and consumer goods
production, and goods production for exports. In terms of international economic
relations, the government has encouraged all economic sectors to diversify exporting
products and markets instead of focussing on the traditional ones such as the former
Soviet Union and Eastern European countries (Le, 1992).
It is apparent that since the government introduced the series of economic
reforms known as doi moi (renovation), 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 and limited companies had quickly risen to 28,811 in
1998 (Tran, 1998, p. 54) and almost all are small and medium enterprises (SMEs).
SMEs have contributed considerably to growing GDP and creating jobs for labour-
age people. Vu (1998, p. 18) summarizes SME contributions as follows:
• providing a large number of diversified products, occupying 26 percent of

GDP and 30 percent of industrial outputs,
• creating jobs for 4.5 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.
3
In addition to achievements and contributions as mentioned above, SMEs in Vietnam

are currently being faced with many serious difficulties such as shortage of capital for
expanding and renovating equipment and technology, low productivity and
competitiveness, lack of experience in terms of marketing, production management,
and financial management. Of these difficulties, lack of financing resources and
experience of financial management is currently one of the most serious issues
(Ebashi, Sakai and Takada, 1997). Inefficient financial management may damage
SME profitability and, as a result, the difficulties of SMEs will become greater.
Conversely, efficient financial management will help SMEs to strengthen their
profitability and, as a result, these difficulties can partly be overcome. Most
commercial banks refuse to offer loans for SMEs because the banks think SME
profitability could not cover loan risks. However, to date there has not been any
research on SME profitability conducted in Vietnam. Conducting such research will
enable commercial banks to evaluate SME profitability and make decisions on
granting loans for SMEs. In addition, when the stock exchange is established in
Vietnam, conducting research on SME profitability will help SMEs to improve their
performances and reinforce financial management as a preparation to participate in
stock exchange listing.
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 is considered a contribution to improvement of
financial management practices and profitability of SMEs in Vietnam. Firstly, it
investigates financial management practices and financial characteristics of SMEs,
and then, examines the impacts of financial management practices and financial
1.3 RESEARCH PROBLEM
Problem definition is essential before conducting a research project, especially

quantitative research. Zikmund (1997, p. 82) recommends that formal quantitative
research should not begin until the problem has been clearly defined. In Vietnam,
defining the research problem of SMEs may begin with a consideration of the typical
characteristics of management. Most SMEs have not appointed financial managers to
be in charge of financial management of the company. Usually, the owner-managers
4
with the assistance of the chief-accountant control financial matters of the company.
However, most owner-managers have no formal training in management skills,
especially financial management. Moreover, the concepts of financial management
have also only been recognized in Vietnam since the beginning of the 1990s when the
economy was converted into a market economy. Currently, financial management is
one of the challenges of SMEs.
Lack of knowledge of financial management combined with the uncertainty of
the business environment often lead SMEs to serious problems regarding financial
performances. Regardless of whether owner-manager or hired-manager, if the
financial decisions are wrong, profitability of the company will be adversely affected.
Consequently, SME profitability could be damaged because of inefficient financial
management. SMEs have often failed due to lack of knowledge of efficient financial
management. Moreover, undercapitalization and uncertainty of the business
environment cause SMEs to rely excessively on equity and maintain high liquidity
and these financial characteristics probably affect SME profitability (Vuong, 1998).
In summary, the problem that SMEs in Vietnam face appears to be that
inefficient financial management practices have adversely affected their profitability.
Therefore, the problem to be addressed in this research is to investigate the
simultaneous effects of financial management practices and financial characteristics
on SME profitability, and then, to determine the best measures for improving SME
profitability in Vietnam by using efficient financial management tools. Figure 1.2
represents the fields of research problem in this study.
Figure 1.2: Fields of the research problem
Financial management practices Financial characteristics
SME profitability
5
1.3.1 Research questions
Research questions involve the research translation of “problem” into the need for
inquiry (Zikmund, 1997, p.88). The research problem defined above leads to the
following research questions:
• How important are SMEs in Vietnam and are they profitable? (answered in
chapters 2 and 5)
• How have researchers in the literature review, identified the context of
financial management practices and financial characteristics, and how have
they proposed to measure SME profitability? (answered in chapter 3)
• How important are financial management practices and financial
characteristics to SME profitability? (answered in chapter 3)
• What are the relationships between financial management practices, financial
characteristics and SME profitability? (answered in chapters 4 and 5)
• How do financial management practices and financial characteristics affect
SME profitability? (answered in chapters 4 and 5)
• What action can improve financial management and profitability of SMEs in
Vietnam? (answered in chapters 5 and 6)
1.3.2 Research objectives
A research objective is the researcher’s version of a business problem. Objectives

explain the purpose of the research in measurable terms and define standards of what
the research should accomplish (Zikmund 1997, p. 89). In solving the research
problem and answering the research questions mentioned previously, this study has
the following objectives:
• to collect descriptive evidence on financial management practices, financial

characteristics and profitability of SMEs in Vietnam
• to develop a model of the impacts of financial management practices and
financial characteristics on SME profitability
• to contribute to knowledge of the relationships of financial management
practices, financial characteristics and SME profitability.
6
1.4 METHODOLOGY
In choosing a research design, Zikmund (1997, p. 37) discusses three types of

business research: exploratory, descriptive and causal research.
• Exploratory research is usually conducted to clarify and define the nature of a

problem.
• Descriptive research is designed to describe characteristics of a population or
phenomenon.
• Causal research is conducted to identify cause-and-effect relationships among
variables where the research problem has already been narrowly defined.
Choosing a type of research depends upon the research questions that the researcher
wants to answer. This research study is designed to describe characteristics of
financial management practices of SMEs and investigates the impact of the financial
management practices and financial characteristics on SME profitability. Thus,
“descriptive” was viewed as an appropriate research type. Also, this research is
designed to identify the cause-and-effect relationships between efficient financial
management practices and profitability of SMEs. Thus causal research was also
implemented in combination with descriptive research. In summary, a combination of
descriptive and causal research has been chosen for this research.
Selecting research design is the next step after choosing type of research. There
are four types of research design from which to select: survey, experiments,
observation and secondary data (Zikmund, 1997). Selection of research design is
based on the advantages and disadvantages of each kind of research designs and
circumstances in which the research problem is defined. 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 and
describe financial management practices of SMEs in Vietnam. Questionnaires were
designed and directly delivered to SMEs to collect data related to financial
management practices. The argument for choosing survey was twofold. Firstly,
surveys provide quick, efficient and accurate means of assessing information about
the population. Secondly, surveys are more appropriate in cases where there is lack of
secondary data.
7
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 are derived from financial statements. These financial
statements are available from taxation departments of Vietnam and sometimes from
businesses directly.
One of the objectives of collecting data related to financial management
practices, which are collected from the survey, and data related to financial
characteristics of SMEs, which are derived from the financial statements, was to test
hypotheses. This research study was designed to test two kinds of hypotheses. The
first was the hypothesis of the simultaneous impacts of financial management
practices and financial characteristics on SME profitability. The second was the
hypothesis related to differences in the average profits between SMEs with efficient
financial management practices and SMEs with inefficient practices.
1.5 JUSTIFICATION FOR THE STUDY
Concerned with financial management practices, most previous researchers have

concentrated on examining, investigating and describing the behaviour of SMEs in
practising financial management. Five specific areas of financial management
practices including accounting information systems, financial reporting and analysis,
working capital management (including cash management, receivables management,
inventory management and payables management), fixed asset management and
capital structure management have long attracted the attention of researchers
(McMahon, et al. 1993). Their findings are mainly related to exploring and describing
the behaviour of SMEs towards financial management practices. Although they
provided much descriptive statistical data and empirical evidence on SME financial
management practices, it appears that there still are some gaps in the literature, which
need to be addressed.
• Firstly, most empirical evidence comes from the developed economies such as
the United States of America (USA), the United Kingdom (UK), Canada and
Australia (McMahon et al. 1993). There seems to be a lack of evidence from
emerging economies, especially from transiting economies such as Vietnam
and China.
8
• Secondly, most previous researchers focus on investigating and describing

financial management practices whereas there has been little research
examining the impact of financial management practices on SME profitability
(McMahon et al. 1993).
These are major gaps and it is difficult to convince business financial management
practitioners of the need for changes in practices until evidence of the effects of
financial management practices on SME profitability is provided and the relationship
between the two variables are discovered.
In addition to financial management practices, previous researchers provided
valuable findings related to financial structures/characteristics of SMEs. Four
variables including liquidity, financial leverage, activity and profitability are
popularly used by previous researchers to identify and measure financial
characteristics of SMEs (McMahon et al, 1993). There are many studies on financial
characteristics of SMEs conducted by researchers over several decades. However,
there still exist gaps in the literature related to financial characteristics of SMEs,
which need to be supplemented.
• Firstly, it appears that the financial characteristics of SMEs in developing

countries, especially in transiting economies such as Vietnam and China have
not been investigated and empirical data has not been produced.
• Secondly, to date, there is no study, which examines the relationship or the
impact of three variables: liquidity, financial leverage, and activity on
profitability variable.
This lack of empirical evidence from emerging economies and the lack of
examination of the impact of financial management practices and financial
characteristics on SME profitability are major gaps in the knowledge of financial
management practices and financial characteristics of SMEs. Based on previous
research findings and recognition of these gaps, a study of the impact of financial
management on SME profitability is justified and a model of the impacts of financial
management practices and the financial characteristics should be developed and tested
by using the empirical data from emerging economies. Vietnam is one of many
9
appropriate countries to provide such data. Therefore, this study will extend previous
studies by focusing on examining the simultaneous impacts of financial management
practices and financial characteristics on SME profitability using the empirical
evidence from Vietnam.
1.6 DEFINITIONS OF TERMS USED IN THE STUDY
Specialized terms used in this study include SMEs, private company, limited
company, stock companies, efficient financial management and profitability. These
terms are adopted for Vietnamese context. In this study, SMEs refers to small and
medium enterprises. Currently, Vietnam has not uniformly defined which criteria a
business has to fulfil to be viewed as an SME. In this study, SMEs are understood to
have the same definition given by the Vietnamese Chamber of Commerce and
Industry (VCCI, 1998). According to VCCI, a SME is defined as a business unit that
fulfils the following criteria, depending on its size:
• Small business:
− Manufacturing: less than 200 employees and VND5 billion capital
− Trading and services: less than 200 employees and VND5 billion capital
• Medium business:
− Manufacturing: 200 – 500 employees and VND5 – 10 billion capital
− Trading and services: 50 – 100 employees and VND5 – 10 billion capital
As will be examined in more detail in chapter two, SMEs include many forms of
business organization such as private enterprises, limited companies, joint stock
companies, cooperatives and business households or family businesses. However, this
study only focuses on the forms of business that set up a formal system of financial
management. Based on this criterion, private enterprises, limited companies, and joint
stock companies are the objects of this study whereas others such as cooperatives and
family businesses are beyond the study. Also, the term “company” is used
synonymously with the term “enterprise” in this study. Private enterprises are
companies that are registered under the Vietnam Private Business Law. These
companies have one owner who is responsible for all his or her assets. Limited
companies are companies that are registered under the Company Law and they have
10
larger initial capital than private enterprises. Owners’ liability is limited to the initial
capital that they have to invest in full at the time of establishment of the company. If
there are more than 12 owners, a formal owner meeting and boards of director
meetings must be held.
Financial management is concerned with all areas of management which
involve finance – not only the sources and uses of finance in the enterprise, but also
the financial implications of investment, production, marketing or personnel decisions
and the total performance of the enterprise (Meredith, 1986). Financial management is
concerned with raising the funds needed to finance the enterprise’s assets and
activities, the allocation of these scarce funds between competing uses, and ensuring
that the funds are used effectively and efficiently in achieving the enterprise’s goals
(McMahon, Holmes, Hutchinson and Forsaith, 1993). However, financial
management, in this study, is limited to a framework of five specific areas: (1)
accounting information system (2) financial reporting and analysis, (3) working
capital management, (4) fixed asset management, and (5) capital structure
management. This limitation is necessary and appropriate to financial management
practices of SMEs in Vietnam, given information available for research.
Financial management objectives, in this research, refer to two main
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 (McMahon,
1995). Liquidity management is concerned with avoiding 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 (McMahon, 1995).
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. Chapter 4 defines variables and criteria to measure the
extent of efficiency of financial management. In this study the context of financial
management practices include accounting information systems, financial reporting
and analysis, cash management, receivable management, inventory management,
11
fixed asset management and financial planning. The extent of efficiency of each
financial management component is measured by the sum of points of eight items on
the nine-point scale (1 = not efficient at all, 9 = very efficient). If the sum of points of
a financial management component of a business is greater than the average point of
40 (8 x 5 point average), the business is said to be “efficient” in practising that
financial management component. Conversely, if that sum is less than the average
point of 40, the business is said to be “not efficient” or “inefficient” in practising that
financial management component. Lastly, a business is said to be “efficient” in
financial management practices, if all components of financial management practices
are efficient, that is, all sums of points of components are greater than the average
point of 40.
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 characteristics of the enterprise are represented by financial ratios,
derived from financial statements. This information can be used to quantify the
position of SMEs in terms of their profitability, liquidity, and leverage and to compare
them with other or large enterprises (McMahon et al. 1993). In this study, financial
characteristics are measured by three variables including liquidity, financial leverage
and business activity, which are derived from financial statements.
SME profitability is an abstract concept. There are many different ways to
measure profitability. 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. This
limitation is necessary to narrow the scope of the study and is suitable for financial
management practices for SMEs in Vietnam. In addition, in this study, the concept of
profitability is defined as a comparative concept. A business is said to be “profitable”
if it produces annual average returns (average of return on sales, return on assets and
return on equity) that are greater than the free-risk rate of interest, which was
estimated as 5.4% percent at the middle of the year 2000 in Vietnam. Conversely, if
the annual average profit of a business is not greater than the free-risk rate of interest,
the business is said to be “not profitable”. The arguments for the concept of
profitability will be explained in chapters 4 and 5.
12
1.7 SIGNIFICANCE AND SCOPE 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 practices and
financial characteristics of SMEs by focussing on examining the simultaneous
impacts of financial management practices and financial characteristics on SME
profitability. In addition, utilizing data from Vietnam, one of the emerging economies,
contributes to the literature of SME financial management, which traditionally
concentrates on SMEs of developed economies rather than SMEs in other economies.
Using data from Vietnam to test theories of financial management helps to confirm
and expand the scope of theoretical applications.
In practice, this study is significant for financial management practices in
Vietnam. Results will indicate relationships between financial management practices,
financial characteristics 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.
1.8 ANALYTICAL MODEL FOR THE STUDY
The analytical model for this research, which is developed and justified in the
literature review chapters, and which ultimately provides structure to the empirical
chapters, is illustrated in figure 1.3 (page 14). This analytical schema represents the
model of the effects of financial management practices and financial characteristics
on SME profitability. The model demonstrates that SME profitability is expected to
be positively influenced by efficient financial management practices and financial
characteristics.
This analytical schema presented in Figure 1.3 can be expressed in
mathematical notation as follows:
Pm = f(As, Fa, Wo, Fi, Cs, Ls, FLa, ACo) (Eq. 1.1)
where:
Pm = SME profitability ratios, viewed as dependent variables
13
As = Accounting information system practices, viewed as independent variables

Fa = Financial reporting and analysis practices, viewed as independent variables
Wo = Working capital management practices, viewed as independent variables
Fi = Fixed-asset management practices, viewed as independent variables
Cs = Capital structure management practices, viewed as independent variables.
Ls = Liquidity ratios, viewed as independent variables
FLa = Financial leverage ratios, viewed as independent variables
ACo = Activity ratios, viewed as independent variables.
Figure 1.3: Analytical model for the research
Financial management practices:
•
•
Accounting information system
•
Financial reporting and analysis
•
Working capital management
•
Fixed asset management
•
Capital structure management
Financial planning
SME profitability:
Efficient
financial •
•
Return on sales
management
•
Return on assets
Return on equity
Financial characteristics:
•
•
Liquidity ratios
•
Financial leverage ratios
Activity ratios
Source: Developed for the study
Chapter 4 will present, in more detail, definitions and measures of dependent

variable (profitability) and independent variables such accounting information system,
financial reporting and analysis, working capital management (including cash
management, receivables management, inventory management), fixed asset
14
management, capital structure management, and financial planning. In addition, the

model of simultaneous effects of financial management practices and financial
characteristics on SME profitability will be developed from the literature review in
chapter 3 and with variables defined in chapter 4 of the study.
1.9 STRUCTURE OF THE STUDY
This research is structured into 6 chapters. Chapter 1 introduces the research including
research background, research problem, research questions, research objectives and
justifications for the research. Chapter 2 examines the economic structure, and the
current practices and role of SMEs in Vietnam. Chapter 3 provides a literature review
of financial management practices, financial characteristics and SME profitability.
Chapter 4 discusses methodology utilized in the research. Chapter 5 analyses the data
collected and presents the findings of the research. Chapter 6 points out conclusions
and the implications of the research in the world of business administration. Figure
1.4 (page 15) illustrates the structure of the study and the relationships between
chapters.
Figure 1.4: Structure of the study
Chapter 1: Introduction to the Study
Chapter 2: The Economic Structure Chapter 3: Financial Management

and SMEs in Vietnam Practices, Financial Characteristics and
Profitability of SMEs
Chapter 4: Research Methodology
Chapter 5: Data Analysis and Findings
Chapter 6: Conclusions and Implications
15
1.10 CONCLUSIONS
This research examines the simultaneous impacts of financial management practices

and financial characteristics on SME profitability using evidence from Vietnam. To
date, there is no significant research related to financial management practices and
financial characteristics of SMEs conducted in Vietnam and there is also no research
that examines the simultaneous impact of financial management practices and
financial characteristics on SME profitability. This research is designed as a
combination of descriptive and explanatory research in which a sample of 160 SMEs
are drawn from a list of over 14,000 SMEs in Ho Chi Minh City for personal
interview.
Gathered data will be processed by computer and the Statistical Package for
Social Science (SPSS) is the main computer software utilized in data analysis. In term
of data analysis, this study applies both descriptive and inferential statistics.
Descriptive statistical techniques will be applied to describe characteristics of
financial management practices and financial characteristics of SMEs in the sample.
Inferential statistical techniques such as bivariate analysis for measuring the
association, bivariate analysis for testing the difference, factor analysis, and
multivariate analysis will be applied to test the hypotheses of association and
differences (chapter 5). Findings of this study will be applied to increase efficiency of
financial management practices and improve profitability of SMEs in Vietnam
(chapter 6). To provide an in-depth picture of business environment in which SMEs
operate, chapter 2 will respectively examine and present information on background
of the economy, business structure and SMEs in Vietnam whereas chapter 3 reviews
the literature of financial management for SMEs around the world.
16
Chapter Two:
The Economic Structure and
SMEs in Vietnam
2.1 INTRODUCTION
As of 2000, Vietnam, a country suffering from 30 years of war and 10 years of

economic mismanagement, stands on the threshold of a new era – an era of
international relations and economic development. After a decade of strong efforts, its
economy and finance have been substantially reformed, and is integrating into the
world economy. Vietnam has made substantial progress in rearranging its foreign debt
arrears and started to benefit from financial assistance and foreign direct investment
(FDI) since the end of 1980s. Although challenges remain, Vietnam’s achievements
over the past years foretell its capacity to prevail. This chapter provides an overview
of Vietnam’s economy and performance of small and medium enterprises (SMEs) in
Vietnam. Objectives of the chapter are (1) to provide a literature review of economic
background, business structure and the development of SMEs in Vietnam, and (2) to
identify gaps in financial management for SMEs in Vietnam compared with financial
management for SMEs worldwide.
This chapter is structured into 6 main sections. Section 2.1 provides a general
introduction to the chapter, including the objectives and structure of the chapter.
Section 2.2 examines information on Vietnam such as geographic location, history,
political structure, the process of economic and financial development, and its
population and labour force. Section 2.3 concentrates on examining Vietnam business
structures with special emphasis on SMEs and the support policy for SME
development. Section 2.4 analyzes all aspects of SME finance in Vietnam including
types of finance, use of finance and financial management. Section 2.5 provides an
overview of business structure of SMEs in Ho Chi Minh City where SMEs are
considered the largest groups in term of numbers and are representative of SMEs in
the whole country. Section 2.6 summarizes the conclusions drawn from reviewing the
background of economy and SME performances in Vietnam. Figure 2.1 (page 18)
provides a visual outline of the structure of the chapter.
Chapter Two: The Economic Structure and SMEs in Vietnam
2.1 Introduction
2.2 Vietnam: background information
2.2.1 Overview of the country 2.2.3 Vietnam population
2.2.2 Vietnam economy 2.2.4 Vietnam labour force
2.3 Vietnam business structure
2.3.1 Type of business 2.3.3 Small and medium enterprises
2.3.2 Overview of enterprises in VN 2.3.4 Policies for supporting SMEs
2.4 SME finance in Vietnam
2.4.1 Types of 2.4.2 Use of 2.4.3 Financial management for

finance finance SMEs
2.5 Business structure and SMEs in

HCM City
2.6 Conclusions
18
2.2 VIETNAM: BACKGROUND INFORMATION
Section 2.2 reviews information on Vietnam background including geographical

location, historical overview, economic development process, population and labour.
This section is structured into three subsections. Subsection 2.2.1 provides an
overview of the country. Subsection 2.2.2 examines the process of economic
development since the country was reunified in 1976. Section 2.2.3 reviews
population and labour force in Vietnam.
2.2.1 Overview of the country
When asked about Vietnam many around the world probably answer that it is a “poor
country” damaged seriously by conflicts. That was the position in the late 1970s. As
of 2000, the country has seen increasingly remarkable changes. Harvie (1996, p. 1)
presents a current impression of Vietnam since the country has introduced its market-
oriented economic policy.
Vietnam has only recently emerged as a participant in the most rapidly

growing region of the world economy, the Asia Pacific economy. It is poised
to become one of Asia’s most vigorous market economies during the
remainder of the 1990s and into the twenty-first century, having rejected
central planning, and is widely tipped to become Asia’s next economic
dragon.
2.2.1.1 The geographical location
Schuwalow (1996, p.189) described Vietnam as the country that extends more than
1,600 kilometres along the east coast of Indochina, from the Chinese-border mountain
and the Red River delta in the north, the Laotian and Cambodian borders, to the fertile
Mekong River delta in the south. Although in its extreme north the country is more
than 500 kilometres wide, much of the middle section is a relatively narrow strip of
coastal land. For a considerable distance it is 80 kilometres wide, and in the south
expands again to about double that width (see the map, page 20). Vietnam’s total land
area is 325,360 square kilometres, and 75 percent is hill country or mountains.
Climate is typically monsoon, and the temperature varies considerably according to
latitude. In the tropical south, conditions are warm to hot throughout the year and the
humidity is usually high. In the north, particularly in the highlands, markedly warmer
and cooler seasons occur and temperatures are much lower than those at sea level.
19
20
2.2.1.2 Historical overview
After the government of South Vietnam fell on 30 April 1975, the north and the south
of Vietnam were reunified by a national election held in April 1976 and in July of the
same year the Socialist Republic of Vietnam was established. This reunification came
in an attempt to transform the south from a basically market economy to a planned
economy. Collectivization and nationalization respectively happened in agriculture
and other industries. In the meantime, trade with the western countries was greatly
restricted due to the United States of America trade embargo. Vietnam’s conflict with
Cambodia during 1977 – 80 and border conflict with China in 1979 further hampered
the country’s progress. Throughout the 1980s most people associated Vietnam with
the word “war”. However this perception is slowly fading as a new image of Vietnam
emerges. Currently Vietnam is a country at peace with a vast variety of natural
resources, a high literacy rate (90 percent), and an increasingly skilled and hard labour
force. Although an often-difficult business climate has been experienced in the past,
Vietnam is currently changing and amending many of its laws in order to attract more
foreign investment and trade opportunities (Vietnam Embassy in USA, 1999).
By the mid-1980s, a decline in the former Soviet Union aid and government’s
tight control over economic policy proved to be an economic disaster leading to a
decline of production in many sectors, and an increasing reliance on imports. In
response to this inefficiency, the Vietnamese Government initiated a series of
economic reforms known as doi moi ("renovation") in December 1986. The main
goals of doi moi were to improve lagging productivity, to raise living standards, and
to curb rapid inflation, which reached almost 500 percent a year in mid-1980s
(Kimura, 1993). Renovation process included macro-economic stabilization, the
recognition of Vietnam’s private sector, and the promotion of foreign trade and
investment. Following this paradigm, Vietnam has attempted to transform itself into a
market-oriented economy, and opened itself to the outside world. After more than a
decade of doi moi, Vietnam has experienced huge growth in investment, industry and
an expansion of trade (20% per annum on average) and has had considerable success
in restructuring the economy (Vietnam Embassy in USA, 1999). The government has
opened the country to foreign investment, by allowing many joint venture and wholly
foreign-owned enterprises to flourish. Regulations and rules have more and more
become liberalized.
21
In July 1995, Vietnam became a full member of the Association of South East
Asian Nations (ASEAN). On January 1st 1996, Vietnam became a member of the
ASEAN Free Trade Agreement (AFTA) and in 1998 Vietnam was admitted into the
Asia Pacific Economic Cooperation (APEC) and has since signed trade agreements
with a number of countries and territories (Australian Department of Foreign Affairs
and Trade, 2001). As of 2000, Vietnam is closer then ever to establishing a long-term
trade relationship with the United States of America, and has submitted an application
to enter the World Trade Organization (WTO). In recent years, the government has
planned to establish a Vietnamese stock market and new laws on foreign investment
are currently being promulgated and amended in order to make Vietnam more
attractive to foreign investment. After many years of preparation, the stock market
was finally opened and launched the first transaction on 26 June 2000 (USA
Department of Commerce, 1998).
2.2.1.3 Political structure
In Vietnam, leadership structure is divided into three levels. The General Secretary is
in charge of representing and dealing with issues concerning the Vietnamese
Communist Party. The Prime Minister is in charge of handling government affairs and
day-to-day business of the country. Finally, the President focuses on security issues
and the armed forces. Vietnam is a socialist country under the leadership of the
Communist Party. The Communist Party has nearly 2 million members and strongly
influences every aspect and at every level of Vietnamese life. The party holds a
national congress every five years to outline the country’s overall direction and
formalize policies (Commercial Chamber of Vietnam in USA, 1998).
The National Assembly, which includes 450 members, representing all walks
of life throughout the country, and is open to non-party members, is the highest state
authority and the only body with constitutional and legislative power. The National
Assembly elects the President of the State and the Prime Minister (figure 2.2, page
23). The Prime Minister is in charge of handling government affaires with assistance
of 18 ministries. At its meeting, the National Assembly examines reports and plans
presented by the ministries involved, and National Assembly members have rights to
ask ministries to clarify and answer questions raised by members (Commercial
22
Chamber of Vietnam in USA, 1998; Australian Department of Foreign Affairs and

Trade, 2001).
Figure 2.2: Political structure of Vietnam
The National Assembly
Supreme People’s Court President Supreme People’s Procuracy
Prime Minister
Ministry of Defense Ministry of Interior Ministry of Foreign

Ministry of Industry Ministry of Trade Ministry of Finance
Ministry of Planning Ministry of Technology Ministry of Education

and Investments and Environment and Training
Ministry of Ministry of Agriculture Ministry of Fishery and

Transportation and and Rural Development Aquatic Products
Communications
Ministry of Health Ministry of Construction Ministry of Information

State Bank of Vietnam Ministry of Justice Government Office
Source: Adopted from the Commercial Chamber of Vietnam in the U.S.A. and
Australian Department of Foreign Affairs and Trade
2.2.2 The Vietnam economy
Since unification of the north and south, the process of the Vietnam economy
development can be divided into three main periods: the central-planned economy
period (1976 – 1986), the policy reform period (1986 – 1990) and the transition
economy period (1990 – present). This subsection reviews the development of
Vietnam economy throughout each period with a special emphasis of the effects of
the government’s economic policy. Its purpose is to review the background in which
SMEs operate and develop because the process of SME development is linked to the
process of economic policy reform.
23
2.2.2.1 The central-planned economy period (1976 – 1986)
The central-planed economy period is characterized by state intervention in almost all

activities of the economy. When the war ended in 1975, along with the unification of
the country, the integration of the economies of the north and the south of Vietnam
was set in motion. Vu (1994, p. 4) mapped out points which characterized the
Vietnam economy in that period as follows:
• The state determined the important economic activities of the country through
a system of production plans and product distribution and strictly regulated
pricing and interest rates.
• The state sector and the collectives constituted the foundation of the economy,
the collectives being heavily subsidized in activities such as investment and
loans and they quickly developed to become a sizable part of the national
economy.
• Large-scale private enterprises were not encouraged to expand further, but
were singled out to be finally incorporated into either state or collective units.
• The market mechanism operated only in small businesses and the household
economy, that is to say, in only a part of the agricultural, handicraft, and
consumer goods retailing sectors. Many input factors used for production were
not allowed to be bought or sold on the market but were allocated by the
state’s planned distribution systems.
• The state monopolized foreign trade. Due to historical circumstances,
Vietnam’s trade relations had been mainly with the former Soviet Union and
Eastern European countries through bilateral treaties. Foreign trade companies
under the control of the state implemented these trade treaties, and the profit-
and-loss account of foreign trade was entirely taken care of by the state.
• The finance of the state was not separated from that of state-owned
enterprises. The state undertook to compensate for losses incurred by state-
owned enterprises by means of subsidies, and when these enterprises produced
profits, these profits were channelled back to the state budget. All production
activities were subsidized by the state through its provisions of raw materials
and other inputs of production. Machinery and equipment were imported with
aid funds and credit loans, and sold at low prices to state-owned enterprises.
24
For this reason, the budget deficits and foreign debt would have increased
along with any increase in outputs.
Such policies were not conductive to motivating individuals and companies to boost
enterprising economic activities. The economic institutions had no room for private
individual’s creativity and business dynamism. Thus, although income distribution
was egalitarian and all members of society were assured the basic necessities of life,
there was, however, no incentive for individuals to use their talents or assiduity in
work to make larger contributions to the country. This is demonstrated by failure of
the 1976 – 80 five-year plan. In 1980 food production attained only 69 percent of its
target; coal, 52 percent; electricity, 72 percent; cotton fabric, 39 percent; paper, 37
percent (Vu, 1994). The economy’s growth was seriously hampered by the centrally
planned system.
2.2.2.2 The policy reform period (1986 – 1990)
The policy reform period is characterized by the changes in management mechanisms

of the economy. After ten years, the practical results proved that the central-planned
economic system was not efficient and effective. In 1986 the Government recognized
that policy reform was the survival goal. The year of 1986 was viewed as the year of
beginning policy reform. Vu (1994, p. 7) confirmed the path taken by Vietnam’s
economic reform was marked by the important conclusions on the system of concepts
regarding economic renovation drawn up by the Sixth National Congress of the
Communist Party of Vietnam in December 1986. In this congress the following
changes in policies were mapped out:
• confirmation of the long-term development of the multi-sector economy,

eliminating the former discrimination against the private economy, allowing
private sector to compete with other sectors on an equal footing in a healthy
competitive environment,
• confirmation of the importance of market relations in the economy,
• renovating the economic structure, using available resources to meet the main
objectives: developing agriculture, promoting the production of consumer
25
goods, increasing the export of goods and services, and enlarging its external
economic relations,
• stabilizing the socio-economic environment by reducing the inflation rate, the
budget deficits, and excessive government expenditure, and improving the
living standard of people, and
• carrying out an open-door policy in relations with foreign countries.
Policy reform mentioned above opened opportunities for changes in activities of the
economy including changes in economic structure, financial and banking system, and
price and market relations.
Changes in economic structure
Developing a multi-sector economy led to change in economic structure. In Vietnam’s

economic ideology, the national economy could be divided into several economic
sectors based on the form of ownership and means of production. Before policy
reform, the economy consisted of two sectors: state-owned and collective. Since
policy reform, the following main sectors were officially recognized (Le, 1992):
• state sector, based on the state ownership,

• collective sector, based on the voluntary contribution of capital by a group of
people to set up joint units and use labour forces of the collective’s members
and their relatives,
• private sector including the family or household businesses and private
companies, and
• joint sector between state and other sectors.
Table 2.1 (page 27) demonstrates changes in economic structure during the period
1986 – 1991 in which the non-state sector had increasingly risen in terms of national
income, labour and labour in industry. For example, labour force working for state
sector declined to 10.4 percent in 1991 from 14.7 percent in 1986 whereas labour
force working for private sector increased to about 90 percent in 1991 from 85 percent
in 1986. This showed that private sector played a major role in creating employment.
26
Table 2.1: Changes in economic structure (1986 – 1991)

1986 (%) 1991 (%)
State Non-state State Non-state
National income 29.8 70.2 29.0 71.0
Labour 14.7 85.3 10.4 89.6
Gross industrial output 56.3 43.7 58.6 41.4
Labour in the industry 30.0 70.0 33.0 67.0
Source: Statistical data of Socialist Republic of Vietnam (1986 – 1991)
Previously, the state and collective sectors constituted the main part of the
national economy. The private sector, especially private companies, were not
encouraged to develop but were instead the target of nationalization, collectivization
or transformation to state-private joint ventures. With policy reform, enterprises of all
ownership forms received equal treatment and competition in the market. There still
existed differences in terms of motivations and attitudes between the state and non-
state sectors but it was not necessary to distinguish between the various sectors as
mentioned above (Vu, 1994). Creating equally competitive environment forces all
enterprises regardless of the state, collective or private sectors to consolidate its
competitiveness.
Changes in financial systems
There were three main changes in the financial system in this period (Vu, 1994). The
financial reform in 1985 was the first comprehensive financial readjustment aimed at
decreasing the state budget deficit and inflation rate. Details of this reform were as
follows:
• trimming subsidies allocated by the state to enterprises through the low prices
of raw materials and other inputs of production,
• switching from the price system fixed by the central government to the system
in which the prices are determined by the market through negotiation by
buyers and sellers,
• reforming the wage system to do away with the rationing of fixed quantities of
food and other necessities, and
27
• readjusting the revenue and expenditure policy of the state budget to step by
step reduce deficits and control the rate of inflation.
Taxation reform was the second change in the financial system. Before 1989, taxes
were collected from non-state economic sectors. The two main kinds of taxes were
the agricultural tax, based on quantity and quality of land used, and the industrial and
trade tax, based on turnover of collective and private businesses (Table 2.2).
Table 2.2: State-budget revenue, 1986 - 89 (million dong)

1986 1987 1988 1989
Revenue from state sector 60,349 284,801 1,184,945 2,085,838
Net sales 56,908 270,220 1,027,627 1,616,870
Depreciation 893 4,911 3,724 71,300
Others and service revenue 2,548 9,670 78,634 144,000
Taxes on commercial export and import - - 74,960 253,668
Revenue from non-state sector 23,277 97,489 573,216 1,505,988
Industry and trade tax 8,325 38,055 184,084 427,949
Agriculture tax 3,834 12,176 136,456 308,093
Non-commercial export and import tax 6,171 17,441 56,368 108,715
Others 4,947 29,817 196,308 661,231
Total 83,626 382,290 1,758,161 3,591,826
Source: Statistical Yearbook, 1991
The state sector did not pay any tax but had to transfer most of its profit and turnover
to the state budget. Therefore, one of the most important tasks of taxation reform was
to eliminate the administrative supply-withdraw system of state enterprise finances
and to build a new tax system applicable to every business. The new tax laws
promulgated including the following kinds of taxes: agricultural tax, turnover tax,
profit tax, special commodity consuming tax (cigarettes, alcoholic products,
automobiles), import-export tax, tax on the use and exploitation of natural resources,
tax on housing and the use of land, and personal income tax.
After reforming tax systems, not only discrimination between the state and
non-state sectors was eliminated but also the state-budget revenue was increased.
Table 2.3 (page 29) shows changes in terms of sources and amounts of tax revenue
compared with table 2.2, which shows the sources and amounts before reforming tax
policy.
28
Table 2.3: State-budget revenue, 1991-93 (billion dong)

1990 1991 1992 1993
Tax collected from state enterprises 2,080 3,817 5,887 8,878
Tax collected from joint ventures 1,091 1,942 4,242 5,104
Industry and trade tax 667 941 1,821 2,942
Agriculture tax 298 707 1,294 1,350
Export and import tax 732 1,099 2,194 6,398
Housing and land tax 2 5 18 241
Income tax - 62 154 181
Fees and others 1,036 1,271 2,905 4,138
Depreciation 247 239 1,660 1,939
Total 6,153 10,083 20,175 31,171
The third change was to restructure the national financial apparatus and
management. Formerly, Vietnam’s financial system had operated at two levels:
central and local. At the local level there were three sub-levels: provincial, district and
village in the countryside or residential in urban areas. During the Vietnam War and
central-planned economy period, financial and fiscal decision-making had been
strictly concentrated at the central level. With policy reform, it was to be
decentralized and liberalized to grant more powerful decision-making in finance and
fiscal issues for the lower (province and district) levels.
Changes in banking systems
Until 1988 there were only three state-owned banks in Vietnam: the State Bank of
Vietnam (SBV), the Vietnam Investment and Development Bank (VIDB), and the
Vietnam Bank for Foreign Trade (Vietcombank). Unlike other countries, in Vietnam
the SBV played both roles of central and commercial banks (The World Bank Group,
1997). This was never seen in countries based on a market economy. The VIDB and
Vietcombank basically operated as commercial banks. The VIDB was in charge of
providing funds and loans for the state long-term investment projects while the
Vietcombank specialized in providing loans and banking services for all international
economic activities.
Reform in the banking system was initiated in 1988 by issuing the Decree
53/HDBT to divide the banking system into two categories: the State Bank played the
role of central bank and the specializing banks played the role of commercial banks.
29
In addition, two other state-owned commercial banks: the Vietnam Industrial and
Commercial Bank and the Vietnam Bank for Agricultural Development were
established. Four state-owned banks were allocated primary funds from the state
budget and operated as commercial banks (The World Bank Group, 1997). At the end
of 1990, the Government started liberalizing the banking system. Since 1990 the non-
state sectors have been allowed to establish commercial banks. Dozens of joint stock
banks were established in cities such as Hanoi, Hai Phong, and Ho Chi Minh City.
Some were based mainly on the participation of state units, others on mixture of state
and private operations, while the rest were entirely private (Vu, 1994).
Banking system reform quickly changed the banking system in Vietnam to
comprise development and investment banks, state-owned commercial banks, foreign
banks’ branches, joint-venture banks, joint stock banks, credit co-operatives, and
financial companies (Table 2.4). All the banks are self-managed and operate as
business organizations. Gradually the system of state subsidization providing low-
interest-rate credits was removed, and interest rates were stabilized at higher levels
than the rate of inflation.
Table 2.4: Financial institutions in Vietnam, 1995

Institution Number of Institutions
State Bank of Vietnam 1
State commercial banks 4
Joint stock banks 46
Joint venture banks 4
Foreign banks 17
Financial companies 2
Financial leasing company 1
Insurance company 1
Credit co-operatives 120
Total 198
Source: Australia and New Zealand Banking Group, 1996
Changes in price systems
Vietnam’s transition to the market economy started alongside price reform (Vu, 1994,
p.26). Since 1989, prices have not been fixed by the state, except in the case of items
such as electricity, water, coal, and cement used for the major state construction
projects. The decentralization of the price decision-making process and the
introduction of a free-market price system have given rise to a better balance between
total demand and supply in the entire economy and between different regions, as well
30
as encouraging economic exchange. The system of price management changes from

one extreme of total state-monopolized control to the other extreme of prices set by
free market forces without state intervention (Vu, 1994). These changes created a
substantial foundation for the economy in the transition period.
2.2.2.3 The transition economy period (1990 – 2000)
The transition economy period has been characterized by the high growth rate in GDP
and stabilization of price and financial system. Unlike Russia and Eastern European
countries, Vietnam’s transition from a centralized to a market economy was smooth
(Dana, 1994). The economic achievements and changes in the economic and social
life have only started in 1990 though the innovation policy had been initiated since
1986.
At the beginning of 1990s, the Vietnam economy has been known as one of
the economies that achieved high growth rates (Le, 1997). Le (1997) summarized the
Vietnam’s recent economic achievements as follows:
• GDP growth rate has annually averaged 8.0 percent since 1991 whereas rate of
inflation, once in triple digits 1980s, has been brought down to a single digit
level at the end of 1990s (Table 2.5).
Table 2.5: GDP index by economic sector and rate of inflation (%)
1991 1992 1993 1994 1995 1996 1997 1998 1999
Rate of inflation 67.5 17.5 5.2 14.4 12.7 4.5 3.6 9.2 0.1
GDP growth rate 6.00 8.60 8.10 8.80 9.54 9.34 8.15 5.8 4.8
State sector 8.60 12.40 11.60 12.80 9.42 11.28 9.67 5.60 4.3
Non-state sector 4.70 6.80 6.20 6.70 n/a n/a n/a n/a n/a
Collective n/a n/a n/a n/a 4.48 3.56 2.64 3.5 3.6
Private n/a n/a n/a n/a 9.30 14.39 9.80 7.9 6.2
Household n/a n/a n/a n/a 9.78 6.58 5.63 3.4 3.9
Foreign-invested n/a n/a n/a n/a 14.98 19.42 20.75 9.1 13.4
Others n/a n/a n/a n/a 12.68 8.06 3.54 4.1 -1.3
Source: Statistical Yearbook, 1994, 1998 and 1999
• Per capita income has risen from about USD140 in 1991 to USD300 in 1995.
• The exchange rate, which strongly fluctuated in 1980s, has been fairly stable
in recent years (Table 2.6, page 32)
31
Table 2.6: Index of exchange rate of USD/VND (%)

1996 1997 1998 1999
January 100.00 100.88 103.68 99.81
February 100.02 101.41 98.39 99.79
March 99.99 100.94 100.35 100.30
April 100.04 101.12 98.70 100.16
May 100.01 100.53 99.59 100.00
June 100.01 99.56 100.15 100.06
July 100.11 99.98 100.58 100.41
August 100.06 100.36 100.26 99.87
September 99.99 100.54 108.09 100.06
October 100.42 100.25 101.30 100.21
November 100.58 106.12 97.16 100.02
December 100.38 102.92 99.73 100.14
• The country has benefited from significant expansion and diversification of

external trade (Table 2.10, page 35).
Vietnam Embassy in the USA (1999) provided an overview of Vietnam economy

since the country started the transition economy in 1990. Major industries such as
agriculture, oil, gas and mining, manufacturing, and international trade have
considerably grown in recent years. Agriculture is currently the dominant economic
sector, accounting for nearly 30% of GDP and employing 70% of the work force.
Agricultural growth has averaged about 4.25% per annum from 1991 to 1998 (Table
2.7), laying a solid base for growth in related industries, particularly in food
processing.
Table 2.7: GDP index by economic industry (%)

1991 1992 1993 1994 1995 1996 1997 1998
Agriculture 2.20 7.10 3.80 3.90 4.43 4.44 4.71 3.44
Industry 9.00 14.00 13.10 14.00 13.55 13.59 12.82 11.00
Trade and services 8.30 7.00 9.20 10.20 11.30 9.74 6.93 4.43
Total 6.00 8.60 8.10 8.80 9.54 9.34 8.15 5.80
Source: Statistical Yearbook, 1994 & 1998
Total food output reached a record 27.4 million tons in 1995. Vietnam was the
world’s third largest exporter of rice, with 85% of cultivated land devoted to rice
growing. Besides rice, the main agricultural products are corn, tropical vegetables and
32
fruits, cassava, potatoes, sugarcane, cashew nuts, soybeans, groundnuts, coconuts,

coffee, tea and rubber (Vietnam Embassy in the USA, 1999).
Vietnam’s S-shaped coastline is over 3,200 km long and supports a vibrant
seafood industry. In 1994, of the 1.5 million tons of fishery products, some 70% came
from the ocean and the remainder from fish farms and fresh-water sources. Fishery
production reached 1.5 million tons in 1995, making seafood become one of the
country’s major exports. Earnings from seafood exports reached US$ 580 million in
1995 and are expected to top US$ 1 billion by the year 2000. Table 2.8 summarizes
the achievements of agriculture in recent years.
Table 2.8: Agriculture development over the years

Unit 1990 1992 1994 1996 1998
Gross output value billion dong 20,667 49,061 64,877 92,006 107,517
Cultivation " 16,394 37,540 49,921 71,589 87,618
Livestock " 3,701 10,152 13,113 17,792 17,551
Service " 572 1,369 1,843 2,625 2,348
Labour force 1000 people 21,895 23,208 23,548 24,725 25,124
Growth rate % 2.20 7.10 3.90 4.44 3.44
Source: Statistical Yearbook 1994, 1998
Vietnam’s oil reserves, estimated at 1.7 billion barrels, are among the largest
in the world. The country started to produce oil in 1986 through a joint venture with
the former Soviet Union. Oil production reached nearly 7 million tons in 1994 and 7.7
million tons in 1995. The government plans to raise production to 22 - 25 million tons
per year by the year 2000 (Asia Business Network, 1997).
Vietnam’s oil sector is on a path of rapid growth. Since 1986, 29 production-
sharing contracts have been signed between PetroVietnam, the state-owned oil
company, and various foreign oil companies. In addition to the White Tiger field, the
country’s only oil source prior to 1995, two more fields – Dai Hung (Big Bear) and
Rong (Dragon) – are now also producing oil. All of the current oil production is for
export, with most crude oil destined for Japan. However, the government is planning
and seeking foreign investment for two refinery projects with a capacity of six million
tons each.
Natural gas reserves, estimated at 100 billion cubic meters, represent another
huge potential export. A pipeline was recently completed to harness gas potential
instead of burning it off. The development of gas-related industries is being
considered by the government of Vietnam as well as by foreign companies.
33
Vietnam is endowed with an abundance of other mineral resources such as

coal (3 - 3.5 billion tons), bauxite (3 billion tons), iron ore (700 million tons), copper
(600,000 tons), tin (70,000 tons), chromate (10 million tons), and appetite (1 billion
tons). The country is also rich in granite, marble, clay, and silica sand. Almost all of
these resources remain largely untapped. Foreign investment in the extraction and
processing of these minerals, particularly the mining and processing of those minerals
used in infrastructure projects, such as steel, is strongly encouraged by the
government.
The industrial sector employed about 12% of the country’s work force and
generates about 30% (including construction) of GDP. Over the past years, the
industrial sector has grown an average of 13.0% per annum (Table 2.7, page 32).
Light industry, particularly in food processing, textiles and footwear, are the major
sectors, although most factories were operating with old or obsolete equipment. The
textile and garment industry presently accounted for around 16% of industrial output,
but it was a key source of employment and one of the country’s major exports. The
yearly production of the industry was about 450 million running meters of woven
fabric, 15,000 tons of knitting fabric and 100 million units of garments and other
products. Total textile export earnings reached around US$ 700 million in 1995,
making it become the second biggest export after crude oil. The textile industry was
forecasted to produce one billion running meters of fabric and to export between US$
2 billion and US$ 2.5 billion worth of products in 2000.
Heavy industry makes up an insignificant portion of output and, like light
industry, currently suffers from a handicap of old and obsolete machinery and
technology. Government investments in this sector have included power stations,
telecommunication, and coal, shipyards, engineering, steel, and fertilizer, chemical
and cement plants. High-tech industries such as electronics are also receiving
increasing attention. Table 2.9 summarizes achievements of industry in recent years.
Table 2.9: Industry development over the years

Unit 1990 1992 1994 1996 1998
Gross output value billion dong 14,011 18,117 23,214 118,096 150,685
Number of establishment 393,518 377,105 463,505 626,177 592,948
Labour force 1000 people 3,392 3,450 3,522 3,653 1,210
Growth rate % 3.10 17.10 13.70 14.20 12.10
34
In the centrally planned system, the government tightly controlled external

trade. Targets were fixed for both imports and exports. A complex system of multiple
exchange rates was maintained. Under the renovation program, trade was gradually
liberalized. Whereas in 1981 there were only 12 import-export companies, the number
rose to 35 in 1987 and 1,250 in 1995 (including private firms). Foreign-invested
entities can handle the importation of their own equipment, machinery and materials
or parts needed for the construction and operation of their projects as well as the
export of their products (Vietnam Embassy in the USA, 1999). Table 2.10
summarizes the achievements of export and import activities in recent years.
Though achieving the objectives mentioned above, like other transition
economies, Vietnam economy still has to face many problems and challenges for the
future. These problems and challenges significantly affect the business environment
where SMEs start up and grow. The next subsection will review these problems and
challenges.
Table 2.10: Export and import value by major countries (million USD)
1992 1993 1994 1995 1996 1997 1998
Exports value 2,348 2,685 3,686 5,261 6,826 8,956 9,308
Asia 1,902 2,168 2,919 3,945 5,254 6,017 5,472
Europe 374 409 563 983 1,172 2,208 2,615
America 26 42 134 238 300 426 660
Africa 24 11 20 38 27 50 56
Australia and ocean 22 55 50 57 73 255 505
Import value 2,133 3,474 5,076 7,704 10,626 11,360 11,311
Asia 1,663 2,719 3,911 6,339 8,613 9,086 8,970
Europe 420 692 1,020 1,083 1,540 1,726 1,637
America 25 30 73 170 304 306 390
Africa 5 0 3 8 13 24 16
Australia and ocean 20 33 69 104 156 218 298
Trade balance 215 -789 -1,390 -2,443 -3,800 -2,404 -2,003
2.2.2.4 Problems and challenges for the future
Although the Vietnam economy in the transition period has achieved its recent
successes, ability to maintain a fast rate of economic growth and development and to
become the next newly industrialized country in Asia requires the country to
successfully address its main problems and challenges. Harvie (1996) pointed out the
key challenges the Vietnam economy has to face as follows:
35
• Deploy its resources effectively – Vietnam needs to utilize its scare resources
efficiently, through raising productivity in the agricultural sector, utilizing the
entrepreneurial flair of southern business owners, encouraging overseas
Vietnamese to invest locally, merging viable state enterprises with private
investors and utilizing overseas development assistance effectively.
• Create equitable wealth – Vietnam needs to narrow the gap between the poor
and rich people during the process of economic development.
• Control the rate of population growth – Vietnam is a relatively poor country
that is likely to remain impoverished until it is able to control the growth of
the population. Annual increase in population puts further strain on the limited
resources of the country and puts severe pressure on the nation’s resources.
• Create employment – The abilities to maintain political stability and the
formation of a consumer class providing the foundations for further
industrialization will require the government to bring about the creation of
jobs across the broad spectrum of society, ranging from peasant farmers to
university graduates.
• Maintain sound economic management of the economy – Attainment of a
stable macro-economy is a key prerequisite for further development of the
economy, as clearly evidenced by the experiences of the dynamic economic
neighbours. This will create the necessary environment for the market-based
economy.
• Invest in human capital and physical infrastructure – There will be a pressing
need for Vietnam to invest in the education of its people and also in its
physical infrastructure. Whilst Vietnam has an abundance of cheap labour, this
will not be enough when it eventually hits shortages in trained and skilled
workers.
• Create strong and efficient institutions – Vietnam lacks the necessary
institutions to support a market-oriented economy. It needs to develop a
modern central bank, an independent judiciary, a modern banking system and
supportive capital market for the fledgling private sector.
• Reduce its reliance on primary exports (oil, rice and seafood) – Vietnam
remains exposed by fluctuations of world commodity prices and heavily
dependent upon exports of crude oil, sea products and rice.
36
• Prevent the North/South, and rural-urban split from widening – A gulf

between the north and south of Vietnam, as a result of history, politics, and
economics, threatens to become even more pronounced as free market reforms
take root. Ho Chi Minh City is destined to become Vietnam’s leading
commercial centre and international focal point. In order to prevent regional
disparities the government needs to divert more investment to the north and
other underdeveloped provinces.
• Maintain political stability – Whilst economic reform has been a key
component of the developmental program, political reform is not on the
agenda.
Recently, Mekong Project Development Facilities (MPDF), a multi-donor program

managed by International Financial Corporation (IFC) examined the current state and
indicated four big problems that Vietnam economy has to face including:
• GDP growth rates have been falling – That growth has slowed significantly in
Vietnam is scarcely a matter of debate. GDP growth has fallen from a high of
9.3 percent in 1996 to 4.8 percent in 1999. Growth rates have roughly halved
across all major sectors: industrial growth has dropped from a high of 16
percent in 1995 to 8 percent in 1999, and growth in services has fallen from
8.8 percent in 1996 to 2.5 percent in 1999 (MPDF, 1999).
• Both unemployment and underemployment are rising – Unemployment in
urban areas was officially estimated at 7.4 percent for 1999 and the
underemployment rate for rural was reported at 28.2 percent (MPDF, 1999).
• Foreign direct investment has sharply declined since 1998 – The number of
new foreign-invested projects was estimated to total 252 in 1999, a seven-year
low from a high of 411 projects in 1995 (MPDF, 1999)
• Growth in exports has fell precipitously in 1998 – Seventy two percent and 65
percent of Vietnam’s exports in 1996 and 1997, respectively, were shipped to
Asian countries. Monetary crises of Asian countries caused Vietnam’s exports
sharply declined in 1998 and 1999 (MPDF, 1999).
37
In recent years, the financial and monetary crises of Asian countries have remarkably
affected the process of economic development in Vietnam and made these problems
and challenges become more serious. Vietnam was affected by the East Asian crisis,
although the consequences were not as severe as in neighbouring countries. The crisis
had in particular an impact on the external trade of Vietnam. East Asia accounted for
70% of Vietnam’s exports and foreign investment. As a result of the crisis, the exports
of Vietnam to these countries stagnated and fell by respectively 5% and 20% in 1997
and 1998 (Pool, 2000).
2.2.3 The Vietnam population and labour
This subsection examines the population and labour and their potential effects on the
economic and SME development in Vietnam.
2.2.3.1 Population
Vietnam is a small country but very crowded with city population, and the population
growth rate is relatively high. At the beginning of 1980s, the population of Vietnam
was about 53 million. Its population has risen to 76 million at the end of 1990s, an
increase of 43 percent after 20 years (Table 2.11).
Table 2.11: Population by sex and areas (in thousands)

1980 1985 1990 1995 1999
Total 53,722 59,872 66,233 73,962 76,327
By sex
Male 26,018 29,285 32,327 36,095 37,581
Female 27,704 30,587 33,906 37,867 38,829
By areas
Urban 10,301 11,360 13,281 14,575 17,918
Rural 43,321 48,512 52,952 59,387 58,409
In recent years, the government has recognized that a population boom in poor
countries like Vietnam will threaten development and stability of the economy.
Therefore the government has carried out strong measures to restrict population
growth. As a result, population growth rate of Vietnam has declined to 1.7 percent at
the end of 1990s (Table 2.12, page 39) from 2.3 percent at the beginning of 1990s.
38
Table 2.12: Population growth rates and structure (%)

1990 1992 1994 1996 1998
Population growth rate 2.30 2.41 2.09 1.88 1.75
Population structure 100.00 100.00 100.00 100.00 100.00
Male 48.80 48.70 48.80 48.80 49.00
Female 51.20 51.30 51.20 51.20 51.00
Urban 20.40 19.40 19.90 20.30 21.30
Rural 79.60 80.60 80.10 79.70 78.70
2.2.3.2 Labour force
Vietnam’s well-educated but inexpensive labour force is one of the country’s primary
assets. Investors view the low wages and a high literacy rate (90%) of Vietnamese
workers as one of the most attractive aspects of the country’s investment environment
(Geib, 1999). The labour force - estimated at nearly 34 million in 1995 - is growing at
an average of 5 million in each of five years. Every year around one million new
workers enter the market (Table 2.13). Ninety percent have a secondary level
education, and 57,000 are college or university graduates. Nevertheless, a shortage of
skilled workers in certain areas as well as qualified management personnel has lifted
salaries in some sectors of the economy, but this situation is likely to equalize as
training programs and educational institutions respond to the new demands of the
more open economy.
Table 2.13: Labour force by economic sector (in thousands)

1980 1985 1990 1995 1997
Industry 2,250.0 2,800.0 3,392.0 3,586.6 3,656.0
Construction 1,008.0 832.0 817.7 995.6 976.5
Agriculture and forest 15,301.1 18,979.0 21,895.0 24,121.7 25,443.4
Transportation 417.1 484.0 513.0 781.0 856.0
Trade and services 1,180.2 1,162.0 1,711.2 2,394.3 3,190.2
Education and health 877.5 960.0 1,105.5 1,252.6 1,294.8
Others 649.6 808.0 860.2 1,457.2 1,577.3
Total 21,683.5 26,025.0 30,294.6 34,589.0 36,994.2
Source: Statistical Yearbook 1994, 1998 and Vietnam data bank
After the policy reform in 1986, the private sector had been encouraged to
develop. There was a movement of labour force from the state sector to the non-state
sector. This either makes the labour force in the non-state sector rise and the labour
force in the state sector decline or makes the growth rate of labour force in non-state
sector higher than that of labour force in state sector (Table 2.14, page 40).
39
Table 2.14: Labour force by the state and non-state sector (in thousands)
1980 1985 1990 1995 1997
State sector 3,315.8 3,859.2 3,421.4 3,053.1 3,266.9
Non-state sector 18,367.7 22,165.8 26,837.2 31,535.9 33,727.3
Total 21,683.5 26,025.0 30,258.6 34,589.0 36,994.2
Source: Statistical Yearbook 1994, 1998 and Vietnam data bank
Although foreign investor views labour-force as a key potential factor and

labour costs are quite low, the rate of unemployment is still high, especially in the
north of Vietnam. Table 2.15 shows the rate of unemployment in 1998. The rate of
unemployment of the whole country was 6.85 percent while Hanoi and Ho Chi Minh
City account for 9.09 and 6.76 percent respectively.
Table 2.15: Unemployment rate of labour force in 1998 (%)

Over 15 years old Working age
Total Female Total Female
Whole country 6.60 6.25 6.85 6.55
Hanoi 8.86 8.91 9.09 9.30
Hai Phong 7.98 7.20 8.43 7.68
Da Nang 6.17 7.50 6.35 7.79
Ho Chi Minh City 6.58 7.03 6.76 7.25
Source: Statistical Yearbook 1998
In summary the details of Vietnam’s background as reviewed above provides

an overview of the business environment in Vietnam. Generally, the business
environment has significantly improved since the government introduced its reform
policy. Policy on development of the multi-sector economy which was mapped out
since 1986 and transition to the market economy in recent years brought about
significant achievements in developing the economy, improving business
environment, encouraging the private sector and integrating into the regional and
world economy.
2.3 VIETNAM BUSINESS STRUCTURE
The previous sections provided an overview of the Vietnam economy with a special
focus on policy reform. This section will examine business structure in Vietnam
including types of business, development of SMEs and the government policy to
support for SMEs.
40
2.3.1 Types of business in Vietnam
With the policy of developing a multi-sector economy and attracting foreign

investment, the Vietnam business structure has currently diversified consisting of
many different economic sectors. The business structure in Vietnam can be classified
into many different types depending upon the breakdown basis.
Based on form of ownership, the business structure in Vietnam includes two
main sectors: domestic and foreign-invested. The domestic sector can be further
divided into the state and non-state sectors. There are five types of business in non-
state sector: private enterprises, limited liability companies, joint stock companies,
collectives or co-operatives and individual households. Figure 2.3 illustrates all types
of business in Vietnam by form of ownership. However, this research only
concentrates on private enterprises, limited liabilities companies, and joint stock
companies – the main types of non-state business in Vietnam. Other sectors such as
foreign-invested companies, state companies, co-operatives and individual households
are beyond scope of the study.
Figure 2.3: Business structure in Vietnam
Business structure in VN
Domestic sector Foreign-invested sector
Non-state sector State sector
Private enterprises* Central
Limited liability companies* Local
Joint stock companies*
Co-operatives
(*) Target population of this research
Individual households
Source: Developed for this research
41
A second way to breakdown the business structure in Vietnam is based on size

of the businesses. Based on size of the businesses, the business structure in Vietnam
can be classified into three types: small, medium and large enterprises (Figure 2.4).
This study only focuses on examining small and medium enterprises whereas the
large enterprises are beyond the scope of this study. These definitions below vary
from the VCCI definitions explained on page 10.
• Small enterprise was defined as business having less than 50 employees and/or
a total capital of less than VND 1 billion (Document 681/CP-KTN issued by
the government in 1998).
• Medium enterprise was defined as business having from 51 to 200 employees
and/or a total capital ranging from 1 to VND 5 billion (Document 681/CP-
KTN issued by the government in 1998).
• Large enterprise was defined as enterprise with more than 200 employees
and/or a total capital of more than VND 5 billion in capital (Document
681/CP-KTN issued by the government in 1998).
Figure 2.4: Breakdown of business by size
Business structure
Small enterprise Medium enterprise Large enterprise

- Labour: < 50 - Labour: 51 – 200 - Labour: > 200
- Capital: < dong 1 bil. - Capital: 1 – dong 5 bil. - Capital: > dong 5 bil.
A third way to break-down the business structure in Vietnam is based on

industry. Based on the characteristics of industry, the business structure in Vietnam
can be classified into businesses operated in the following major industries:
agriculture and forestry, fishery, mining, manufacturing, electricity, construction,
trade and services, hotels, and finance and banking. In scope, this study only
considers small and medium businesses operating in manufacturing and trading
42
industries. Other industries such as agriculture, fishery, mining, construction, and

others are outside the scope of this study.
2.3.2 Overview of enterprises in Vietnam
According to Statistical Yearbook 1995, there were 32,064 registered enterprises in

Vietnam at the end of 1995. Of this number, 6,310 were state enterprises; 18,243
private enterprises, 7,346 limited companies and 165 stock companies. During 1994
and 1995, the number of state enterprise grew by an average of 400 whereas the
number of non-state enterprises grew by that of 6,500 each year (Table 2.16). Of the
non-state enterprises, the number of private enterprises were the biggest (18, 243
enterprises with the average capital of VND170 million), the next was the limited
company (7,346 enterprises with the average capital of VND780 million). Stock
companies were insignificant in terms of number of enterprises and percentage (Table
2.16 and 2.17, page 44) but they represented the biggest in terms of average capital
(VND10.33 billion).
State enterprises had been undergoing reorganization and consolidation since
1991 and there had been large declines in their total number, but in 1994 they began
to grow again, primarily because of joint ventures with foreign companies (Ebashi,
Sakai and Takada, 1997).
Table 2.16: Number of businesses by economic sector and average capital (billion dong).
End of 1994 Licensed in 1994 End of 1995 Licensed in 1995
No. Ave. No. Ave. No. Ave. No. Ave.
Capital capital Capital Capital
Private sector 19,436 0.40 6,845 0.28 25,754 0.41 6,318 0.41
Private enterprises 14,052 0.16 5,088 0.13 18,243 0.17 4,191 0.21
Limited companies 5,258 0.83 1,730 0.59 7,346 0.78 2,088 0.63
Stock companies 126 9.76 27 8.60 165 10.33 39 10.38
State sector 5,835 8.29 338 41.72 6,310 12.31 475 61.63
Central management 1,678 19.42 96 131.35 1,847 30.76 169 143.36
Local management 4,157 3.80 242 6.16 4,463 4.67 306 16.49
Total 25,271 2.16 7,183 2.19 32,064 2.68 6,793 4.62
In accordance with the Decision 115/TTg issued by the Prime Minister on

March 13, 1995, the General Statistical Office (GSO) and other relevant ministries
had carried out a survey of businesses and enterprises in Vietnam’s territory. The
results of survey published in 1997 by GSO revealed that there were 23,708
43
enterprises in Vietnam on July 1, 1995, broken down as follows: 5,873 state

enterprises, 10,916 private enterprises, 4,242 limited liability companies, 118 stock
companies, 1,867 collective businesses and 692 foreign-invested companies. These
businesses and enterprises created employment for by 1.3 million people (Table 2.17).
The number of businesses provided by the result of the survey is not compatible with
that of Statistical Yearbook because the Yearbook did not subtract the number of
businesses, which did not operate due to bankruptcy.
Table 2.17: Number of businesses and employees on July 1, 1995

Type of businesses Number of Percentage Number of Percentage
businesses employees
Domestic sector 23,016 97.08% 1,263,439 93.91%
State enterprises 5,873 24.77% 886,985 65.93%
Collectives 1,867 7.87% 87,771 6.52%
Private enterprises 10,916 46.04% 127,819 9.50%
Limited liability companies 4,242 17.89% 147,792 10.98%
Stock companies 118 0.50% 13,072 0.97%
Foreign-invested sector 692 2.92% 81,964 6.09%
Total 23,708 100.00% 1,345,403 100.00%
Source: Size and Effectiveness of 1.9 Million Businesses in Vietnam’s Territory, GSO 1997
Table 2.17 shows that the domestic sector was the major sector which
accounted for 97.08% of enterprises, and the private enterprises were the biggest
(47.04%), the next were state enterprises (24.77%), limited liability companies and
stock companies were respectively 17.89 and 0.50%. Although the number of state
enterprises is less than that of private enterprises, they employed up to 65.93 percent
of employees.
2.3.3 Small and medium enterprises in Vietnam
This subsection reviews the background, role, current status, difficulties and problems
of SMEs in Vietnam in recent years. The main objective of this subsection is to
address the current status and problems that SMEs face.
2.3.3.1 Background
In recent years, promotion of small and medium enterprises (SMEs) has been given
more attention (Nguyen, 1999). The eighth National Congress and the fourth session
of the Central Conference of the Vietnam Communist Party confirmed promotion
44
policy for small and medium enterprises of all economic sectors. Many laws such as
company law, private enterprises law, co-operative law, home investment promotion
law, civil law, and commercial law had been passed to create a favourable
environment for the development of small and medium enterprises (Nguyen, 1999).
As a result, SMEs in Vietnam have developed, not only in term of quantity but also in
terms of structure and quality of performance. Once the government commenced
programs of promotion for SME development, the studies on SMEs have attracted
many researchers. In terms of supporting policy, finance, and research, the definition
of SMEs should be clarified. In Vietnam there has not been a common definition of
SMEs. Some popular definitions are examined below.
2.3.3.2 Definitions of SMEs
The concept of SMEs has only existed in recent years in Vietnam. As of 2000, there is
no formal definition of what constitutes a “small and medium enterprises” in Vietnam
(Esbashi, Sakai, and Takada, 1997). Below are some popular definitions of SMEs
stated and used in Vietnam.
1) Definition used by the Vietnam Industrial and Commercial Bank

Enterprises with capital of between VND5.0 and 10.0 billion and/or 500 –
1,000 employees are “medium enterprises”; those with less than VND5.0
billion in capital and/or 500 employees are “small enterprises”.
2) Definition used by Ho Chi Minh City

Enterprises with less than VND1.0 billion in capital and/or 100 employees are
“small enterprises”, those with VND1.0 – 10.0 billion in capital and/or 500
employees are “medium enterprises”.
3) Definition used by the Vietnam Chamber of Commerce and Industry (VCCI)

A SME is defined as a business unit that fulfils the following criteria,
depending on its size:
•
− Manufacturing: less than 200 employees and VND5 billion capital
Small business:
− Trading and services: less than 200 employees and VND5 billion
•
capital
− Manufacturing: 200 – 500 employees and 5 – VND10 billion capital

Medium business:
45
− Trading and services: 50 – 100 employees and 5 – VND10 billion

capital
4) Definition defined as Document 681/CP-KTN issued by the Government in 1998

• A small enterprise is defined as one with less than 50 employees or a total
capital of less than VND 1 billion or with a turnover less than VND 1
•
billion.
A medium enterprise is one having a number of employees ranging from
51 to 200 persons or a total capital, ranging from 1 billion to VND 5
billion.
Table 2.18 compares definitions of SMEs in Vietnam with those of some Asian
countries. All countries define SMEs based on two criteria: number of employees and
the amount of capital or assets. Also note that the definitions in Table 2.18 are not
consistent on whether the amount of capital or assets and number of employees are to
be linked with “and” or “or”. Some countries such as Singapore, Taiwan, Thailand,
Philippines use “and”, Vietnam and Japan use “or” whereas Korea and Malaysia
neither use “and” nor “or” (Table 2.18).
Table 2.18: Definitions of SMEs in Asian countries

Country Definition
Japan Less than 300 employees or less than 100 million yen in legal capital
Singapore Greater than 30% in local equity and less than S$12 million in fixed assets
Korea Less than 300 employees
Taiwan Less than NT$40 million in paid capital and less than NT$120 in total assets
Malaysia Less than MR2.5 million in shareholder’s fund
Thailand Less than 200 employees and 100 million bath in investment capital
Philippines Less than 200 employees and 40 million peso in total assets
Vietnam Less than 500 employees or less than VND10 billion in total assets
Source: The APEC survey on small and medium enterprises 1994, APEC Committee on
Trade and Investment, Ministry of Economic Affairs, Chinese Taipei
2.3.3.3 The role of SMEs in Vietnam
SMEs play a very important role in developing the economy and solving social
problems at the present stage when the economy is transiting into the market
economy. Vu (1998) summarized the contribution of SMEs in developing the
economy. SMEs in Vietnam have:
• provided a large number of diversified products, representing 26 percent of

GDP and 30 percent of industrial outputs
• created jobs for some 4.5 million people
46
• mobilized unused resources such as land, capital, labour, and management

skills into development of the economy and contributing to increase of export
volume.
Nguyen (1999) found that SMEs annually contribute approximately 31 percent of the
total industrial output and create jobs and income for 4.2 – 4.5 million people.
According to Vuong (1998), during the period of 1991 – 1997, the private sector
capitalized almost USD3 million, created 3.5 million jobs and made a significant
contribution to Vietnam’s GDP growth, in which 90 percent come from SME
contribution, and only 10 percent from large firms.
2.3.3.4 The current status
It is difficult to gain reliable facts from a literature review regarding the current status
of SMEs in Vietnam. This is for two main reasons. Firstly, there is little research
undertaken related to this field. Secondly, most research, especially the research
conducted by the local researchers, is not reliable and very poor in term of scientific
and academic methods. In Vietnam, there have recently been some surveys on the
current status of enterprises conducted by both local and foreign organizations.
Typical surveys are listed below:
• enterprises census taken by the General Statistics Office (GSO) on July 1,

1995
• survey on small and medium enterprises conducted by Ebashi, Sakai and
Takada in March 1997
• survey on Vietnamese private sector conducted by Mekong Project
Development Facilities (MPDF) in May 1999.
Of these surveys, only the survey conducted by Ebashi, Sakai and Takada (1997)
concentrated on considering the current status of SMEs in Vietnam. The survey
conducted by MPDF only focused on larger private enterprises. Regarding the number
of enterprises and number of SMEs in Vietnam, there are many different opinions.
Based on the census conducted by GSO on July 1, 1995, Ebashi, Sakai and
Takada (1997) concluded that 96.7% of manufacturing enterprises in Vietnam are
47
SMEs. Some 96.7% of enterprises have no more than 500 employees and 91.3% have
less than VND10.0 billion in total capital (Table 2.19, page 49). According to Nguyen
Tien Quan (1999), Director of Non-state Economic Development Centre, there are
5,960 state enterprises in which medium and small enterprises account for 65.9%. Of
1,396 foreign invested enterprises, medium and small enterprises account for 33.6%
and of 19,480 cooperatives and united cooperatives, medium and small cooperatives
account for 65.9%. Also, of 34,000 business establishments having registered under
company and private enterprise law, medium and small enterprises of responsibility
limited companies account for 94.6% and of private enterprises account for 99.4%.
2.3.3.5 Difficulties and problems
Small and medium enterprises in Vietnam are faced with many problems irrespective
of their process of development. In their interview of 14 SME manufacturers (5 in
Hanoi, 4 in Ho Chi Minh City, 2 in Dong Nai and 3 in Binh Duong), Ebashi, Sakai
and Takada (1997) found the main problems that SMEs in Vietnam have to face as
listed below by the order of serious concern.
• Funding rising – A large number of the interviewed SME owners saw

financial shortfalls as one of the biggest problems. They needed funds
primarily to finance plant and equipment investment and for securing working
capital to cover expenses involved in exporting their products until they could
receive payments from exporters.
• Export licenses – Companies who wanted to export goods directly to foreign
countries were required to obtain a direct export license. Companies who were
not eligible for the license had no choice except to export goods on
consignment through government enterprises. Even those who had the license
were required to visit Hanoi every year to renew their licenses.
• Industrial land – Interviews also found that in cities such as Hanoi and Ho Chi
Minh City, there was increasing concern for pollution problems because of the
mixture of residential and industrial areas. Moreover, urban areas were
increasingly and seriously short of industrial estates.
48
Table 2.19: Number of enterprises in manufacturing industry by scale of employees and total capital
Total number of By number of employees By scale of total capital (billion VND)
enterprises 1- 200 201 - 500 1 - 500 >501 <5 >5 <10 >10
(July 1, 95) % % % % % % % % %
Manufacturing total 8,577 100.0 89.7 7.0 96.7 3.3 86.0 14.0 91.3 8.7
Food, foodstuff and drinks 3,200 37.3 94.4 3.8 98.2 1.8 92.7 7.3 95.3 4.7
Tobacco 28 0.3 73.2 12.2 85.4 14.6 28.6 71.4 53.6 46.4
Textile 417 4.9 78.8 11.7 90.5 9.5 72.4 27.6 79.6 20.4
Garment, tanning, leather 384 4.5 66.8 21.2 88.0 12.0 77.9 22.1 87.0 13.0
Leather goods 137 1.6 50.0 19.3 69.3 30.7 56.9 43.1 71.5 28.5
Wooden, bamboo, rice stubble products 656 7.6 92.9 5.6 98.5 1.5 90.2 9.8 95.1 4.9
Paper products 198 2.3 91.1 5.5 96.6 3.4 83.8 16.2 89.9 10.1
Publishing, printing, copying 203 2.4 97.7 2.0 99.7 0.3 87.2 12.8 91.1 8.9
Coke, mineral oil products 3 0.0 86.7 6.7 93.4 6.6 - 100.0 - 100.0
Chemicals, chemical products 290 3.4 88.6 9.3 97.9 2.1 66.2 33.8 76.9 23.1
Rubber, plastic products 226 2.6 94.8 4.0 98.8 12.0 79.6 20.4 89.4 10.6
Non-metal products 1,162 13.5 91.5 7.1 98.6 1.4 91.9 8.1 95.5 4.5
Metal 131 1.5 86.7 7.9 94.6 5.4 79.4 20.6 84.7 15.3
Metal products 380 4.4 95.0 3.7 98.7 1.3 89.2 10.8 95.0 5.0
Machinery and equipment 247 2.9 80.2 13.8 94.0 6.0 72.1 27.9 93.0 17.0
Office machine, computer, calculator 6 0.1 100.0 - 100.0 - 66.7 33.3 100.0 -
Electric machines & equipment 88 1.0 85.0 12.2 97.2 2.7 67.0 33.0 79.5 20.5
Radio, TV and communication equipment 76 0.9 85.8 12.3 98.1 1.9 51.3 48.7 61.8 38.2
Medical instruments, optics & clocks 25 0.3 85.7 8.6 94.3 5.7 64.0 36.0 80.0 20.0
Motorbikes, trailer 87 1.0 89.1 8.8 97.9 2.1 74.7 25.3 85.1 14.9
Other means of transportation 185 2.2 85.2 11.1 96.3 3.7 76.2 23.8 84.9 15.1
Bed, wardrobe, tables, chairs and others 441 5.1 95.6 3.1 98.7 1.3 89.1 10.9 95.2 4.8
Re-processing 7 0.1 100.0 - 100.0 - 85.7 14.3 85.7 14.3
17
• Business administration – SME managers were deeply aware of the

importance of acquiring more sophisticated management skills. Many owners
have recently attended seminars and training sessions for managers.
• Other problems such as human resource development, quality control,
smuggle effect were less serious than the four problems listed above.
Additionally, Ebashi, Sakai and Takada (1997) conducted a questionnaire survey to

identify management practices and problems, and the needs of SMEs for government
support program. Table 2.20 below shows the result of the survey. This result
demonstrated that 51 percent, the highest percentage, of SMEs faced with financial
issues.
Table 2.20: Business operation problems of SMEs in Vietnam

Problems Percentage of interviewees faced with problems (%)
Financing 51.0
Tax 32.3
Production investment 26.7
Technology development 20.3
Recruiting 17.9
Sales 17.5
Raw material supply 16.7
Regulation 13.5
Production 9.2
Export 7.6
Information access 4.8
Distribution 3.6
Outside manufacturers 2.0
Source: Survey conducted by Ebashi, Sakai and Takada, 1997
2.3.4 Policies for supporting SMEs
Countries around the world have policies to support small and medium enterprises.
The objectives of SME support policy are different depending on the country’s stage
of economic development (Ebashi, Sakai and Takada, 1997). In Vietnam, the
necessity of policies to support SMEs has been supported with the following
objectives:
• expand export and improve the living standard of the residents
• raise capital and labour productivity
• create jobs for residents
50
• change economic structure

• create an equal competitive environment between state and non-state
enterprises.
Finally, regarding the needs for SME support programs, Ebashi, Sakai and Takada
(1997) listed various support programs that SME owners in Vietnam expect (Table
2.21). Table 2.21 demonstrated that 46.6 percent, the highest percentage, of SMEs
expect the support programs related to financial issues.
Table 2.21: The kind of SME support programs

Kind of programs Percentage of interviewee
expecting programs (%)
Expansion of bank financing 46.6
Sales tax reduction 45.4
Development of aid for environment 36.7
Simplification of administrative procedures 35.1
Stable supply of electricity 25.1
Technological assistance 25.1
Development of industrial parks 23.5
Financial support for exporting 18.3
Deregulation in exporting 13.5
Foreign information service 12.4
Improvement of law 10.8
Improvement of water supply 9.2
Promotion of industrial associations 8.8
Technological information services 8.4
Deregulation in production investment 6.8
Improvement of traffic infrastructure 6.4
Training service for technology 6.4
Training service for business administration 4.8
Establishment of training institution for engineers 3.6
Management information service 2.0
Source: Survey conducted by Ebashi, Sakai, and Takada
2.4 SMALL AND MEDIUM ENTERPRISE FINANCE IN VIETNAM
This section reviews aspects of finance and financial management of SMEs in

Vietnam. The objective of this section is to examine the current state of small and
medium enterprise financial management in Vietnam, including type of finance, use
of finance, financial management practices and problems of financial management.
While there is a large number of articles and books on financial management for
SMEs around the world, there is very little research and literature on finance and
financial management for SMEs in Vietnam.
51
2.4.1 Types of finance
SMENET Online Vietnam (1999), a SME support organization, summarizes the types
of finance available in Vietnam for SME owners as sources of finance for their
operations. They include owners’ equity, family loans, friends’ loans, bank loans,
share capital, supplier advances, buyer advances, leasing, hire-purchasing, and
factoring. Owners’ equity remains the first choice of SMEs because it has advantages
of making the business owner independent of third parties. However, owners’ equity
is often not sufficient to allow for business growth. For growth, the businesses need
an external source of finance.
The traditional debt financing sources such as bank loans, loans from family
or friends, supplier or buyer advances are popular types of debt finance. Other recent
types of finance such as leasing, hire-purchasing and factoring were only introduced
on the financial market in Vietnam in 1990s (SMENET Online, 1999).
In recent years, some SMEs have used sources of financing from the
International Financial Corporation (IFC). IFC provides a wide variety of financial
products from which its clients can choose (SMENET Online, 1999). This allows IFC
to offer a mix of financing that is tailored to meet the needs of each project. However,
the bulk of the funding, as well as leadership and management responsibility, lie with
private sector owners.
Loans are the IFC’s largest product. IFC provides fixed and variable rate loans
in any of the leading currencies. These loans typically have maturities of 8 to 12
years, with grace periods and repayment schedules determined on a case-by-case basis
in accordance with the borrower’s cash flow needs. If warranted by the project, IFC
provides longer-term loans and longer grace periods.
IFC’s equity investments are based on project needs and anticipated returns.
IFC is never the largest single shareholder in a SME and IFC does not take an active
role in company management. IFC is considered a passive investor. To meet national
ownership requirements, IFC shareholdings can, in some cases, be treated as domestic
capital or “local” shares. IFC usually maintains equity investments for a period of 8 to
15 years and is considered a long-term investor (SMENET Online, 1999).
Other financial products offered by IFC include credit and equity lines,
venture capital, and leasing. IFC is investing in credit lines and private equity funds to
make longer-term finance available to SMEs as they seek to enhance their
52
competitiveness in more open economies around the world. Credit lines to developing
country banks help redress the limited availability of term funding that constrains the
ability of these banks to provide working capital and investment financing for their
corporate customers. Leasing is often essential to the development of SMEs, which
typically lease costly capital equipment. Leasing plays a critical role in financial
sector development in countries with small economies or low per capita incomes
(SMENET Online, 1999).
2.4.2 Use of finance
In the middle of 1999 Kack and Lindgren (1999) conducted exploratory research
related to financing SMEs in Vietnam. They interviewed 16 SMEs in Ho Chi Minh
City to identify what type of financing sources they used during and after their
establishment.
Regarding financing during the establishment, SMEs were classified into two
groups: those who had obtained bank loans and those who had used alternative
financing. Of sixteen SMEs, only one SME (Toan Luc) obtained a bank loan as a
source of capital at establishment. The residual 15 SMEs financed their
establishments by using capital from their relatives, friends, or from owner savings.
The main reason for not choosing the bank as a source of capital was the lack of SME
assets that could be used as collateral.
Regarding financing after the establishment, the SMEs were also classified
into two groups: those who have obtained bank loans and those who have not used
bank loans to finance their operations. Of sixteen SMEs, only seven enterprises (ADC
Company, Ann’s Tourist and Trading Ltd, Autec Ltd, Hunsan Ltd, Orient Plastic
Company, Saigon Private Garment Ltd, and Vien Thang Ltd) obtained bank loans
after establishment. The other SMEs had financed their business after the
establishment by using profits, long supplier credits, customer payments in advance,
co-operation with foreign companies and networks consisting of relatives and friends.
The main reasons they did not use bank loans were (1) lack of assets to offer as
collateral, (2) lack of good relations and stipulations with the banks, and (3) high
interest rate charged on bank loans.
Kack and Lindgren (1999) also found there are several “misfits” regarding
distribution of capital in Vietnam. Firstly, according to general regulations,
53
commercial banks had to require collateral for their loans. However, this requirement
was not equal between private and state companies. Private companies had to offer
collateral to obtain bank loans whereas state companies do not. Secondly, there were
difficulties in evaluating collateral but this may differ from time to time. Hence the
problem is not collateral itself, but unequal regulations and the difficulties of banks in
evaluating collateral. Thirdly, different rules for different banks and different rules
from time to time made SMEs avoid banks due to common assumptions of poor
stipulation, expensive fees, and changing policies, and owners turned to seeking
sources of finance from their families, relatives and friends. However, often due to
lack of capital, SMEs could not accept business options for further expansion.
Sam Korsmor (Vietnam Investment Review, 1998) also found that SMEs in
Vietnam face more difficulties than those in regional countries because the state and
non-state do not rest on an equal “playing field”.
Say, there are two companies – one state company and one private enterprise.
The state company will be granted the loan every time because it holds a
government guarantee.
This discrimination may negatively impact on private SME growth. Unless the
government had created an equal “playing field”, it would not be realistic to discuss
promotion policies for SMEs.
2.4.3 Financial management for SMEs
Financial management in general and financial management for SMEs in particular

has only become popular in Vietnam in the 1990s when the economy moved into a
market economy. To date, there is little research related to financial management for
SMEs. Vuong Quan Hoang (1998) found that the current ratio and quick ratio are
extremely important for SMEs in Vietnam because they usually have little permanent
working capital. Regarding financial characteristics of SMEs in Vietnam, his findings
are summarized in Table 2.22.
Table 2.22: Some financial characteristics of SMEs in Vietnam

Characteristics Minimum Average Maximum
Current ratio 1.15x 2.1x 7.1x
Quick ratio n.a 1.2x n.a
Equity/total assets 25% 61. % 90%
Short-term ratio n.a 67% n.a
Source: Vietnam Investment Review, 1998
54
By applying linear regression analysis, it had been found that equity and short-
term liability ratios have a correlation coefficient of about +0.6. In other words, the
equity ratio and short-term ratio are moderately related. The short-term debt ratio is
relatively high (67%) because SMEs had difficulties in accessing long-term sources of
capital and they, therefore, are willing to use short-term borrowing to finance non-
current assets.
2.4.4 Problems in financial management
As mentioned earlier, there is almost no significant research regarding financial

management for SMEs in Vietnam. Based on the exploratory research conducted by
Kack and Lindgren (1999) and findings of Vuong Quan Hoang (1998), the following
gaps are found in SME financial management practices in Vietnam:
• SMEs in Vietnam use equity as the major source of finance. Sometimes,

equity ratios are up to 90 percent.
• Due to difficulties in obtaining long-term loans, SMEs in Vietnam are willing
to use short-term loans to finance non-current assets.
• SMEs in Vietnam seem likely to maintain very high current ratios.
These financial management practices might adversely affect SME profitability.

However, the findings above are not enough evidence to conclude on the relationships
between SME financial management practices and its profitability. Therefore further
descriptive research regarding the financial management practices and impact of
financial characteristics and financial management practices on SME profitability is
justified to provide more convincing evidence. Moreover, because of the uncertainty
of the business environment SMEs in Vietnam tend to maintain relatively high
liquidity ratios and low financial leverage ratios. These financial characteristics may
adversely affect SME profitability. Figure 2.5 (page 56) represents the gap between
financial management practices in Vietnam and findings from the literature reflecting
other country trends.
55
Figure 2.5: SME financial management practices and the gap
Literature review of financial management

practices of SMEs in Vietnam
Difficulties in obtaining bank loans High risk business environment
• High equity ratio/low debt ratio • Financial leverage

Results: Framework of:
• High current ratio • Liquidity

• Using short-term loans to • Profitability
finance non-current assets.
The gap
Research problem:
How does the gap impact on SME profitability?
2.5 BUSINESS STRUCTURE AND SMEs IN HO CHI MINH CITY
Section 2.3 and 2.4 respectively reviewed business structure and SMEs in Vietnam.
However, because of constrain of time and funding, this research only focuses on
investigating SMEs in Ho Chi Minh City where SMEs are considered to be
representative of the country. This section examines business structure of SMEs in Ho
Chi Minh, which is defined as the target population for this research.
According to the Ho Chi Minh City Department of Investment and Planning,
at the present time, there are 14,806 businesses (consisting of 4,909 private
enterprises, 8,030 limited liability companies, 322 joint stock companies and 1,545
businesses belonging other sectors) operating in Ho Chi Minh City with over VND18
56
billion in total capital, and over 280,000 employees (Table 2.23). This figure accounts
for all businesses that have been established since 1990, the year of commencing the
transition economy period.
Table 2.23: Business structure of SMEs in Ho Chi Minh City

Year Private enterprise Limited company Joint stock Others Total
company
1991 - 3 - - 3
1992 66 330 28 - 424
1993 197 557 21 - 775
1994 656 508 10 - 1,174
1995 565 632 7 1 1,205
1996 487 667 18 - 1,172
1997 518 637 14 8 1,177
1998 542 813 23 5 1,383
1999 712 1,868 65 11 2,656
2000 1,166 2,015 136 1,520 4,837
Total 4,909 8,030 322 1,545 14,806
Source: Ho Chi Minh City Department of Investment and Planning (2000)
In terms of business size, almost all of these businesses are small and medium
enterprises with the average total capital of VND327 million for private enterprises,
VND1, 617 million for limited liability companies and VND11, 257 million for joint
stock companies. In term of number of employees, these businesses have an average
number of employees of 3 for private enterprises, 33 for limited liability companies
and 18 for joint stock companies (Table 2.24).
Table 2.24: Size of businesses in Ho Chi Minh City

Forms of business Number of Capital (Million VND) Number of employees
business
Total Average Total Average
Private enterprises 4,909 1,609,785 327.93 14,043 3
Limited companies 8,030 12,989,401 1,617.61 267,452 33
Joint stock companies 322 3,625,031 11,257.86 5,679 18
Others 1,545 111,027 71.86 n/a n/a
Total 14,806 18,335,244 1,238.37 287,174 19
With an average total capital and number of employees as mentioned earlier,

most businesses in Ho Chi Minh City are considered small and medium enterprises.
These businesses satisfy the criteria of SME definition as indicated in chapter 1.
57
2.6 CONCLUSIONS
Vietnam is in transition to a market-oriented economy and has achieved stability and

relatively high growth rates. Its policy of developing the multi-sector economy has
created a substantial and attractive foundation for enterprises in all economic sectors.
Based on this policy reform, SMEs in Vietnam have had opportunities to develop and
create employment. However, as of 2000, there are still differences in policy between
the state and non-state enterprises as well as between large and small enterprises.
These differences in policy mean small and medium enterprises have many problems
in the process of development.
Financing is one of the most difficult issues faced by SMEs (Ebashi, Sakai and
Takada, 1997). SMEs cannot easily obtain bank loans for establishment and further
expansion. This leads SMEs to use equity as a major source of finance and use short-
term loans to finance non-current assets. Moreover, different rules for different banks
and different rules from time to time lead to negative impacts on financial policy for
SMEs. As a result, they often maintain relatively high current ratios to respond to the
regularly changing business situations. Probably, financial management practices of
SMEs as mentioned above, have adversely affected profitability.
In addition, operating in an uncertain business environment probably makes
the financial characteristics of SMEs in Vietnam differ from that of SMEs in other
countries. As a result, financial characteristics may adversely affect SME profitability.
These conclusions are viewed as the foundation for conducting research on the impact
of financial management practices and financial characteristics on SME profitability
in Vietnam. Chapter 3 will review the literature on financial management practices
and financial characteristics of SMEs around the world as a framework for
comparisons with financial management practices of SMEs in Vietnam.
58
Chapter three:
Financial Management and
Profitability of SMEs
3.1 INTRODUCTION
This chapter follows from chapter 2 as a review of the literature on financial

management. Chapter 2 provided an overview of the economic development and
performance of SMEs in Vietnam. Chapter 3 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. It emphasizes
profitability and the impact of financial management practices and financial
The objectives of this chapter are to review previous research related to the areas
of financial management practices, financial characteristics, and profitability of SMEs
and to build a model of the impact of financial management practices and financial
This chapter is structured into nine main sections (Figure 3.1, page 60). Section
3.1 introduces the general purpose and objectives of the chapter. Section 3.2 reviews
definitions of SMEs, both qualitative and quantitative. Section 3.3 defines the objectives,
major decisions and the specific areas of SME financial management. Section 3.4, 3.5
and 3.6 respectively review the previous studies on financial management practices,
financial characteristics and SME profitability conducted by previous researchers in the
developed economies. Section 3.7 concentrates on examining the relationships between
financial management practices, financial characteristics and SME profitability. Section
3.8 develops a model of the impact of financial management practices and financial
characteristics on SME profitability. Lastly, section 3.9 provides the conclusions that are
drawn from the literature review and figure 3.1 (page 60) provides a visual outline of the
structure of the chapter where the sections are combined as a whole.
Chapter Three: Financial Management and SME Profitability
3.1 Introduction
3.2 Definition of SMEs
3.3 Financial management for SMEs
3.3.1 Defining financial management 3.3.3 Major decisions of financial management
3.3.2 Objectives of financial management 3.3.4 Specific areas of financial management
3.4 Financial management practices
3.4.1 The context of financial management 3.4.4 Working capital management
3.4.2 Accounting information system 3.4.5 Fixed asset management
3.4.3 Financial reporting and analysis 3.4.6 Capital structure management
3.5 Financial characteristics
3.5.1 Identifying 3.5.2 Measuring 3.5.3 Previous findings related to financial

financial variables of financial characteristics
characteristics characteristics
3.6 SME profitability
3.6.1 Importance 3.6.2 Defining and 3.6.3 Factors influencing on profitability

of profitability measuring profitability
3.7 Relationships between financial

management and SME profitability
3.8 The model of impact of financial

management on SME profitability
3.9 Conclusions
60
3.2 DEFINITIONS OF SMEs
This section reviews the definitions of small and medium enterprises (SMEs) from the
literature. Obtaining a definition is the starting point for reviewing literature on the
aspects of SME financial management. There is no universal definition of small
enterprise (Scarborough and Zimmerer, 1984; Back, 1985 and Meredith, 1993). In theory
and practice, there are many terms used to refer to SME including “small business”,
“small enterprise”, “small firm”, “small company”, “small and medium enterprise”, and
“small and medium-sized enterprise”. They all are somewhat different in meaning but
distinguishing differences among these terms is not the purpose of this study. In this
study all these terms are used as if having the same meaning.
Although there are several definitions of small and medium enterprises,
definitions are basically classified into two types: those based on qualitative
characteristics and those based on quantitative characteristics of small and medium
enterprises (Back, 1995).
3.2.1 Qualitative definitions
Qualitative definitions define small and medium enterprises based on their qualitative
characteristics. The great advantage of these definitions is that they attempt to capture the
essential nature of small business. However, the problem is that they vary from country to
country and from industry to industry. This study mainly reviews the definitions of small
business in the developed countries such as the United States of America (USA), the
United Kingdom (UK), Australia and Japan.
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.
61
The Small Business Act of 1953 of USA defines a small business as “one which is
independently owned and operated and not dominant in its field of operation”. The act
also empowers the Small Business Administration (SBA) to identify standards of size for
“number of employees” and “sales volume” that small business must meet. When
reviewing the quantitative definitions, these standards will be examined in more detail.
In the UK, the qualitative definitions adopted by the Bolton Committee (1971)
identified three major characteristics 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 characteristic 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.
In Australia, the qualitative definition commonly used was devised by the Wiltshire
Committee of Inquiry in 1973. Wiltshire (1973) defines a small business as:
A business in which one or two people are required to make all the critical
decisions (such as finance, accounting, personnel, purchasing, processing or
servicing, marketing, selling) without the aid of internal specialists and with
specific knowledge in only one or two functional areas.
The second annual report of small business released by the Department of Industry,
Technology and Commerce (1992, p.5) employs a definition of a small enterprise that is
based on the following characteristics:
• independently owned
• closely controlled by owner-managers who have responsibility for principal
decisions
• owner-managers contribute most, if not all, of the capital
• operations are locally based, although its market might not be.
62
The problem of definitions of small business in Australia is that each State Government
has its own definition. For instance while the Western Australia Small Business Advisory
Service has followed the Wiltshire Committee’s definition, Victoria and New South
Wales have their own definitions, which emphasize the role of ownership, legal structure,
market share and management (Price, 1984, p. 2).
A small business is one which is wholly owned and operated by an individual, or

individual persons in a partnership or by a proprietorship company and which has
relatively small share of the market in which it competes; is managed personally
by the owners or directors; is not part of a larger business or enterprise.
The Small Business Agency of New South Wales includes in its definition reference to
annual turnover and the number of employees (Price, 1984).
A small business is one, which is owned and operated by an individual or group

of people either, as a sole trader, in partnership, or as an incorporated company. In
majority of cases the annual turnover of business generally does not exceed
$500,000.
In addition to the definitions of small business stated by the organizations mentioned

above, there are many other different definitions of small business put forward by many
authors and researchers. Meredith (1986, p.3) defines small enterprises as enterprises
where one or two owners are required to make all critical decisions, and these owners,
therefore, rely on specialist advice multiplier agents. McMahon (1995, p. 3) confirmed
that many people think small business should be defined as:
A business in which one or two persons are required to make all the critical
management decisions: finance, accounting, personnel, processing or servicing,
marketing, selling, etc. without the aid of internal specialists and with specific
knowledge in only one or two functional areas.
Although qualitative definitions have the great advantage of attempting to capture the
essential nature of small business, they still have the disadvantage of being unworkable in
carrying out research or in gathering statistical information. It is, therefore, useful to
define small business from the quantitative characteristic perspective.
63
3.2.2 Quantitative definitions
Quantitative definitions define small and medium enterprises based on their quantitative
characteristics. Unfortunately, quantitative characteristics 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 assets, 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 (McMahon et al. 1993).
Secondly, the quantitative characteristics 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.
Regarding the number of employees, in the USA the government decided to use
500 employees as the general cut-off between small and other businesses (Back, 1985,
p.4) while most studies in Australia have assumed a firm is small, if it employs less than
100 employees (Back, 1985, p.3). In addition to the number of employees, some other
countries such as the USA, Britain, Japan define small business based on turnover and
industry breakdown. Table 3.1 (page 65) summarizes the quantitative definitions of
SMEs in the developed countries.
The quantitative definitions of SMEs, especially their quantitative characteristics,
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.
64
Table 3.1: Summary of the quantitative definitions of small business

Country Industry Quantitative characteristics
Retailing Annual sales or receipts not exceeding $2 to $7.5
million, depending on the industry
Services Annual receipts not exceeding $2 to $8 million
depending on the industry
Wholesaling Yearly sales must not be over $9.5 to $22 million,
depending on the industry
The US Agriculture Annual receipts not exceeding $1million
General construction Average annual receipts not exceeding $9.5
million
Special trade construction Average annual receipts not exceeding $1 or $2
million
Manufacturing Maximum number of employees may range from
250 to 1,500, depending on the industry.
Manufacturing 200 employees or less
Retailing Turnover £50,000 pa or less
Wholesale £200,000 pa or less
The UK Construction £200,000 pa or less
Mining 25 employees or less
Motor trader Turnover £100,000 pa or less
Miscellaneous services Turnover £50,000 pa or less
Road transportation 5 vehicles or less
Australia Manufacturing 50 employees or less
General Turnover not exceeding $500,000
Manufacturing Less than 300 employees
Japan Wholesales Less than 100 employees
Retail and service Less than 50 employees
Sources: (1) Small Firms, Report of the Committee of Inquiry on Small Firms (Bolton, 1971), (2) Small
Business Management (Price, 1984), (3) The US Small Business Administration, “Business Loans for the
SBA”, Washington, D.C., September 1981.
3.2.3 The forms of ownership of SMEs
In general, SMEs in every country have many different legal forms of ownership. This
subsection reviews the main legal forms of ownership of SMEs. In the USA, there are
three forms of ownership: proprietorship, partnership and corporations (Walker and Petty,
1978, p.6; Scarborough and Zimmerer, 1984, p.68). The percentage of each of the major
business ownership forms is examined in Table 3.2.
Table 3.2: Forms of SME ownership in the USA

Proprietorship Partnership Corporation
Percentage of business 76.2 8.0 15.8
Percentage of business receipts 8.9 4.1 87.0
Source: Effective small business management, Scarborough & Zimmerer (1984, p.69)
65
In the UK the Bolton (1971) reported that the legal forms of small firms consists
of sole proprietorships, partnerships, quoted and non-quoted companies, limited and
unlimited companies. Of these forms, the majority is the unlimited companies while the
quoted companies are not significant (Table 3.3).
Table 3.3: Legal status of small firms in the UK

Quoted Non- Unlimited Partner- Sole
Co. quoted Co. ships proprietor-
limited Co. ships
Manufacturing
1 – 24 employees 0.0 77.4 2.6 7.4 12.6
25 – 99 employees 1.0 94.6 1.1 2.3 1.0
100 – 199 employees 5.4 91.8 1.6 0.7 0.7
Non-manufacturing
Catering 0.0 6.5 0.0 24.7 68.8
Constructions 0.0 72.4 0.2 9.1 18.3
Motor trades 0.0 46.7 0.3 21.4 31.5
Retail distribution 0.4 34.5 0.6 22.6 41.8
Road transport 0.8 35.2 0.0 19.5 44.5
Wholesale distribution 0.7 82.7 1.8 4.6 10.2
Source: Adopted from Report of the Committee of Inquiry on Small Firms, Bolton (1971)
In summary, there are several legal forms of ownership for SMEs. Three of the
most popular forms are proprietorships, partnerships and company. Each form of
ownership has both advantages and disadvantages. Table 3.4 (page 67) lists all these
advantages and disadvantages by the forms of ownership (Scarborough and Zimmerer,
1984). Legal forms of ownership also have a certain influence on the financial
management practices and financial characteristics. This will be examined in more detail
in the next sections (section 4 and 5) where financial characteristics of many different
kinds of SMEs are compared. Related to the legal forms of ownership, as indicated in
chapter 2, state enterprises, private enterprises, limited companies, joint stock companies,
cooperatives and households are the popular legal forms of ownership of SMEs in
Vietnam. However, as indicated in chapter 1, this study only focuses on private
enterprises, limited companies and joint stock companies.
66
Table 3.4: Summary of advantages and disadvantages of each form of ownership

Form of Advantages Disadvantages
Proprietorship – A • • Unlimited personal liability

ownership
business owned and • Least costly form of • Limited skills and capability
Simplicity in creation
managed by an • Limited access to capital

•
ownership to start up
individual. The owner receives all the • Lack of continuity of the
• The owner has total

profit business
• There are no special legal

decision making authority
Partnership – An • Easy to establish • Unlimited liability of least one

restrictions
association of two • Division of profits

• Capital accumulation
partner
or more persons • Larger pool of capital
who engage in
• Large pool of talent • Difficulty in disposing of
co- • Ability to attract limited
business in partnership interest without
businesses
government • Potential for personality and
dissolving the partnership
purpose of making a • Little
owners for the partners
•
authority conflicts
• Flexibility
profit regulation
Partners are bound by the law of
• Taxation agency
Corporation – A • Limited liability of the • Cost and time involved in the
separate legal entity
its • Ability to attract capital • Taxation
stockholders incorporation process
apart from
owners and it may • Ability of the corporation • Potential for diminished
engage in business
• Transferable ownership • Legal restrictions and regulatory
to have “perpetual life” managerial incentives
make contracts, sue
•
and be sued and pay
• Potential loss of control by the
Large pool of skill, red tape
taxes.
• Potential for economies
expertise, and knowledge
founder(s) of the corporation.
of scale
Source: Adopted from Effective Small Business Management, Scarborough & Zimmerer, 1984
3.3 FINANCIAL MANAGEMENT FOR SMEs
This section provides a general framework of financial management for SMEs from the
literature. At the same time, it points out the specific areas of financial management in
the literature that will be reviewed. This section is structured into four subsections.
Subsection 3.3.1 reviews the definitions of SME financial management. Subsection 3.3.2
discusses the objectives of financial management. Subsection 3.3.3 examines the major
decisions that the financial managers or owner-managers have to make in financial
67
management. Finally, subsection 3.3.4 summarizes the specific areas of financial

management that will be more particularly discussed in the next sections.
3.3.1 Defining financial management
The main objective of this study is to review financial management and its impact on
profitability of small and medium enterprises. Before reviewing the relations between
financial management and SME profitability, the concept of financial management needs
to be clarified. According to Meredith (1986) financial management is one of several
functional areas of management but it is the central to the success of any small business.
This definition emphasizes the central role and position of financial management in
relation to the other specific areas of business management. Figure 3.2 describes the
central role and position of financial management in relation to specific areas of business
management.
Figure 3.2: The central position and role of financial management
Marketing Sales
management management
Personnel Customer
Financial
management
Engineering Production
R&D Quality
Source: Adopted from the Central Role of Financial Management (Meredith, 1986)
68
McMahon et al. (1993, p.3) 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 McMahon et al. (1993), 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.
However, according to Meredith (1986) financial management is concerned with all areas
of management, which involve finance not only the sources, and uses of finance in the
enterprises but also the financial implications of investment, production, marketing or
personnel decisions and the total performance of the enterprise. English (1990) argues
financial management is concerned with what is going to happen in the future. Its
purpose is to look for ways to maximize the effectiveness of financial resources.
Definitions mentioned above only emphasize areas or scopes of financial
management, which financial management is concerned with, but they do not emphasize
the objectives of financial management. While English (1990) indicated financial
management consists of working simultaneously toward three objectives: liquidity,
profitability and growth. The next subsection discusses more detail on these objectives.
3.3.2 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
69
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 (McMahon, 1995). 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.
• 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 (McMahon, 1995).
In addition to the two objectives mentioned by McMahon, English (1990) viewed growth
as another objective of financial management. He also emphasizes the relationships
between the three objectives by putting them on a triangle as illustrated in figure 3.3
below.
Figure 3.3: The relations among objectives of financial management
Liquidity
Growth
Profitability
Source: Adopted from Financial Management for Small Business, English (1990)
70
While discussing the objective function of a privately held small firm, Ang (1992)
indicated that its objective function is to maximize three components. The first is to
maximize its current market price, to avoid unwanted mergers and to obtain outside
financing in the securities market. The second is to maximize long term or intrinsic value,
if the two values diverge. The last is to maximize non-owner manager’s own pecuniary
and non-pecuniary incomes by avoiding control rights. Whether the absence of
marketable securities means that small firms need not be concerned with current
performance and can concentrate on long-term values, depends on the organizational
types and circumstances. Profitable firms, where outside funding is not a major concern,
can afford to maximize long-term value whereas for those small businesses, which need
outside financing, current performance may be very important. Thus, a number of small
businesses would have a weighted average objective function consisting of both current
profit and long-term value. Weight for current profit is expected to be higher for small
businesses approaching loan re-negotiation, initial public offering, potential sale to an
acquirer, signing long-term contracts with supplier or customers and possible dissolution
of a partnership. On the other hand, its weight will be smaller when the business is due to
pay estate taxes, renegotiate employee contracts, discourage a non-managing family
member from their shares, and avoid tax on excess accumulation.
In making decisions related to financial management, the owner-manager or the
financial manager should remember objectives of financial management and balance
between liquidity and profitability objectives, and between current and long-term
(growth) objectives.
3.3.3 Major decisions of financial management
Generally, previous authors had no differences in opinions of major decisions in financial

management. Ross, Westerfield and Jaffe (1999, p.1) 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, Ang (1992) also indicated three main financial decisions
including the investment decisions, financing decisions and dividend decisions.
71
McMahon (1995) 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 (McMahon,
1995).
• 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 (McMahon, 1995).
These major decisions of financial management will be discussed in more detail in the
next section where the specific areas of financial management are respectively clarified.
3.3.4 The 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 Walker and Petty (1978), Barrow (1984), Meredith
(1986), Cohen (1989), English (1990) and McMahon (1995).
Walker and Petty (1978) define the main areas of financial management including
planning (cash planning and control, asset-required forecasting, profit planning), financial
leverage, investment decision-making, working capital management (cash, receivable and
inventory management) and sources of financing (short-term and long-term financing,
72
intermediate financing and going public). Barrow (1984) emphasizes a practical rather
than theoretical perspective. Instead of identifying specific areas of financial
management, he listed the tools of financial analysis, including business controls;
measure of profitability; control of working capital (or liquidity); control of fixed assets,
cost; volume; pricing and profit decisions, and business plans and budgets.
Meredith (1986) emphasizes information systems as a base for financial
management including financial management records and reports. This is considered very
important because the owner-managers or financial managers find it is difficult, if not
impossible, to make decisions if they lack finance information. Cohen (1989) focuses on
working capital management and tools of financial management such as ratio analysis,
profitability measures and bread-even analysis. English (1990) 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).
McMahon (1995) 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
73
• profit distribution (dividends and retained earnings policy).
Figure 3.4 below, adopted from financial management for small business
(McMahon, 1995), illustrates a model of financial management, which covers most issues
discussed earlier and shows relations between objectives and decisions of financial
management.
Figure 3.4: A model of financial management
Financial management
uses makes
− Capital
Resources:
− Investment
Decisions:
− Labor
− Financing
− Raw materials
− Profit distribution
− Technology
− Information
with
− Profitability
Specific objectives:
− Liquidity
General/Final goal
To maximize the owner’s wealth
Source: Adopted from Major Decisions in Financial Management (McMahon, 1995)
This study examines financial management practices in relation with objectives,

decisions and specific areas of financial management. Objectives, decisions and areas of
financial management are relevant to financial management practices. The specific areas
of financial management are viewed as a theoretical framework for financial management
practices while objectives and decisions of financial management are viewed as factors
influencing financial management practices. Figure 3.5 (page 75) illustrates interaction
74
between theoretical and practical aspects with influence of objectives and decisions of
financial management.
Figure 3.5: Interaction between theories and practices of financial management
•
Specific areas of financial management:
•
Current asset management
•
•
Funding management
•
Financial budgeting and planning
•
Leverage and capital structure
•
Financial analysis and evaluating performance
Profit distribution
• Liquidity • Investment decisions

Objectives of financial management: Decisions of financial management:
• Profitability • Financing decisions

• Growth • Profit distribution decisions
•
•
Accounting information system practices
•
Financial reporting and analysis practices
•
Working capital management practices
•
Fixed asset management practices
•
Capital structure management practices
Financial planning practices
Profitability
Figure 3.5 presents the relationship between specific areas of financial

management and financial management practices. However, the purpose of this study is
not to cover all areas of financial management but only to examine the areas of financial
management practices such as accounting information system, financial reporting and
analysis, working capital management practices, fixed asset management practices,
capital structure management practices, financial planning and financial characteristics
75
including liquidity, financial leverage, and activity. Section 3.4 and 3.5 respectively
review financial management practices and financial characteristics.
3.4 FINANCIAL MANAGEMENT PRACTICES
The previous section provides a review of SME and financial management. This section
reviews SME financial management practices in the developed economies such as the
USA, Canada, the UK and Australia. Firstly, the context of financial management
practices should be defined and then the aspects of financial management practices,
which may affect SME profitability, will be reviewed and discussed in more detail.
3.4.1 The context of financial management practices
Financial management practices in the SME sector have long attracted the attention of
researchers. Depending on different objectives, researchers emphasize different aspects
of financial management practices. McMahon, Holmes, Hutchinson and Forsaith (1993)
and McMahon (1998) summarize their review of financial management practices in
Australia, the UK and the USA. In their review the context of financial management
practices includes the following areas:
1. Accounting information systems – the nature and purpose of financial records,

bookkeeping, cost accounting, and use of computers in financial record keeping
and financial management
2. Financial reporting and analysis – the nature, frequency and purpose of
financial reporting, auditing, analysis and interpretation of financial performance
3. Working capital management – non-financial and financial considerations in
asset acquisition, quantitative techniques for capital project evaluation, investment
hurdle rate determination and handling risk an uncertainty in this context
4. Financial structure management – financial leverage or gearing, accounting to
lenders, knowledge of sources and uses of finance, non-financial and financial
76
considerations in financial structure decisions and non-financial and financial

considerations in profit distribution decisions
5. Financial planning and control – financial objectives and targets, cost-volume-
profit analysis, pricing, financial budgeting and control, and management
responsibility centers
6. Financial advice – internal and external sources and types of financial advice and
use of public accounting services
7. Financial management expertise – informal and formal education, training and
experience in financial management, relevant qualifications, and overall financial
management expertise.
However, the purpose of this study is not to cover all the contexts of financial
management practices as indicated above but to review selected financial management
practices that affect on or are related to SME profitability. These include accounting
information systems, financial reporting and analysis, working capital management, fixed
asset management, and capital structure management.
3.4.2 Accounting information systems
In the developed economies such as the USA, Canada, the UK and Australia, accounting
system practices in SMEs have long attracted the considerations of many researchers.
This section examines the accounting system practices and computer utilization in
accounting. In these fields, D’Amboise and Gasse (1980), Raymond and Magnenat-
Thalmann (1982), Cheney (1983), Raymond (1985), DeThomas and Fredenberger
(1985), and Farhoodman and Hryck (1985) are considered key researchers in the USA
and Canada. Further research in the 1990’s was carried out by Gul (1991), Chen (1993)
Palmer (1994), and Gorton (1999).
D’Amboise and Gasse (1980) studied the utilization of formal management
techniques in 25 small shoe manufacturers and 26 small plastic manufacturers in Quebec,
Canada and found that 88 percent of the businesses used a cost accounting system.
Regarding accounting standards, DeThomas and Fredenberger (1985), in a survey of over
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360 small enterprises in Georgia, found that the standards of financial record keeping was
very high. In addition to cheque and deposit receipts, around 92 percent of respondents
had some form of record keeping. Over 50 percent of respondents used an in-house
bookkeeper for recording transactions, whereas preparing financial statements was
carried out by external accountants (Table 3.5).
Table 3.5: Responsibility for the bookkeeping and accounting task

Percentage of response (%)
Recording transactions Preparing financial statements
Owner-manager 21 17
In-house bookkeeper 54 40
Outside accountant 25 53
Source: Adapted from DeThomas and Fredenberger (1985)
Regarding the use of financial information, DeThomas and Fredenberger’s

(1985) study indicated that 96 percent of the respondents had financial statements
prepared, the responsibility for evaluating and using the information was within the
business itself and only four percent relied on an outside accountant (Table 3.6).
Table 3.6: Responsibility for preparation and use of financial information

Percentage (%)
Responsibility for interpreting financial statement information:
No specific responsibility 0
Owner/manager responsibility 82
In house bookkeeper 14
Outside accountant 4
Specific use of financial statement information:
Not used at all 0
Cursory use 89
Formal use 11
For computer software applications in accounting, Raymond and Magnenat-

Thalmann (1982) conducted a survey of 129 small manufacturing businesses, whose
number of employees totaled between 20 and 250 and sales varied from $0.5 to $ 25
million, in 1982. Another survey of 464 small businesses was carried out by Raymond in
1985 in the province of Quebec. The results of the two surveys are summarized in Table
3.7 (page 79). In the 1990’s, Chen (1993) found that accounting still was the most
important and widely software in the small business studied.
78
Table 3.7: The results of survey of computer software application

Applications Raymond and Magnenat-Thalmann (1982) Raymond (1985)
Percentage use Percentage use
Accounts receivable 85 58.5
Accounts payable 77 80.6
General ledger 75 78.8
Billing 68 72.6
Sales analysis 75 68.5
Inventory 54 56.4
Order entry 42 47.3
Cost accounting 43 43.0
Budgeting n.a 35.4
Purchasing n.a 31.5
Forecasting n.a 31.3
Production control 11 29.6
Production scheduling 14 16.8
Word processing 10 15.8
Personnel n.a 15.1
Payroll 79 n.a
Others 9 5.8
Source: Adapted from Raymond and Magnenat-Thalmann (1982) and Raymond (1985)
In the USA, researchers conducted many surveys of the most important

applications of computers in accounting. Cheney (1983) reports on a survey of 30 small
and medium-sized businesses in a variety of industries in Georgia. In his survey, the
respondents were asked to indicate the most important applications of computer software
in use and the results are summarized in Table 3.8. The results revealed that the most
important applications of computer software are in the areas such as payroll, accounts
receivable, accounts payable and general ledger.
Table 3.8: The most important applications of computer software

Application Number of respondents Percentage use
Payroll 30 100
Accounts receivable 26 87
Accounts payable 24 80
General ledger 22 73
Inventory 12 40
Sales analysis 11 37
Order entry 9 30
Bill of materials 3 10
Source: Adapted from Cheney (1983)
79
In the survey of 69 small enterprises across the USA, Farhoomand and Hryck
(1985) reported on the most important applications of computers, which are presented in
Table 3.9, in which accounting was rated as the highest percentage. Similarly, Palmer
(1994) interviewed 36 small independent retail owner-managers and found that 33
percent of the sample businesses used computerized accounting systems.
Table 3.9: The most important applications of computers

Application Percentage rating as most important
Accounting 32
Word processing 16
Spread sheet 13
Database management 12
Point of sale 4
Telecommunications 1
Others 22
Source: Adapted from Farhoomand and Hryck (1985)
Reviewing previous research results shows accounting and financial management

applications dominated the use of computers in small and medium enterprises in the
North America in 1980’s and 1990’s.
In the UK the most significant studies of small enterprises were conducted by
Bolton Committee (1971). Additionally, there are several researchers who studied
accounting systems such as Corner (1967), Murphy (1978 and 1979), Lovett (1980),
Arnold-McCulloch and Lewis (1985, 1986) and Gorton (1999). According to McMahon
et al. (1993) the inadequacy of financial record keeping system in small enterprises was
well documented in the main Bolton Report (1971) and in various supplementary
research reports. This situation reflected a poor appreciation of the significance of
financial management amongst owner-managers who were often technically-or sales-
oriented.
Concerned with costing systems, Corner (1967) reported on the results of studies
including 119 small enterprises, 62 medium-sized enterprises and 29 large enterprises in
1963. The study results showed the extent of use of costing systems in large enterprises
was 82.1 percent, while in small and medium enterprises was 62.1 and 69.4 percent
respectively. Awareness of use of costing systems was found to be very high in the study
of Murphy (1978 and 1979) whereas the utilization of costing systems was lower (Table
3.10, page 81). Murphy (1978) explained that smaller enterprises were often aware of the
80
importance of sound costing systems but they lacked the time and expertise to install such
systems.
Table 3.10: Percentage of awareness and utilization of costing systems

Size category (employees) Awareness (%) Utilization (%)
11 – 50 91 45
51 – 100 100 66
101 – 200 91 63
201 – 500 100 80
Source: Adapted from Murphy (1978)
Lovett (1980) found that many businesses either had no costing system at all or
relied on periodic attempts to estimate the cost of a product through a rough calculation
of the labor and materials content plus a mark up for overhead and profit.
In Australia Peacock (1985, 1987, and 1988), Williams (1986), Holmes (1987)
and Holmes and Nicholls (1988) are typical researchers who published results of studies
of accounting information system practices. Peacock (1985) investigated the effects and
causes of more 1,000 proprietary company failures in South Australia during ten years
and found that 4.6 percent of failures had inadequate or no accounting records. In another
study of company failures in South Australia, Peacock (1987) reviewed the bankruptcy
reports of 418 unincorporated businesses for four years (from 1981 to 1985) and found
that 50.5 percent of these used single entry systems, 32.8 percent used bank and taxation
records whereas only 2.1 percent utilized double entry systems. In a more recent study,
Peacock (1988) found a significant element in the failure of many of the businesses was
inefficient or absence of accounting records. More than half of the businesses failed were
found to have no records or only basic bank and taxation records. Peacock’s (1985, 1987,
and 1988) findings are very important as examining the impact of accounting system
practices on performance of SMEs.
Williams (1986) evaluated the adequacy of accounting records for 10,570 failed
and surviving small enterprises operating throughout Australia. The results, which are
summarized at Table 3.11 (page 82), are compatible with Peacock’s (1986, 1987,1988)
findings in that a significant proportion of owner-managers kept inadequate accounting
records.
81
Table 3.11: Evaluate the adequacy of accounting records

Standard Percentage (%)
Excellent 9.33
Good 22.93
Average 43.88
Inadequate 21.58
Poor/ non-exist 2.28
Source: Adapted from Williams (1986)
Holmes (1987) conducted a survey of accounting information requirements of 928

small enterprises operating in Sydney, Melbourne and Brisbane. Fifty-seven percent of
respondents indicated they used the journal/ledger (double entry) systems. This finding is
rather in contrast to Peacock’s (1987) findings of types of records maintained by failed
enterprises, where only 2.1 percent of respondents were found to use double entry
systems. In a more recent study, Holmes and Nicholls (1987) analyzed the use of
accounting information by Australian small firms. The owner-managers were asked to
indicate the accounting information prepared at least once a year by either business or an
external accountant. The responses are listed in Table 3.12.
Table 3.12: Accounting information prepared externally or internally
Information Internally prepared Externally prepared
Statutory Tax return 7.7 88.8
Statutory accounts 9.7 51.7
Financial statements 14.5 69.3
Budget Profit/Loss 17.0 26.6
Cash flow 20.6 16.3
Additional Ratio analysis 7.4 5.0
Manufacturing statement 6.0 2.6
Source & application of funds 10.0 7.7
Break-even analysis 12.3 4.2
Cash flow statement 20.5 8.1
Production reports 10.3 4.3
Job costing reports 18.4 2.4
Source: Adapted from Holmes and Nicholls (1987)
An inspection of the data in Table 3.12 suggests that a significant difference exists
between the internal and external preparation of accounting information. In order to
check this hypothesis, tests of equality of proportion were carried out and the testing
results supported the conclusions that statutory information is sought mainly from
external accountants, whereas additional management information tends to be prepared
within the business.
82
In summary, the accounting system practices of SMEs have long attracted the
attention of many researchers. Several findings have been found and modified over past
decades. Table 3.13 summarizes research areas related to the accounting system practices
of SMEs conducted by previous researchers in the developed economies such as the
USA, Canada, the UK, and Australia. Previous research describes characteristics of
accounting information system practices but without empirical evidence of links between
accounting information system practices and profitability of SMEs.
Table 3.13: Summary of research areas related to the accounting system practices of SMEs
Researcher(s) and year Country Main research areas
Corner (1967) UK Use of cost accounting system
Murphy (1973, 1978, 1979) UK Use of cost accounting system
Lovett (1980) UK Costing system
D’Amboise and Gasse (1980) Canada Cost accounting system
Cheney (1983) USA The most important applications of computer
software
Raymond and Magnenat- Canada Computer software applications
Thalmann (1982)
DeThomas and Fredenberger USA Financial record keeping
(1985)
Farhoodman & Hryck (1985) USA The most important application of computer
software
Raymond (1985) Canada Computer software applications
Peacock (1985, 1987, 1988) Australia The effects of cost accounting system on business
failure
Williams (1986) Australia Accounting records
Holmes (1987) Australia Double entry system
Holmes and Nicholls (1988) Australia Accounting information preparation
Gul (1991) Australia The effects of management accounting systems
on small business manager’s performance
Chen (1993) UK Computer software applications in accounting
systems
Palmer (1994) USA Using computerized accounting systems by small
businesses
Gorton (1999) UK Use of financial accounting techniques and
computerized accounting systems
Source: Adapted as indicated above
3.4.3 Financial reporting and analysis
Recording and organizing the accounting information systems will not meet objectives
unless reports from systems are analyzed and used for making managerial decisions. This
section provides a review of financial reporting and analysis of SMEs. In the USA and
83
Canada, the key researchers of this issue include Luoma (1967), D’Amboise and Gasse
(1980), Lindecamp and Rice (1983), DeThomas and Fredenberger (1985), Thomas and
Evanson (1987), and Palmer (1994). Louma (1967) conducted a survey of 62
manufacturing SMEs on the use of accounting information in managerial decision-
making. Eighty-six percent of respondents reported that they used some form of financial
statement analysis and interpretation. Of these, 40 percent indicated that the founder of
the businesses was actively involved.
D’Amboise and Gasse (1980) studied the use of financial statement analysis by
small manufacturers in Quebec, Canada and found that small manufacturers in shoe and
plastic industries formally undertook the analyses based on financial statements as
presented in Table 3.14.
Table 3.14: Use of financial statement techniques by small manufacturers in Quebec

Technique Shoe industry Plastic industry
% use % use
Rate of return analysis 72 76.9
Financial situation analysis 96 92.3
Source: Adapted from D’Amboise and Gasse (1980)
Lindecamp and Rice (1983) studied familiarity with financial statement analysis
of 102 owner-managers of small retail stores in Mississippi. Some 73 percent of
respondents reported that they analyzed their cost figures on a frequent or regular basis.
Nearly 60 percent indicated that they did not maintain up-to-date figures on the
contribution to profit of individual product or product lines. Nearly 50 percent seldom or
never compared their concern’s performance with industry figures. Over 50 percent of
respondents did not appear to understand the meaning of “debt/equity ratio” and 59
percent did not know the value of this ratio for their business.
In their survey, DeThomas and Fredenberger (1985) found that 81 percent of the
small enterprises regularly obtained summary financial information. Ninety-one percent
of the summary information was in the form of traditional financial statements (balance
sheets, profit and loss statements, fund statements), the remainder being bank
reconciliation and operating summaries whereas no business was regularly receiving
cash-flow information. Regarding responsibility for interpretation of financial statements,
DeThomas and Fredenberger’s findings are summarized in Table 3.15 (page 85).
84
Table 3.15: Responsibility for financial statement interpretation

Responsibility Percentage of response
Owner-manager 82
In-house bookkeeper 14
Outside accountant 4
DeThomas and Fredenberger also found that 61 percent of respondents felt the financial
statements provided the information they required for planning and decision-making.
Nevertheless, only 11 percent of respondents reported that they had used financial
statement information formally as part of managerial evaluation, planning and decision-
making, 2 percent of businesses utilized financial ratio analysis, and few made even
simple historical comparisons.
Thomas and Evanson (1987) studied 398 small pharmacies (in Michigan, North
Carolina, Nebraska, Rhode Island and Washington) to examine the extent to which
financial ratios were used in a specific line of small retail business and tested for a
relationship between use of financial ratios and business success. The proportion of
respondents using financial ratios in Thomas and Evanson’s (1987) study of small
pharmacies is summarized in Table 3.16 (page 86).
Thomas and Evanson (1987) used regression analysis to examine the relationship
between financial ratio usage and SME profitability. However, they could not
demonstrate any significant relationship between earnings-to-sales and the number of
financial ratios used by the owner in operational decision-making. When efforts were
made to include the effects of other managerial practices and variations in business
environments, no association between use of individual ratios and total earnings or total-
to-sales was found. They explained the lack of association between financial ratio usage
and either survival or profitability, may also indicate that the level of sophistication in use
of ratios has not reached a high enough level among pharmacies to make a discernible
difference between those which use and those which do not use financial ratios.
However, Thomas and Evanson (1987)’s study only examined the association between
SME profitability and the number of financial ratios, while the relationship between SME
profitability and the efficiency as the result of using the financial ratios was not studied.
85
Table 3.16: Proportion of respondents indicating use of selected financial ratios

Percentage of each kind of pharmacies using
financial ratios
Closed Changes of Ongoing Total
(%) ownership (%) (%) (%)
Cost of goods sold to sales 64.4 66.7 71.6 68.5
Inventory turnover 64.4 68.4 69.5 68.0
Gross margin to sales 64.4 64.0 69.5 61.9
Net profit to net sales 43.7 52.6 45.3 47.1
Net profit to inventory 37.9 49.1 34.2 39.4
Current assets to current liabilities 41.4 38.6 38.4 39.1
Net sales to inventory 40.2 42.1 32.1 36.8
Accounts receivable collection period 23.0 31.6 33.7 30.7
Total liabilities to net worth 28.7 28.9 23.2 26.1
Return on equity or investment 26.4 29.8 23.2 25.8
Days accounts receivable outstanding 21.8 23.7 27.4 25.1
Days accounts payable outstanding 19.5 23.7 22.1 22.0
Inventory to net working capital 28.7 28.9 23.3 21.5
Source: Adapted from Thomas and Evanson (1987)
Palmer (1994) interviewed 36 small independent retail owners to determined if

timely and accurate financial information is really all that important to small businesses
and found that the more knowledgeable the owner-managers were about the financial
position of these businesses, the more successful the businesses appeared to be.
The key researchers of financial reporting practices in the UK include Ray and
Hutchinson (1983), Hankinson (1982, 1983), Arnol-McCullock and Lewis (1986), and
McMahon and Davies (1994). Ray and Hutchinson (1983) studied the type and frequency
of financial reporting in the super-growth enterprises and found that there was a clear
tendency towards more frequent financial reporting as the business grew and became
public companies. Hankinson (1982, 1983) studied making investment decisions in 52
small engineering businesses in southwest England between 1979 and 1982 and found
that only one business in the sample used financial ratio analysis. Conversely, in their
survey of 102 growth enterprises operating in the northeast region of England, McMahon
and Davies (1991) found that 80 percent or more of the participants employed financial
ratio analysis. Related to the kind of financial ratios used, Arnold-McCulloch and Lewis
(1986) examined 52 recently established businesses. Their findings are summarized in
Table 3.17 (page 87), which revealed that the percentage of use of financial ratios such as
debtors/creditors, acid test, sales to debtors and cash, inventory turnover, return on
86
investments, net return on sales, and gross return on sales, is not more than 12 percent
respectively.
Table 3.17: Percentage of use of financial ratios
Kind of financial ratio Percentage of use
Debtors/Creditors 10
Acid test 6
Sales to debtors and cash 8
Inventory turnover 10
Return on investments 12
Net return on sales 10
Gross return on sales 10
Source: Adapted from Arnold-McCulloch and Lewis (1986)
McMahon and Davies (1994) examined significant associations between financial

reporting and analysis and achieved growth rates and financial performance and found
the following:
• Enterprises that had more comprehensive reporting in terms of both the number of
statements obtained and their frequency were more likely to employ financial
analysis.
• There is apparently no statistically significant association between rates of growth
in turnover and employment achieved by participating enterprises and their
historical financial reporting practices.
• There appears no statistically significant association between achieved rates of
growth in turnover, employment, and net profit and use of financial ratio analysis.
In Australia, Holmes (1986,1987), Williams (1986), Holmes and Nicholls (1988), and
McMahon (1998, 1999) are considered key researchers who studied financial reporting
and analysis. Holmes (1986) examined preparing the accounting statements of 60 small
enterprises and found that they were both internally and externally prepared but taxation
returns were mainly prepared by external accountants (92.7 percent). Similar results were
also found from a study conducted by Holmes and Nicholls (1988). With only a minor
change in percentage of internal and external taxation return preparation (Table 3.18 page
88).
87
Table 3.18: Percentage of preparing accounting information both internally and externally
In 1986 In 1988
Internally Externally Internally Externally
prepared prepared (%) prepared prepared (%)
(%) (%)
Taxation returns 3.6 92.7 7.7 88.8
Statutory accounts 7.3 61.8 9.7 51.7
Balance sheet/ profit and loss n.a n.a 14.5 68.3
Manufacturing statements n.a n.a 6.0 2.6
Funds statements 18.2 12.7 10.0 7.7
Cash-flow statement 27.3 14.5 20.5 8.1
Production reports 25.5 1.8 10.3 4.3
Job costing reports 23.6 1.8 18.4 2.4
Source: Adapted from Holmes (1986), Holmes and Nicholls (1988)
A common tendency is that relatively complicated accounting reports such as taxation

returns, statutory accounts, balance sheets, and profit and loss statements are usually
prepared by external experts.
McMahon (1998) examined which enterprises and financial management
characteristics seem to most influence financial reporting practices adopted in small and
medium-sized manufacturing enterprises in Australia and what impact these financial
reporting practices appear to have on achieved business growth and performance. The
research results showed that development orientation, extent of owner-management,
technological complexity, degree of reliance upon external financial advice, and financial
reporting climate significantly influence on the comprehensiveness of financial reporting
practices in Australian small manufacturing enterprises. According to McMahon (1998)
the relationship between financial reporting practices and business growth and
performance is difficult to identify, describe and explain. The reason explained for this is
that management is a complex activity affected by a myriad of interacting internal and
external factors. Recently, McMahon (1999) reported new empirical evidence on
financial reporting to financiers by small and medium-sized enterprises and found a
significant relationship exists in the study sample between enterprise size in employment
terms and provision to financiers of a business plan or future-oriented financial
statements or annual historical financial statements or periodic historical financial
statement. However, no statistically significant relationship exists in the study sample
88
between enterprise size in employment terms and the likelihood of being asked to provide
more financial information by potential financiers.
In summary, researchers reporting in the literature have spent much time studying
financial reporting and analysis practices and effects on the performance of SMEs. Table
3.19 (page 89) summarizes the main research areas related to the financial reporting and
analysis practices of SMEs conducted by previous researchers in the developed countries.
Table 3.19: Summary of the main research areas related to the financial reporting and analysis
Researchers Country Main research areas
D’Amboise & Gasse (1980) Canada Use of financial statement techniques
Lindecamp and Rice (1983) USA Familiarity with financial statement analysis
Hankinson (1982, 1983) UK Financial ratio analysis
Ray & Hutchinson (1983) UK Frequency of financial reporting
DeThomas & Fredenberger USA Use and interpretation of financial statement
(1985)
Holmes (1986, 1987) Australia Preparing accounting statements
Arnld-McCulloch & Lewis UK Use of financial ratios
(1986)
Thomas & Evanson (1987) USA Association between financial ratio and business
success
Holmes & Nicholls (1988) Australia Preparing accounting statement
McMahon & Davies (1994) Australia Association between financial reporting analysis and
achieved growth rate
McMahon (1998) Australia The impact of financial reporting practices on
achieved business growth and performance.
McMahon (1999) Australia Financial reporting to financiers by Australian
manufacturing SMEs
Source: Adapted as indicated above
3.4.4 Working capital management
This subsection reviews the literature on working capital management practices of SMEs.
The context of working capital management includes cash management, receivables and
payables management, and inventory management.
In the USA and Canada, Luoma (1967), Grablowsky (1978), Grablowsky and
Rowell (1980), Cooley and Pullen (1979), D’Amboise and Gasse (1980), Anvari and
Gopal (1983), Thomas and Evanson (1987), Kathawala (1988), Khoury, Smith and
MacKay (1999) are considered the key researchers who studied working capital
management practices. In the UK and Australia, Murphy (1978), Arold-McCulloch and
Lewis (1986), Williams (1987), and Peel and Wilson (1996) are the main researchers.
89
Regarding cash management practices, Grablowsky (1978) and Grablowsky and

Rowell (1980) conducted a questionnaire survey concerned with the cash management
practices of 66 small enterprises from a number of industries located in and around
Norfolk, Virginia. The results showed that 67 percent of respondents replied they did not
do forecasting of cash flows. When asked how they determined the level of cash to be
held by the business, less than 10 percent of enterprises reported using any type of
quantitative technique. The method most often employed was to hold cash as a fixed ratio
of projected expenses, forecasted sales or anticipated purchases. Non-quantitative
methods used consisted of meeting compensating balance requirements, maintaining the
level considered safe by management or achieving a level recommended by outside
advisers. Additionally, seventy-one percent of business in the Virginia survey reported
that they had no short-term surpluses of cash in their recent history. Only 23 percent had
a long-term surplus. Nearly 30 percent of respondents had invested excess cash in
earnings securities or accounts. The most common investments were savings accounts,
certificates of deposit, treasury bills, repurchase agreements, commercial papers, shares,
bonds and other investments.
Based on Cooley and Pullen’s (1979) research, cash management was seen as the
process of planning and controlling cash flows. It consisted of three basic components:
cash forecasting practices, cash surplus investment practices and cash-control practices.
Cooley and Pullen (1979) examined cash management practices of 122 small businesses
engaged in petroleum marketing and reported that 73 percent of respondents had
experienced a cash surplus. Comparison of cash surplus investment practices of
businesses in Grablowsky and Rowell’s survey and Cooley and Pullen’s survey are
summarized in Table 3.20.
Table 3.20: Cash surplus investment practices
Grablowsky and Rowell’s Cooley and Pullen’s survey
survey (1978) (1979)
Outlet Percentage use (%) Percentage use (%)
Saving account 17 57
Cheque account n.a 25
Repurchase agreement 3 n.a
Treasury bills 6 15
Common sock n.a 9
Certificate of deposit 11 8
Commercial paper 3 8
Other investments 6 8
Source: Adapted from Grablowsky and Rowell (1978, 1980) and Cooley and Pullen (1979)
90
In contrast to Grablowsky and Rowell’s (1978) and Cooley and Pullen’s (1979)
survey, Murphy’s (1973) study indicated that active cash management in small
enterprises in the UK was unusual, and that there was little inclination to invest surplus
cash on a short-term basis.
Evidence on the cash management practices of 123 small enterprises across a
variety of industries in the Canadian provinces of Quebec and Ontario was provided by
Anvari and Gopal (1983). Generally, 53 percent of the sample businesses indicated that
they prepared cash forecasts, substantially higher than the 30 percent figure reported by
Grablowsky (1978, 1980). Respondents were also asked the basis for determining the
level of their cash balances. Only 26 percent of respondents indicated they used formal
techniques, using a fixed percentage of sales or expenses, for determining the level of
their cash balances. Fifty-five percent of respondents claimed to have had a short-term
surplus of cash and 26 percent of businesses had generated what they considered to be
long-term surplus funds in the previous year. The instruments of short-term investment
used by these firms are shown in Table 3.21.
Table 3.21: Instruments of short-term investment used

Instrument Percentage
Checking account 1.5
Saving account 9.1
Treasury bills 3.0
Bankers acceptance 28.8
Term deposits 56.1
Commercial paper 1.5
Source: Adapted from Anvari and Gopal (1983)
Regarding accounts receivable management practices, Grablowsky (1976) and

Grablowsky and Rowell (1980) found generally low standards. Approximately 95 percent
of businesses that sold on credit tended to sell to anyone who wished to buy. Only 30
percent of respondents subscribed to a regular credit reporting service. Most had no credit
checking procedures and guidelines, and only 52 percent enforced a late-payment charge.
Thirty-four percent of businesses had no formal procedure for aging accounts receivable.
Bad debts averaged 1.75 percent of sales, with a high of 10 percent in some concerns.
Murphy (1978) revealed a very high level of awareness and utilization of credit control
systems in the UK, even in the smallest businesses (Table 3.22, page 92).
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Table 3.22: Awareness and utilization of credit control systems

Size category (Employees) Awareness (%) Utilization (%)
11 – 50 100 91
51 – 100 100 100
101 – 200 100 91
201 – 500 100 100
Source: Adapted from Murphy (1978)
On inventory management practices, D’Amboise and Gasse (1980) studied the

utilization of management techniques in small shoe and plastic manufacturing industries
in Canada and found 64 percent of shoe and 65.4 percent of plastic businesses employed
formal inventory control systems. While Grablowsky and Rowell (1980) found that most
of the respondents had in excess of 30 percent of their capital invested in inventory, the
general standard of inventory management was poor. Only six percent of businesses in
their survey used a quantitative technique such as economic order quantity for optimizing
inventory and 54 percent had systems which were unable to provide information on
inventory turnover, reorder points, ordering costs or carrying costs. Related to the
methods used to determine inventory level, Grablowsky (1984) compared methods used
by a sample of 94 small enterprises with those used by large enterprises and found the
results as in Table 3.23.
Table 3.23: Methods used by small and large enterprises to determine inventory level
Small enterprises Large enterprises
Method Percentage use (%) Percentage use (%)
ABC 2 -
Economic order quantity (EOQ) 2 63
Inventory turnover ratio - 55
Linear programming - 24
Statistical methods - 10
Safety stock 7 50
Anticipation stock 32 -
Executive judgement 6 66
Sales projections 9 -
Past experience 15 -
No method 27 -
Source: Adapted from Grablowsky (1984)
Unlike the researchers mentioned above, Peel and Wilson (1996) studied working
capital management practices of small firms based in the North of England without any
92
separation of cash management, receivable, payable and inventory management but

dealing with working capital components. In their research, respondents were requested
to indicate the frequency with which they used or reviewed various methods or
components pertaining to the management of working capital. Table 3.24 reports the
research results conducted by Peel and Wilson (1996).
Table 3.24: Working capital management: Frequency (%) of using or reviewing

Never Some- Quite Often Very
times often often
Cash budgeting (use) 8.5 11.0 20.7 23.2 36.6
Debtors’ credit period (review) 8.6 9.9 22.2 35.8 23.5
Debtors’ discount policy (review) 30.0 22.5 23.8 13.8 10.0
Bad debt (review) 4.9 13.6 13.6 29.6 38.3
Doubtful debts (review) 3.7 13.6 19.8 37.0 25.9
Customer credit/risk standing (review) 8.6 18.5 22.2 25.9 24.7
Creditors’ payment period (review) 12.2 22.0 36.6 15.9 13.4
Factoring (use) 78.0 4.9 4.9 3.7 8.5
Working capital financing requirements 12.2 22.0 36.6 15.9 13.4
Stock turnover (review) 38.5 16.7 24.4 12.8 7.7
Stock level (review) 34.6 10.3 17.9 23.1 14.1
Stock re-order levels (review) 40.3 10.4 20.8 16.9 11.7
Economic order quantity model (use) 73.8 8.8 12.5 2.5 2.5
Source: Adapted from Peel and Wilson (1996)
In general, depending upon their objectives, in examining working capital

management practices, previous researchers emphasized specific aspects of working
capital management. Burns and Walker (1991) examined working capital management as
a whole. In their survey of working capital policy among small manufacturing firms in
the USA, the following aspects of working capital were considered:
• working capital policy,

• managing working capital components, including cash, receivable, payable and
inventory management, and
• relationships between working capital management practices and profitability.
Probably this survey was one of the most comprehensive surveys of working capital
management practices where almost all aspects of working capital management were
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examined. Burns and Walker’s (1991) findings can be summarized into some main points
as follows:
• Thirty-nine percent of the company’s total assets were working capital, but only
24 percent of the financial manger’s time were spent on working capital. Overall,
companies had an informal procedure or no written policy for working capital
management. However, those that did have a written policy were probably more
profitable than others.
• For cash management, the typical company used cash budgeting on a weekly
basis mainly to plan for shortages and surpluses of cash. Company would
determine target cash balances based on needs for transaction balances, and put its
idle cash in cash management accounts or certificates of deposit.
• For accounts receivable, the typical company used both the collection period and
aging schedule to monitor the payment behavior of credit customers.
• With regard to inventory policy, the typical firm used computerized inventory
control systems to decide on the appropriate amount to replenish its storage points
by using ad hoc decisions. Company mainly considered the availability of parts
and materials in deciding on reorder quantities for inventory purchased.
• As for accounts payable, the typical firm became a net supplier of credit believing
that the cost of foregoing trade discounts was only about 13%, yet it always or
sometimes took the discounts.
In summary, working capital management practices have long attracted the attention of
previous researchers. The main research areas related to these practices included cash,
receivable and inventory management summarized in Table 3.25 (page 95). This table
shows that studies on working capital management practices conducted by previous
research provided detailed descriptions of working capital management practices of
SMEs. However, relationships between working capital management practices and SME
profitability have not been investigated. To date there almost are no tests of associations
between working capital management practices and SME profitability.
94
Table 3.25: Summary of working capital management practices
• Short-term surplus of cash

Researcher(s) and year Country Main research areas
Grablowsky and Rowell (1980) USA
• Low standards of receivable management
• Cash forecasting
bad debt
Cooley and Pullen (1979) USA
• Cash surplus investment
• Cash control
Anvari and Gopal (1983) Canada • Preparing cash forecasts
• Techniques used to determine cash balance
• Short-term cash surplus
• Investment of short-term investment
Mrphy (1973) UK • Awareness and utilization of credit control
system
• Capital invested in inventory

D’Amboise and Gasse (1980) Canada Inventory control system
Grablowsky and Rowell (1980) USA
• Poor standard of inventory management
• Methods used to determine inventory level
Pell and Wilson (1996) UK • Frequency of using and reviewing working
capital management
Source: As indicated above
3.4.5 Fixed asset management
This subsection reviews research on fixed asset management practices of SMEs. The key
researchers in this field include Soldofsky (1964), Corner (1967), Taylor Nelson
Investment Services (1970), Scott et al. (1972), Murphy (1978), Hankinson (1979),
Grablowsky and Burns (1980), Pattillo (1981), Arnold-McCulloch and Lewis (1986),
Williams (1986), Holmes (1986, 1987), Brigham (1992), Proctor and Canada (1992),
Ruyon (1993), and Block (1997) in the developed countries such as the USA, Canada, the
UK, and Australia.
Brigham (1992) suggested that capital budgeting might be more important to a
smaller firm than its larger counterparts because of the lack of access to the public
markets for funding. Capital budgeting has attracted researchers over the past several
decades. McMahon et al. (1993) claimed the earliest study of capital budgeting of SMEs
was reported by Soldofsky (1964). During 1961, Soldofsky interviewed 126 owners of
small manufacturing businesses in Iowa and the results were published in 1964.
95
Soldofsky (1964) found there was considerable variation in the methods of calculating
payback period and in determining payback standards. In many businesses, required
payback periods were flexible according to circumstances such as the variability of cash,
planned product changes and business outlook. In the smaller enterprises, approvals for
capital outlays tended to be given as required, whereas larger concerns were more likely
to have annual capital budgets. Only four firms attempted to calculate some variation of
the average cost of capital for use as a hurdle rate for capital projects. Most businesses
seemed unaware of the link between their financing and investment decisions. On the
positive side, it was quite clear that the evaluation of capital projects was heavily cash
flow oriented.
Regarding capital project selection techniques, there were several surveys
conducted by previous researchers such as Soldofsky (1964), Luoma (1967), Taylor
Nelson Investment Services (1970), Hankinson (1979), Grablowsky and Burns (1980),
Proctor and Canada (1992), and Block (1997). Soldofsky’s (1964) study results are
summarized in Table 3.26 which shows around 58 percent of respondents used payback
period methods whereas only 4.1 percent employed accounting rate of return technique.
Table 3.26: Percentage of firms using capital project selection methods

Methods Percentage use
Payback period 57.7
Accounting rate of return 4.1
No formal criteria 41.5
Source: Adapted from Soldofsky (1964)
Domination of payback period methods compared with other techniques in

evaluating capital investment projects of SMEs was also found in the study of Louma
(1967). Louma (1967) conducted a survey of small and medium-sized manufacturing
businesses in the United States and found that more than 22 percent of SMEs used formal
methods of capital investment evaluation (Table 3.27).
Table 3.27: The extent of use of formal methods of the capital investment evaluation
Method SMEs with annual sales SMEs with annual sales >
< $5 million (% use) $5 million (% use)
Payback period 63 77
Simple rate of return 30 46
Discounted cash flow methods 22 31
Not specified 26 8
Source: Adapted from Louma (1967)
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Thirty years after the Louma’s (1967) study, Block’s (1997) survey of 232 small
businesses in the USA indicated payback method remains the dominant method of
investment selection for small businesses, whereas large corporations widely incorporate
discounted cash flow models in financial analysis of capital investment proposals
(Proctor and Canada, 1992). This is not evidence of a lack of sophistication as much as it
is a reflection of financial pressures put on the small business owner by financial
institutions. The question to be answered is not always how profitable the project is, but
how quickly a loan can be paid back. Nevertheless, more sophisticated methods using
discounted cash flow (IRR and NPV) have increased in use over time (Table 3.28).
Table 3.28: Primary method of investment analysis

Firms Percentage
Payback period (PP) 99 42.7
Accounting rate of return (ARR) 52 22.4
Internal rate of return (IRR) 38 16.4
Net present value (NPV) 26 11.2
Others, not specified 17 7.3
Total 232 100.0
Source: Adapted from Block (1997)
The predominance of the payback period method can be attributed to its

simplicity, emphasis on liquidity, and response to external financing pressures. While
other more complicated methods are not as popular. Similarly, Grablowsky and Burns
(1980) found that the level of understanding and use of more advanced capital budgeting
polices and techniques were very low. For example only 4.6 and 13.8 percent of
respondents in the Grablowsky and Burns (1980) survey indicated they use the net
present value and internal rate of return methods respectively. In the UK, Corner (1967)
found remarkable differences in methods used for assessing capital projects between
smaller and lager enterprises. The percentage use of different methods depending upon
business size (Table 3.29) illustrated by Corner (1967).
Table 3.29: Percentage use of different methods by small, medium, and large enterprises
Size category Payback period Rate of return Discounted cash flow
(% use) (% use) (% use)
Small 61 35 11
Medium 29 47 24
Large 45 35 45
Source: Adapted from Corner (1967)
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Scott et al. (1972) examined the capital investment evaluation procedures of 135
small manufacturing enterprises in the USA and the following are some principal
findings:
• Eighty-four percent of respondents indicated that some investments were

necessary in the short-run, regardless of their profitability.
• Payback period was used to evaluate capital projects by 51 percent of
respondents, while 30 percent reported use of some variation of accounting rate of
return. Only 10 percent reported use of discount cash flow methods such as net
present value (5 percent) and internal rate of return (2 percent). This finding is
consistent with the Soldofsky (1964), Louma (1967), Corner (1967), and
Grablowsky and Burns (1980) findings of a tendency in using simple and
complicated methods of capital investment project evaluation.
• Sixty-one percent of respondents indicated that they screened capital expenditures
by comparing the expected rate of return on investment with the cost of capital or
some cost of financing.
• Regarding the screening rates used to evaluate the capital projects, the
respondents indicated the percentages in Table 3.30.
Table 3.30: Percentage of kinds of screening rate used to evaluate the capital projects
Percentage use
Cost of some specific source of fund (e.g., cost of borrowing) 37
Some mix of financing cost (e.g., average cost of capital) 13
Some other hurdle rate (e.g., historic rate of return n investment) 9
Others 1
No response 40
Source: Adapted from Scott et al. (1972)
Similarly, Block (1997) found that, of the 64 firms using discounted cash flow as the
primary method of investment analysis, only 9 used a concept closely related to weighted
average cost of capital as the discount or hurdle rate. The majority of firms used the cost
of funding the specific project as the cut-off point. Others relied on such concepts as an
arbitrarily determined cut-off point or historical rate of return (Table 3.31, page 99). The
reason for not using weighted average cost of capital is that smaller firms have difficulty
in estimating the cost of equity capital. They were accustomed to relating cost to
98
contractual obligations, and not other concepts such as opportunity cost related to
retained earnings. Furthermore, smaller firms have less access to the public capital
markets and fewer alternatives overall than larger firms and feel a less compelling need to
measure the relative cost of each.
Table 3.31: Methods of determining the required rate of return as using discounted cash flow
Firms Percent
Cost of funding a specific project 34 53.1
Arbitrary cut-off point 13 20.3
Weighted average cost of capital 9 14.1
Historical rate of return 5 7.8
Non-specified or other 3 4.7
Source: Adapted from Block (1997)
In summary, subsection 4.2.1 shows the previous findings related to fixed asset
management practices. Payback period method continues keeping its dominant position
in evaluating capital investment projects of SMEs as shown in Table 3.32.
Table 3.32: Summary of fixed asset management practices
• Domination of payback period method

Researcher Country Research areas Main findings
Soldofsky (1964) USA Capital project
selection • Most businesses seemed unaware of the
techniques link between their financing and

investment decisions
Luoma (1967) USA Methods of
capital • Percentage of using discounted cash
investment flow methods was risen when the firm
evaluation
size increases
Scott et al. USA Capital
(1972) investment • Cost of some specific source of funding
evaluation is mainly used as the screening rate to
• Payback period method remains

evaluate the capital projects
Block (1997) USA Methods of
investment
• More sophisticated methods have
dominant method
analysis
• Cost of funding a specific project used

increased in use over time
• Level of understanding and use of more

as the required rate of return
Grablowsky and USA Capital
Rowell (1980) budgeting advanced capital budgeting polices and
policy and techniques ere very low
• There are the significant differences

techniques
Corner (1967) UK Methods used
for assessing between larger and smaller enterprises
capital projects
99
3.4.6 Capital structure management
Subsection 3.4.2.4 examined financial management practices related to capital investment

decisions. The current subsection reviews capital structure management or financial
management practices related to the decisions of sources of financing. It includes
examining what factors affect capital structure decisions and how capital structure impact
on SME profitability.
Small companies frequently suffer from a particular financial problem – lack of a
capital base. Small businesses are usually managed by their owners and available capital
is limited to access to equity markets, and in the early stages of their existence owners
find it difficult in building up revenue reserves if the owner-managers are to survive. A
question concerns how small businesses determine sources of finance in such difficult
circumstance. According to Brigham (1995, p. 447), modern capital structure theory
began in 1958, when Modigliani and Miller’s (1958) seminal article on capital structure
was published. Since that point of time, researchers have attempted to explain how firms
choose their capital structure. Myers (1984, p. 575) stated:
How do firms choose their capital structure? The answer is we don’t know… we
do not know how firms choose the debt, equity, or hybrid securities they issue.
Though some theoretical work focuses on small business capital structure (Day et al.
1985; McConnell and Pettit, 1984; Pettit and Singer, 1985; and Walker, 1988), empirical
work on small business and capital structure is minimal (Norton, 1991).
Literature of the 1980’s has attempted to explain small firm financing decisions
by using modern financial theories. McConnell and Pettit (1984) suggested that small
businesses generally have proportionally less debt than large firms because: (1) small
firms generally have lower marginal tax rates than larger firms, thereby, less tax
deduction benefit of debt, (2) small firms may have higher bankruptcy costs than large
firms, and (3) small firms may find it more difficult to express their business health to
creditors.
Another attempt to explain small firm financing behaviour relied on agency
theory. Agency theory holds that investors who have equity or debt in a firm require costs
100
to monitor the investment of their funds by management or the small business owner
(agency costs). This view suggests that financing is based on the owner-manager being
able to assess these agency costs for each type of financing, and then select the lowest
cost method of financing the firm’s activities. One weakness of this explanation is that no
one has yet been able to measure agency costs, even in large firms (Myers, 1984).
In contrast, more recent theoretical and empirical work suggests that a strategic
perspective may have promise in explaining the financing decisions. Barton and Gordon
(1988) suggest that the following characteristics must be accounted for in any explanation
of firm financing decisions:
• behavior at the firm level

• fact that the capital structure decision is made in an open systems context by top
management, and
• decisions reflects multiple objectives and environmental factors, not all of which
are financial in nature.
The firm’s financing decision, then, appears to be a product of many internal and external
factors, as well as managerial values and goals.
The arguments of Barton and Gordon (1988) for the management choice
perspective on large-firm financing decisions may have even more relevance and validity
for small firms. First of all, because most small firms are not actively traded on a
financial market as large, public firms are, they are unconcerned with the financial
market’s assessment of their capital structure. As a result, modern financial leverage
theory, which is based on the market’s assessment of total stock valuation, does not
always apply. Second, as Levin and Travis (1987) pointed out the owners’ attitudes
toward personal risk – not the capital structuring policies public companies use –
determine what amounts of debt and equity are acceptable. In effect, the authors argue
that small firms choose debt based on personal, managerial preference.
While the classic strategy paradigm is not explicitly theoretical in nature, it does
identify key decision categories, which are affected by top managers, when they make
strategic decisions. Based on dimensions of the strategy paradigm, Barton and Matthews
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(1989) suggested five propositions to explain how small firms determine their capital
structure listed as follows: (1) top management’s risk-taking propensity affects the firm’s
capital structure; (2) top management’s goal for the firm will affect the firm’s capital
structure; (3) top managers would prefer to finance firm needs from internally generated
funds rather than from external creditors or even new stockholders; (4) the risk
propensity of top management and financial characteristics of the firm affect on the
amount of debt lenders are willing to offer and on what terms; and (5) financial
characteristics moderate the ability of top management to select a capital structure for the
firm.
However, the authors mentioned above and Barton and Matthews (1989) have not
provided empirical evidence to support their propositions. Conversely, Norton (1991)
provided empirical evidence on capital structure selection by conducting a survey of 400
small, high-growth corporations. In his survey, respondents were asked to describe the
underlying firm philosophy in making debt and equity decisions. There were 261
respondents answering this question and the results are shown in Table 3.33.
Table 3.33: Viewpoint guiding firms’ financing decisions

Response
percentage
a. Raise/use money in the following order: 31.8
1. Use internal funds as much as possible
2. Issue short-term debt, long-term debt
3. Issue convertible securities
4. Issue common stock
b. Consider market response to new issues of debt and equity 16.9
c. Alternate between debt and equity issues 4.6
d. Choice depends on the existence of any differences in firm value
between management and the marketplace 7.7
e. Try to balance present value of the tax shield of debt with the present
value of possible bankruptcy costs 0.0
f. Issue debt and equity to stay close to a target debt: equity ratio 6.1
g. Use no long-term debt 5.4
h. Borrow the maximum available 1.9
i. Borrow the maximum available with an “A” rating 1.9
j. Maintain a given coverage ratio 5.0
k. Careful firm evaluation of cash flow variation and bankruptcy given
financing choice 1.1
l. Issue debt when interest rates are low, issue stock when prices are
high, to finance capital budgeting projects 10.0
m. Issue debt when interest rates are low, issue stock when prices are
high, even though present needs are not great in order to build up a
long-term funds “cushion” 7.7
Source: Adapted from Norton (1991)
102
Other empirical evidence on capital structure was provided by Peterson and

Shulman (1987). Peterson and Shulman (1987) analyzed the empirical data collected for
1984 International Small Business Congress. Approximately 130 questions were asked
in 4,000 interviews conducted in 12 countries including Brazil, Colombia, Spain,
Kenya, Cameroon, Indonesia, USA, Canada, West Germany, United Kingdom,
Netherlands, and Japan. The survey questionnaire contains information regarding the
source of funds, including traditional debt, internal equity, friends/relatives, and trade
suppliers. The actual percentage of each source that a firm employs varies depending on
such factors as (1) age of firm, (2) location of the firm, (3) cost of the source, (4)
availability of the source, (5) profitability of the firm, (6) growth level of the firm, and
(7) information flows.
The results of the study show that a life cycle of capital structure among small
growing firms depend on age, size, and economic development. Most firms appear to be
initially dependent on relatives/friends and personal equity for expansion/working
capital needs and over time are able to rely on more heavily on traditional source of
bank debt for financial support. Since firm managers/owners will attempt to minimize
the overall cost of capital, the firm is seen as having a rising level of debt as it becomes
available.
Using debt finance seems to be dependent on size, profitability of the firm and the
development of the economy. This conclusion is supported by the evidence shown in
Table 3.34.
Table 3.34: Factors influencing percentage of bank debt usage

Percentage of bank debt use
Number of employees
Under 10 44
10 – 50 63
Over 50 73
Firm profitability
Profitable firms 71
Unprofitable firms 43
Development of the economy
Developed countries 68
Developing countries 42
Source: Adapted from Peterson and Shulman (1987)
103
Section 3.4 reviewed the literature of financial management practices of SMEs in

the developed countries. Most previous researchers in the literature concentrated on
examining, investigating and describing the behavior of SMEs in implementing financial
management. Specific areas of financial management practices including accounting
information system, financial reporting and analysis, working capital management, fixed
asset management and capital structure management, have attracted the attention of many
researchers. However, their findings are mainly related to exploring and describing
behavior of SMEs in financial management practices. As a result, they provided many
descriptive findings but seem to lack the associative findings of the relationship between
financial management practices and financial performance of SMEs.
3.5 FINANCIAL CHARACTERISTICS OF SMEs
This section reviews the literature on financial characteristics of SMEs. Its objectives are
(1) to examine how previous researchers identify and measure financial, characteristics,
(2) to review the findings related to financial characteristics that were found by previous
researchers, and (3) to identify gaps in knowledge of financial characteristics of SMEs.
This section is structured into three subsections. Subsection 3.5.1 examines the variables
of financial characteristics identified by previous researchers. Subsection 3.5.2 discusses
measuring these variables. Lastly, subsection 3.5.3 summarizes all the previous findings
related to financial characteristics of SMEs.
3.5.1 Identifying financial characteristics
This subsection mainly discusses the concept of financial characteristics of SMEs. It

reviews definitions of financial characteristics that were mentioned and used by previous
researchers. Stevens (1973), Burns (1985), Hutchinson, Meric and Meric (1988), Jaggi
and Considine (1990), Davidson and Dutia (1991), Laitinen (1992), Hutchinson and
Mengersen (1993), McMahon et al. (1993), and Meric et al. (1997) are viewed as the key
researchers who study financial characteristics. In defining financial characteristics,
McMahon et al. (1993, p. 177) states:
104
Financial characteristics 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.
Stevens (1973), who studied financial characteristics 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 characteristics. Burns (1985) analyzed financial characteristics and profitability
of small companies in the UK. He used the following ratios: quick ratio, current ratio,
gearing, long-term debt ratio, and interest cover ratio to define financial characteristics of
the companies.
Hutchinson, Meric and Meric (1988) studied financial characteristics of small
firms, which achieved quotation on the United Kingdom Unlisted Securities Market.
They used financial ratios including liquidity ratios, leverage ratios, activity ratios,
profitability ratios and growth ratios to identify financial characteristics of the firm. In
another study, Hutchinson and Mengersen (1993) examined the effect of growth on
financial characteristics. The variables used to define financial characteristics were
profitability, liquidity, and leverage.
Jaggi and Considine (1990) examined whether financial characteristics of owner-
controlled acquired firms differ from those of the non-owner-controlled acquired firms.
Four variables: profitability, liquidity, leverage, and dividend payment capability were
used to identify financial characteristics of the firm. To reduce the large number of ratios
produced, some researchers such as Stevens (1973), Laitinen (1992) used factor analysis.
According to Laitinen (1992) factor analysis is a useful statistical tool reducing a large set
of correlated variables to fewer unrelated dimensions and identifying a typology. Laitinen
(1992) studied financial characteristics of newly-founded firms and used the following
variables: profitability, dynamic liquidity, quick ratio, indebtedness or static solidity,
dynamic solidity, logarithmic net sales, and capital intensiveness to identify financial
characteristics.
105
Davidson and Dutia (1991) explored whether small firms have distinctively
different financial characteristics from larger firms and determined the extent of the
under-capitalization problem. In their study, four variables: liquidity, profitability, debt
and solvency, and turnover are viewed as the variables to determine financial
characteristics of SMEs. Meric et al. (1997) conducted a comparative study on financial
characteristics of 87 Japanese and 87 USA chemical firms. In their study, they compared
financial characteristics between the USA and Japanese chemical firms by using ten
financial ratios. Financial ratios used to define financial characteristics in their study
included: (1) operating profit margin, (2) total asset turnover, (3) return on assets, (4)
return on equity, (5) fixed charge coverage, (6) common equity ratio, (7) long-term debt
ratio, (8) current ratio, (9) quick ratio and (10) inventory turnover.
In summary, depending upon the purpose of each study, previous researchers
selected appropriate variables to identify financial characteristics of the small firms. The
following variables: liquidity, leverage, profitability, and activity were most popularly
used by most researchers to describe financial characteristics of the firms. Table 3.35
summarizes the variables used by previous researchers to define financial characteristics.
Table 3.35: Summary of literature review of financial characteristic variables
Researcher(s) Business type Variables for identifying financial
characteristics
Stevens (1973) 40 acquired and 40 Leverage, profitability, activity, liquidity, dividend
non-acquired firms policy, price and earning ratio
Burns (1985) General Current ratio, quick ratio, gearing, long-term debt
ratio and interest cover ratio.
Hutchinson, The UK Unlisted Liquidity ratios, leverage ratios, activity ratios,
Meric and Meric Securities Market profitability ratios and growth ratios
(1988) small firms
Jaggi and 73 owner controlled Profitability, liquidity, leverage and dividend
Considine (1990) acquired firm payment capability
Laitinen (1992) Newly-founded Profitability, dynamic liquidity, quick ratio,
firms indebtedness or static solidity, dynamic solidity,
logarithmic net sales, and capital intensiveness.
McMahon et al. General Profitability, liquidity and leverage
(1993)
Hutchinson and Growth small firm Profitability, liquidity, and leverage
Mengersen
(1993)
Meric et al. 87 Japanese and 87 Operating profit margin, total asset turnover, return
(1997) US chemical firms on assets, return on equity, fixed charge coverage,
common equity ratio, long-term debt ratio, current
ratio, quick ratio, inventory turnover
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3.5.2 Measuring financial characteristics
Subsection 3.5.1 discussed financial characteristic identified by previous researchers in

their studies. Subsection 3.5.2 examines how to measure financial characteristics.
However, the purpose of this study is not to examine all variables but only discusses
measuring four variables: liquidity, leverage, activity and profitability, which are the
most popularly used to identify financial characteristics and meet the objectives of the
study.
3.5.2.1 Liquidity
Most researchers view liquidity as one of the variables to define financial characteristics.
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 (McMahon and Stanger, 1995, p.24). When used for determining financial
characteristics, liquidity is often measured as ratios. There are two kinds of ratios used by
most researchers such as Stevens (1973), Burns (1985), Jaggi and Considine (1990),
Hutchinson and Mengersen (1993), Meric et al (1997):
1. Current ratio = Current assets / 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 characteristics of small enterprises.
3.5.2.2 Financial leverage
Leverage is the next variable often used by most researchers to determine financial
characteristics of the small enterprises. Walker and Petty (1978, p.145) defined financial
leverage to be the process of using senior (debt or equity capital with a fixed return)
capital to increase the rate of return on junior securities. Brigham (1995, p. 429) indicated
that financial leverage is the extent to which fixed-income securities (debt and preferred
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stock) are used in a firm’s capital structure. Similarly, Ross, Westerfield and Jaffe (1999,
p.33) said that financial leverage is related to the extent to which a firm relies on debt
financing rather than equity.
When financial leverage is used to identify financial characteristics of the firm, it
is often measured by the following ratios:
1. Equity ratio = Equity/Total asset: used by Hutchinson, Meric and Meric (1988),
Meric et al (1997)
2. Long-term debt ratio = Long-term debt/Total capital: used by Burns (1985), Meric
et al (1997)
3. Lon-term debt to equity ratio = Long-term debt/Common stock equity: used by
Jaggi and Considine (1990)
4. Debt ratio = Total debt/Total assets: used by Brigham (1995) and Ross,
Westerfield, and Jaffe (1999).
5. Debt-to-equity ratio = Total debt/Total equity: used by Brigham (1995) and Ross,
3.5.2.3 Activity
A ratio of activity is considered the third variable to determine financial characteristics of

the firm. Hutchinson, Meric and Meric (1988) 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
Meric et al (1997) only used two ratios of activity: total asset turnover (Sales/Total
assets) and inventory turnover. Noticeably, Ross, Westerfield, and Jaffe (1999) and Meric
et al. (1997) used inventory turnover instead of inventory ratio. Inventory ratio is
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calculated by dividing the cost of goods sold by average inventory while inventory ratio
is calculated by dividing inventory by sales.
3.5.2.4 Profitability
Profitability ratios are viewed as another variables to identify and measure financial
characteristics of SMEs. According to Jaggi and Considine (1990), 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.
Burns (1985) and Meric et al. (1997) measured profitability by three ratios: return
on total assets, return on net assets, and return on equity. According to Burns (1985)
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 characteristics of a firm. Table 3.36
(page 110) summarizes ratios used by previous researchers in measuring financial
characteristics. Table 3.36 reveals that previous researchers have used many different
variables and ratios to identify and measure financial characteristics of a firm. However,
the variables most popularly used by most previous researchers included (Table 3.36,
page 110):
• liquidity measured by current and/or quick ratios,

• 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
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Table 3.36: Summary of measurement of financial characteristic variables
Researcher(s) Financial Measurement

and year characteristic
variables
Burns (1985) Liquidity Current ratio and quick ratio
Profitability Return on total assets, return on net assets and return
on equity
Leverage Gearing ratio and long-term debt ratio
Liquidity ratios Current assets/Current liabilities
(Current assets – Inventory)/Current liabilities
Current assets/Total assets
(Current assets – current liabilities)/Total assets
Leverage ratios Owners’ equity/Total assets
Hutchinson, Current liabilities/Total asset
Meric and Meric Activity ratios Inventories/Sales
(1988) Sales/Total assets
Profitability ratios Net profit after tax/Sales
Earnings before interest and tax/Total assets
Net profit after tax/Owners’ equity
Growth ratios Average annual assets growth rate
Average annual sales growth rate
Profitability Operating profit/Total assets
Jaggi and Liquidity Cash/Current liabilities
Considine (1990) (Cash + accounts receivable)/Current liabilities
current assets/Current liability
Leverage Long term debt/Common stock equity
Dividend payment Cash dividend/Net income
capability
Profitability Return on investment ratio
Dynamic liquidity Cash flow to net sales
Static liquidity Quick ratio
Laitinen (1992) Static solidity Shareholders’ capital to total capital
Dynamic solidity Cash flow to total debt
Capital Net sales to total capital ratio
intensiveness
Operating profit/Sales
Profitability Net income/Total assets
Net income/Common equity
Meric et al. Sales/Total assets
(1997) Activity Income before fixed charges/Fixed charges
Cost of goods sold/Inventory
Leverage Common equity/Total assets
Long-term debt/Total capital
Liquidity Current assets/Current liabilities
(Current assets – Inventory)/Current liabilities
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3.5.3 Previous findings related to financial characteristics
This subsection reviews findings of previous researchers, related to financial

characteristics. Its objective is to identify the gap in knowledge of financial
characteristics of SMEs.
During the three decades of 1960’s, 1970’s and 1980’s, Anderson (1967), Singh
and Whittington (1968), Gupta (1969), Bolton (1971), Bates (1971), Elliott (1972),
Stevens (1973), Walker and Petty (1978), Wilson (1979), Chen and Balke (1979), Tamari
(1980), the US Small Business Administration (1984), Burns (1985), Storey et al. (1987),
and Hutchinson, Meric and Meric (1988) are the well-known researchers who completed
numerous studies related to financial characteristics of SMEs. In recent years, the key
researchers who have contributed to studying financial characteristics of SMEs include
Jaggi and Considine (1990), Davidson and Dutia (1991), Laitinen (1992), Hutchison and
Mengersen (1993) and Meric et al. (1997). The findings and contribution of researchers
as mentioned above can be classified into three categories:
• findings of factors influencing financial characteristics of SMEs

• findings of comparisons (large versus small enterprises, owner versus non-owner
controlled acquired firms, quoted versus unquoted firms, floated versus non-
floated firms, country versus another country) of financial characteristics of
SMEs, and
• findings of the impact of financial characteristics on SME performance.
The next subsections will review details of these findings. Its objective is to identify a
gap in the literature on financial characteristics of SMEs.
3.5.3.1 Findings of factors influencing financial characteristics of SMEs
Researchers in the literature found many factors influencing financial characteristics of

SMEs in which growth and size are two of these factors. According to McMahon et al.
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(1993), the effects of growth are likely to manifest themselves in financial characteristics
and performance of small enterprises.
Weston and Brigham (1981) consider the financial implications of five stages of
development: formation, rapid growth, growth to maturity, maturity, and decline, and
found that major sources of finance at formation are the owners’ personal resources.
However, according to McMahon et al. (1993) the major financial problems likely to
arise at this stage are that these resources are insufficient and that the small enterprise is
thereby under-capitalized. Growth beyond formation is likely to be financed by retained
earnings, trade credit and bank borrowing. As a result, growth may have the following
effects:
• Growth may outstrip financial resources, leading to over-trading and liquidity

crises.
• Growth may also cause a financial gap where the small enterprise is forced to rely
too much on short-term finance because of a lack of long-term finance.
• Further growth may require a stock market flotation in order to overcome the
finance gap.
The effect of growth and size on financial characteristics and performance were
examined by Elliott (1972). Size was found to affect performance in two ways. Below-
average sized enterprises were found to have higher growth in cash flow and to have
undertaken higher rates of capital spending than above-average enterprises. Growth
affected on enterprise’s debt position, with both debt equity ratios and the proportion of
non-equity financed assets being higher for slowly growing enterprises than for rapidly
growing ones. Additionally, below-average growth enterprises had significantly higher
rates of capital spending than above-average growth enterprises. In contrast, Chen and
Balke (1979) reported that the size of enterprises did not seem to have a significant effect
on most financial ratios. Only the current ratio was found to have significantly negative
effects by different sizes of enterprise.
When studying the effect of growth and size on financial characteristics, Gupta
(1969) looked at variations in asset utilization, leverage, liquidity and profitability
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between manufacturing enterprises operating at different size levels and with different
growth rates. Gupta’s (1969) findings are summarized as follows:
• Activity ratios and leverage ratios decrease with an increase in the size of the
enterprise but increase with the growth of the enterprise.
• Liquidity ratios rise with an increase in the size of the enterprise but fall with
growth rates.
• Larger enterprises tend to have higher profit margins on sales than small
enterprises.
In contrast, Whittington’s (1971) conclusions regarding size and profitability, derived

from regression analysis using cross-sectional data, are that the average profitability of
enterprises is independent of their initial size during the period studied. These
conclusions are largely in line with those of an earlier study by Samuel and Smyth
(1968), and thus tend to confirm the law of proportionate effect which asserts that the
profitability of an enterprise growing at a given rate during any specific period of time is
independent of the initial size of the enterprise.
In addition to growth and size, financial characteristics were also found to be
affected by contingent factors. McMahon et al. (1993, p.179) comment on the importance
of keeping in mind that there are many other factors, in addition to stage of development,
growth rate, and stock market flotation, which affect financial characteristics and
performance of small enterprises. However, according to Neck (1977), these factors can
be grouped into three categories: host, agent and environment.
• The host is taken to be the owner-manager of the small enterprise. Financial skills
of small enterprise owner-managers can have a direct impact on the financial
profile of the business in terms of its profitability, financial leverage and liquidity
management.
• The agent is taken to be various financial environmental institutions. Financial
characteristics of small enterprises will be affected by the availability of finance
from institutions. If the finance gap does exist so that small enterprises cannot
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raise long-term finance in the same way as large enterprises, then this will directly
affect their financial structure.
• The environment is taken to be that created by legislation, taxation, and economic
conditions.
3.5.3.2 Comparative studies of financial characteristics
Small versus large enterprises
Comparative studies of financial characteristics between small and large enterprises have
long attracted the attention of several researchers. There are many findings, which report
or describe differences of financial characteristics between small and large enterprises.
McMahon et al. (1993) made an important contribution to reviewing the literature on
financial characteristic differences between small and large enterprises. According to
McMahon et al. (1993, p. 189) these differences can be summarized and classified into
three basic groups:
Differences in liquidity – Liquidity in small enterprises has been found to be lower for
small enterprises than for large by Bates (1971), Gupta (1969), Walker and Petty (1978),
Wilson (1979) and Burns (1985). In contrast, Chen and Balke (1979) and Elliott (1972)
found small enterprises to be more liquid than large enterprises whilst the Bolton
Committee (1971) and the US Small Business Administration (1984) found no significant
differences between the two groups.
In recent years, Davidson and Dutia (1991) found that whilst small enterprises
had higher levels of current liabilities they also had higher cash balances. Based on the
current and quick ratio, Davidson and Dutia (1991) also found that small firms are less
liquid than large firms. Conversely, Osteryoung, Constand and Nast (1992) found that the
liquidity ratios, including current and quick ratio, are not different across the large and
small firms.
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Differences in financial leverage – Financial leverage in small enterprises is not

significantly different from large enterprises, as reported by Bolton (1971), Chen and
Balke (1979), Elliott (1972), Tamari (1980), and Wilson (1979). Only Bates (1971) found
that total debt levels to be lower for small enterprises, whilst Davidson and Dutia (1991),
Gupta (1969), the US Small Business Administration (1984), and Walker and Petty
(1978) and Burns (1985) found small enterprises to be more highly leveraged than large
firms. Small growth enterprises have higher leverage than large enterprises or other small
enterprises according to Bolton (1971). Recently, Davidson and Dutia (1991) also found
that small firms use more short-term debt than larger firms.
Differences in profitability – Profitability has generally been found to be lower for small
enterprises than large in USA studies such as Anderson (1967), Gupta (1969), and the
USA Small Business Administration (1984). Only Tamari (1980) and Walker and Petty
(1978) found small enterprises to be more profitable than large enterprises. In the UK,
only Bates (1971) found small enterprises to be less profitable than large enterprises.
Both Bolton (1971) and Wilson (1979) found that small enterprises were more profitable
than large. The Bolton (1971) Committee also found that growth small enterprises were
more profitable than either large enterprises or other small enterprises.
In more recent, Davidson and Dutia (1991) also found smaller firms in their study
tend to have lower profit margins than large firms. However, small firms did not have
lower ROA ratios. Conversely, Osteryoung, Constand and Nast’s (1992) results of
studying indicated that two profitability ratios, return on sales and return on net worth,
are not different across the large and small firms.
Owner controlled versus non-owner controlled acquired firms
Jaggi and Considine (1990) examined whether financial characteristics of owner

controlled acquired firms differ from those of the non-owner controlled acquired firms.
Their study was based on 73 firms from each group and the results indicated that the
financial position of owner controlled acquired firms was significantly different
compared to that of the non-owner controlled acquired firms. The financial position, as
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reflected by four financial characteristics: profitability; liquidity; leverage and dividend

payment capability was weak for non-owner controlled firms and it was strong for
owner-controlled firms.
Quoted versus unquoted small firms
Differences in financial characteristics of quoted and unquoted small firms were

examined by Hutchinson, Meric and Meric (1988). In their study, they examined whether
financial characteristics of small firms, which are quoted on the Unlisted Securities
Market (USM) in the UK, are different from small firms not listed.
Based on multivariate variance analysis, they indicated that the overall financial
characteristics of these firms are significantly different from those which have not
achieved USM quotation. The most important differences between these two groups of
firms are in terms of sales growth rates, the use of debt financing, and the level of liquid
assets. Small firms, which had achieved USM quotation, appeared to have higher growth
rates, use more debt financing, and invest less in current assets than small firms, which
have not achieved USM quotation.
Floated versus non-floated small firms
While Hutchinson et al. (1988) provided an analysis of financial characteristics of small

firms which achieved quotation on the USM, Hall and Hutchinson (1995) examined how
financial characteristics of small firms entering the USM between 1980 and 1983
inclusive differed from those that remained non-floated. Their results provide useful
insights into some aspects of the operation of the USM with respect to small firms. Those
small firms, which did seek flotation, are not necessarily the fastest growing; and the
establishment of the USM would not appear to have made any difference to the
relationship between the growth of a small firm and its profitability in achieving flotation.
Similarly, whilst small firms that were floated on the USM in 1980 to 1983 were clearly
usually more profitable than those that were not, profitability would not appear to have
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any greater impact on the probability of flotation by a small firm than would have been
the case during the 1970s.
These conclusions are not consistent with Walker and Petty’s (1978) findings.
Walker and Petty (1978) found that small firms preparing to enter the USA public stock
market had a significantly different financial profile from that of large corporations. The
differences for small firms entering the stock market were lower dividend payout, lower
liquidity and higher profitability.
Internationally comparative studies of financial characteristics of SMEs
In addition to comparative studies of financial characteristics as indicated above, a review

of literature also provides many international comparisons of financial characteristics of
SMEs. McMahon et al. (1993) provides the best review of these international
comparisons based on the study conducted by Tamari (1980). From Tamari’s (1980)
analysis, levels of equity, measured either as a percentage of total funds or as a
percentage of long-term finance, are very similar for USA and UK small enterprises
which are, in turn, very much higher than those for Japanese and French small
enterprises, with Israeli small enterprises being in between.
Meric and Meric (1994) compared the overall financial characteristics of 562
USA and Japanese firms from 28 different industries. However, their study did not
compare financial characteristics of USA and Japanese firms in an individual industry.
Meric and Meric (1997) followed with a comparison of financial characteristics of
Japanese chemical firms and those of the USA chemical firms by using ten well-known
financial ratios (Table 3.37)
Table 3.37: Financial ratios used in the study of Meric and Meric (1997)
Operating profit margin = Operating profit/Sales
Total assets turnover = Sales/Total assets
Return on assets = Net income/Total assets
Return on equity = Net income/Common equity
Fixed charge coverage = Income before fixed charges/Fixed charges
Common equity ratio = Common equity/Total assets
Long-term debt ratio = Long-term debt/Total capital
Current ratio = Current assets/Current liabilities
Quick ratio = (Current assets – Inventory)/Current liabilities
Inventory turnover = Cost of goods sold/Inventory
Source: Adapted from Meric and Meric (1997)
117
By using the multivariate analysis of variance method to compare financial

characteristics of Japanese chemical firms, and USA chemical firms, Meric and Meric
(1997) found that the overall financial characteristics of these two groups are
significantly different. Particularly, the differences in financial characteristics of two
groups of firms included:
• All profitability ratios were higher in USA chemical firms compared with
Japanese chemical firms.
• Japanese firms were able to use a significantly higher level of financial leverage
compared with USA firms to boost their return on equity.
• The liquidity level as measured by the quick ratio was not significantly different
for USA and Japanese chemical firms; however, the current ratio was
significantly higher for USA chemical firms than for Japanese chemical firms.
• The inventory turnover ratio was also significantly lower for USA chemical firms
than for Japanese chemical firms.
Another international comparison of financial characteristics was a financial comparison

between Korean and USA firms provided by Van Auken, Doran and Yoon (1993). By
using canonical correlation analysis, they found the differences in financial
characteristics between Korean and USA firms to be as follows:
• The Korean firms were shown to have greater relative level of cash and fixed
assets and small levels of inventory than USA small and large firms.
• Korean firms were less liquid compared to USA businesses. A comparison of the
current and quick ratios of two groups is given in Table 3.38.
• Another difference between Korean and USA businesses was that Korean
businesses depend heavily on the use of current debt.
Table 3.38: Comparison of liquid ratios between Korean and USA firms
Korean firms USA firms
Small Large
Current ratio 0.70 1.70 2.00
Quick ratio 0.47 0.52 1.00
Source: Adapted from Van Auken, Doran and Yoon (1993)
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3.5.3.3 Findings of impact of financial characteristics on performance
Subsection 3.5.3.1 provided a review of the factors influencing financial characteristics of

SMEs. Subsection 3.5.3.3 reviews the findings related to the impact of financial
characteristics on SME performance. Unfortunately, studies on these effects are few in
the literature. While there is much research on factors affecting financial characteristics
and many comparative studies of financial characteristics of SMEs, it appears there is
little research on the impact of financial characteristics on SME profitability. This is a
gap in previous studies, which needs to be met by this research.
3.6 SME PROFITABILITY
Sections 4 and 5 review the literature of financial management practices and financial
characteristics of SMEs, two of three main issues in this research. Section 3.6 reviews the
literature on profitability of SMEs. This section is structured into three subsections.
Subsection 3.6.1 examines the importance of profitability to survival and development of
SMEs. Subsection 3.6.2 reviews measures of profitability. Lastly, subsection 3.6.3
analyses factors influencing SME profitability.
3.6.1 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 (McMahon, 1995).
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.
Due to the importance of profitability, Edmister (1970) among other researchers
have suggested that small firms need to concentrate on profitability. Jen (1963) found
profitability to be a significant determinant of a small firm’s credit risk. Thomas and
Evanson (1987) stress the aim of a business is not only the generation of sales, but also
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generation of profits. Profit is especially important because it is necessary for the survival
of a business. Low profitability contributes to under-capitalization problems because it
leads to fewer dollars as retained earnings and therefore to a reliance on external capital
(Davidson and Dutia, 1991).
3.6.2 Defining and measuring profitability
One of the most difficult attributes of a firm to conceptualize and measure is profitability
(Ross, Westerfield and Jaffe, 1999). 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. In their text, Ross et al. (1999) suggest some methods to measure
profitability including profit margin or return on sales, return on assets, and return on
equity.
• 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.
Cohen (1989) stated measures of profitability are essential in any business. In his text, he
indicated many different ratios to measure profitability of the business. They included
asset-earning power, return on the owner’s equity, net profit on sales, and return on
investment.
• Asset earning power is determined by the ratio of earnings before interest and tax
to total assets. It indicates how much operating profit each dollar of total assets
earns.
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• Return on the owner’s equity is computed by dividing net profit by average

equity, and shows return that the business received in exchange for investment.
• Net profit on sales is determined by the ratio between net profit and net sales, and
measures the difference between what the business takes in and what it spends in
the process of doing business.
• Return on investment is simply computed by dividing net profit by total assets.
This measure is very useful for measuring profitability. There are several different
ways of calculating return on investment depending upon the purpose of measure:
1. A measure of earning power in operating efficiency (Cohen, 1989)
Rate of earning on total Net income + Interest + Tax

capital employed =
Total liabilities and capital
2. A measure of earning power of the borrowed invested capital (Cohen, 1989)
Rate of earnings on Net income + Income taxes

invested capital =
Proprietary equity and fixed liabilities
3. A measure of the yield on the power’s investment (Cohen, 1989)
Rate of earnings on Net income

proprietary capital =
Total capital including surplus reserves
4. A measure of the attractiveness of common stock as a source of income

(Cohen, 1989)
Rate of earnings on Net income

stock equity =
Stock equity
5. To indicate the desirability of common stock as a source of income (Cohen,

1989)
Rate of dividends on Common stock dividends

common stock equity =
Common stock equity
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6. A measure of the current yield on investment in a particular stock (Cohen,

1989)
Rate of dividends on Common stock dividends per share

common stock equity =
Market value per share of common stock
Some researchers, who have studied financial characteristics of SMEs, also mentioned
measuring profitability. For example, Burns (1985) used three ratios: return on total
assets, return on net assets and return on equity to measures SME profitability while
Hutchinson, Meric and Meric (1988) measured profitability by the following ratios: net
profit after tax/sales, earnings before interest and tax/total assets, and net profit after
tax/owners’ equity.
Altman (1968), in a study of financial ratios, discriminant analysis and the
prediction of corporate failure, measured profitability by two ratios: retained
earnings/total assets (RE/TA) and earning before interest and taxes/total assets
(EBIT/TA). According to Altman (1968), retained earnings to total asset ratio is the
measure of cumulative profitability over time and the age of a firm is implicitly
considered in this ratio. A relatively young firm will probably show a low RE/TA ratio
because it had not had time to build up its cumulative profits. EBIT/TA ratio is calculated
by dividing the total assets of a firm into its earning before interest and tax reductions. In
essence, it is a measure of the true productivity of the firm’s assets, abstracting from any
tax or leverage factors.
In summary, previous researchers in the literature have used several different
ratios to measure profitability of SMEs depending on their research purposes. Table 3.39
(page 123) summarizes the ratios used by previous researchers to measure profitability of
SMEs. Of the ratios summarized in table 3.39 (page 123), three ratios: return on sales,
return on assets and return on equity are the most popularly used as the measurement of
SME profitability.
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Table 3.39: Summary of measurement of SME profitability

Researcher(s) and year Ratio Measurement or computation
Return on total assets Measure of firm’s efficient use of assets
Burns (1985) Return on net asset The key measure of performance
Return on equity A measure of the profit return to the
shareholders
Hutchinson, Return on sales Net profit after tax/Sales
Meric and Meric (1988) Return on assets Earnings before interest and tax/Total
assets
Return on equity Net profit after tax/Owners’ equity
Jaggi and
Considine (1990) Return on assets Operating profit/Total assets
Laitinen (1992) Return on investment Return on investment ratio
Meric et al. (1997) Return on sales Operating profit/Sales
Return on assets Net income/Total assets
Return on equity Net income/Common equity
3.6.3 Factors influencing 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 characteristics.
Based on the profitability measures presented by Westerfield and Jaffe (1999) and
by Cohen (1989), 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.
When analyzing factors affecting profitability, Burns (1985) found that
profitability could be affected by many different economic factors. Lev (1983) found that
variability of profit measures over time is affected by type of product, degree of
competition, degree of capital intensity as well as firm size. The effect of size on SME
profitability was also discussed by Gupta (1969), Whittington (1971), Bates (1971),
Walker and Petty (1978), Tamari (1980), and Storey et al. (1987).
Kirchhoff and Kirchhoff (1987) examined family contributions to productivity
and profitability in small businesses. The evidence showed that family members are more
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productive than other employees. However, in his study family member’s productivity
did not increase profitability. Results showed the opposite, as paid family labor increases,
profitability decreases. As family member participation increases, wage and salary
expense increase as a percentage of revenue, thereby causing profit as a percentage of
sales to decline.
McDonald (1999) provided new evidence on the determinants of profitability of
Australian manufacturing firms by analyzing an unique firm level data-set of firm
performance over the period 1984 – 93. Determinants of firm profitability were found to
be generally consistent with previous Australian industry-level results and overseas
studies. Firm profitability was found to be negatively affected by union density and by
import penetration, and positively affected by industry concentration. In addition, there
was a strong degree of persistence in firm profit margins over time. Real wage inflation
was negatively related to profit margins, which suggests that firms do not immediately
pass on increases in real wages by raising current prices. Firm market share was generally
not found to be a significant determinant of profit margins, although this result is
sensitive to the econometric method used.
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 Eisemann (1997), 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) (Eq. 6.1)
Net income/equity = (Net income/sales) x (Sales/assets) x (Assets/equity) (Eq. 6.2)
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:
124
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 (Eisemann,
1997). 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.
Each of these three branches in turn further divides to include more ratios, as illustrated
by the figure 3.6.
Figure 3.6: Financial ratios linked to return on equity
Return on equity
Profit margin Asset turnover Asset/equity
− −
− −
Gross margin Accounts receivable
− − −
Operating expense days Debt/equity
− −
Interest Inventory days Coverage
Taxes Fixed-asset turnover
Source: Adapted from DuPont analysis (Eisemann, 1997)
Figure 3.6 provides a quick insight into factors affecting SME profitability
including gross margin, operating expenses, interest, taxes, accounts receivable days,
inventory days, fixed-asset turnover, leverage and coverage. From the equation 6.1, it
appears that as leverage increases, ROE will also rise. The problem with this thinking is
that another effect of an increase in leverage is larger interest expense, which, in turn,
causes a decrease in the profit margin and ROE. Thus leverage spreads its effects over
two ratios, making it hard to disentangle the impact of leverage and operations.
Moreover, profit margin is not really an accurate measure of operations, since it
combines operations with financial leverage.
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. 6.3).
125
Net income/equity = (operating income/sales) x (EBT/operating income) x

(Net income/EBT) x (sales/assets) x (assets/equity) (Eq.6.3)
Equation 6.3 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.
3.7 RELATIONSHIPS BETWEEN FINANCIAL MANAGEMENT AND SME

PROFITABILITY
This section reviews the relationships between financial management and SME
profitability based on the literature by reviewing findings that were investigated by
previous researchers. Unfortunately, these findings are not clear because most previous
researchers only focus on examining and describing financial management practices and
financial characteristics but do not focus on examining the impact of financial
management practices on SME profitability. Concerned with the relationships between
working capital management practices and SME profitability, only Burns and Walker
(1991) provide some relevant findings as follows:
• profitable firms reviewed their working capital policies on monthly and quarterly
bases
• profitable firms used an ROI (return on investment) criterion in looking at
changes in the management of certain working capital components
126
• profitable firms always or sometimes take discounts on payables whereas

aggressive firms and those with written working capital policies were net users of
trade credit.
Some theoretical researchers do indicate the relationships between financial management

and profitability. For example, Van Horne (1986, p. 145) indicated the relationship
between liquidity and profitability:
The greater the relative proportion of liquid assets, the less risk of running out of
cash… profitability unfortunately, also will be less … resolution of the trade-off
between risk and profitability with respect to these decisions depends upon the
risk preferences of management.
According to Van Horne (1986), if the firm maintains a relatively large proportion of
liquid assets, its profitability probably will decrease.
Regarding the relationship between financial leverage and profitability, Edwards
and Cooley (1979) indicated that the effects of financial leverage on returns available to
equity holders are typically analysed in either one of two contexts. In many financial
management books, financial leverage is examined in a net-operating-income (NOI) or
equivalent context for its effects on rates of return available to stockholders. In the
literature of real estate finance, the effects of leverage on equity return are evaluated in a
cash flow (CF) context. In both settings, the evaluation of leverage effect reduces to a
convenient rule exemplified by the following statement (Edward and Cooley, 1979):
In general, whenever the return on assets exceeds the cost of debt, leverage is
favourable, and the higher leverage factor, the higher the rate of return on
common equity.
The statements mentioned above should be tested by the empirical data. In doing so, this
research will contribute to filling a gap and building up a model of the impact of financial
management on SME profitability. The next section will consider the possibility of such a
model.
127
3.8 MODEL OF THE IMPACT OF FINANCIAL MANAGEMENT ON SME

PROFITABILITY
Based on the literature, this research chapter was seeking to provide an overview of the
findings of financial management practices, financial characteristics and SME
profitability.
Related to financial management practices, most previous researchers from the
literature concentrated on examining, investigating and describing the behaviour of SMEs
in implementing financial management. The specific areas of financial management
practices including accounting information system, financial reporting and analysis,
working capital management, fixed asset management and capital structure management
have attracted the attention of many researchers. Their findings are mainly related to
exploring and describing behaviour of SMEs in financial management practices.
Although they provided much descriptive statistical data and empirical evidence on SME
financial management practices, it appears that there are some limitations in past
research, which need to be addressed.
• 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 and China.
• 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 characteristics of SMEs. Four variables including
128
liquidity, financial leverage, activity and profitability are popularly used by previous
researchers to identify and measure financial characteristics of SMEs.
Many studies on financial characteristics of SMEs have been conducted by
researchers over several decades. Subsection 3.5.3.2 (page 114) concerned with the
comparative studies of SME financial characteristics indicated that most researchers
focused on examining whether or not there exist differences in financial characteristics
between different groups of SMEs. However, there still exist gaps in the literature on
financial characteristics of SMEs, which need to be examined.
• Firstly, it appears that financial characteristics of SMEs in developing countries,

especially in the transiting economies such Vietnam and China have 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.
As such, the lack of empirical evidence from the emerging economies and the absence of
examination of the impact of financial management practices and financial characteristics
on SME profitability, are gaps that this review found from the literature. Based on these
findings provided by previous researchers and these gaps, a model of the impact of
financial management on SME is developed. Such a model is presented in Figures 3.7
(page 130). The model needs to be tested by the empirical data and this will be
demonstrated in chapters 4 and 5.
Figure 3.7 (a) describes the general model of the simultaneous impact of financial
management including the impact of financial management practices and the impact of
financial characteristics on SME profitability. Figure 3.7 (b) describes the detailed model
of the impact of financial management practices on SME profitability in which the
components measuring financial management practices such as accounting information
system, financial reporting and analysis, working capital management, fixed asset
management, capital structure management and financial planning, and components
measuring financial characteristics such as liquidity, financial leverage, and business
activity are identified.
129
Figure 3.7: Model of the impact of financial management on SME profitability
Financial
management
practices
Financial SME
management profitability
Financial
characteristic
a) General model
•
•
Accounting information system
•
•
•
•
Capital structure management
Financial planning
Efficient SME profitability:
•
financial
•
management Return on sales
•
Return on assets
Return on equity
Financial characteristics:
•
•
Liquidity ratios
•
Financial leverage ratios
Activity ratios
b) Detailed model
Source: Developed for this study
130
3.9 CONCLUSIONS
As indicated in the introduction, the objectives of this chapter were to review the
literature, find gaps and build a model of the impact of financial management on SME
profitability based on this review. These objectives could not be separated as different
activities, and all are fulfilled when a model of the impact of financial management on
SME profitability was created (Figure 3.7, page 130).
Sections 3.2, 3.3, 3.4, 3.5 and 3.6 respectively reviewed literature on definitions
of SMEs, definition of financial management, financial management practices, financial
characteristics, and profitability of SMEs. Generally, previous researchers provided
valuable and detailed insights into financial management, financial management practices
and financial characteristics. However, it appears that no investigation has been
undertaken of the relationship between financial management including financial
management practices and financial characteristics, especially the simultaneous impact of
many variables such as accounting information system, financial reporting and analysis,
working capital management, fixed asset management, financial planning practices,
liquidity, financial leverage and activity ratios on SME profitability.
Finally in this chapter, a model of the impact of financial management on SME
profitability was developed. This model indicates that the objectives of this chapter have
been satisfied. Collecting data for testing the model will be examined in chapter 4, which
is designed to discuss aspects of research methodology, while chapter 5 will present the
results of data analysis applied in this study.
131
Chapter Four:
Research Methodology
4.1 INTRODUCTION
Chapter 3 reviewed relevant literature on financial management practices, financial

characteristics, SME profitability and the relationships between financial management
practices and SME profitability. At the end of chapter 3, a model of the impact of
financial management practices and financial characteristics on SME profitability was
created based on the literature. Chapter 4 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 eight
sections.
Section 4.1 generally introduces the chapter including the main contents,
objectives and structure of the chapter. Section 4.2 provides a brief review of research
methods used by prior researchers. The objective of this section is to justify the research
methodology applied in this study. Section 4.3 discusses and explains how the research
design can be appropriately utilized in this study to answer the research questions.
Section 4.4 concentrates on defining and measuring the variables, and developing the
model, which will be tested by empirical data. Section 4.5, 4.6 and 4.7 respectively
present methods of data collection, data transformation, and data analysis, which will be
conducted in chapter 5 of the study. Finally, section 4.8 summarizes the conclusions
drawn from the chapter and Figure 4.1 (page 133) provides a visual picture of the chapter
outline and the links among sections as indicated earlier.
Chapter Four: Research Methodology
4.1 Introduction
4.2 Appraisal of prior research methodologies
4.3 Research design
4.4 Variable definition, survey 4.5 Data collection methods

instrument and model development
4.6 Raw data transformation methods
4.7 Data analysis methods
4.8 Conclusions
Source: Developed for this thesis
133
4.2 APPRAISAL OF PRIOR RESEARCH METHODOLOGIES
The purpose of this section is to provide an initial appraisal of prior SME research
undertaken internationally from a methodological viewpoint. Reviews and surveys of
SME research related to financial management practices and financial characteristics,
which has been reflected in this and earlier chapters, include those of D’Amboise and
Gasse (1980), Raymond and Magnenat-Thalmann (1982), Cheney (1983), Raymond
(1985), DeThomas and Fredenberger (1985), and Farhoodman and Hryck (1985), Corner
(1967), Murphy (1978 and 1979), Lovett (1980), Arnold-McCulloch and Lewis (1985,
1986) and Gorton (1996) Peacock (1985, 1987, and 1988), Williams (1986, 1987),
Holmes (1987) and Holmes and Nicholls (1988), Luoma (1967), Lindecamp and Rice
(1983), Thomas and Evanson (1987), Ray and Hutchinson (1983), Hankinson (1982,
1983), McMahon and Davies (1994), McMahon (1998, 1999), Grablowsky (1978),
Grablowsky and Rowell (1980), Cooley and Pullen (1979), Anvari and Gopal (1983),
Khoury, Smith and MacKay (1999), Peel and Wilson (1996), Soldofsky (1964), Scott et
al. (1972), Grablowsky and Burns (1980), Pattillo (1981), Block (1997), Corner (1967),
Taylor Nelson Investment Services (1970), Stevens (1973), Burns (1985), Hutchinson,
Meric and Meric (1988), Jaggi and Considine (1990), Davidson and Dutia (1991),
Laitinen (1992), Hutchinson and Mengersen (1993), McMahon et al. (1993), and Meric et
al. (1997).
In methodology, studies and surveys conducted by previous researchers have the
features drawn from the review of literature in chapter 3 as follows:
1. Examining the variables of financial management practices including accounting

information system, financial reporting and analysis, working capital
management, fixed-asset management, and capital structure management was
often conducted in separate studies. While prior studies provide interesting
insights into each separate aspect of financial management practices, very few
attempts have been made to link all variables to performance. As a result, the
simultaneous impact of many variables (accounting information system, financial
reporting and analysis, working capital management, fixed asset management,
134
capital structure management and financial planning) on SME profitability have

not been examined and investigated.
2. These studies and surveys provided largely descriptive but little evidence. For
example, regarding financial reporting and analysis, the Bureau of Economic and
Business Research (1961) of Temple University, Philadelphia, was the first to
study the use of financial ratios in small businesses. Unfortunately, this Bureau
report was largely descriptive and provided very little associative evidence. In
other research, Ray and Hutchinson (1983) investigated financial reporting and
analysis practices in small growth enterprises but the provision of historical
financial reports did not differ markedly between growth enterprises and a
matched sample of non-growth enterprises. However, there was a tendency
towards more frequent financial reporting as growth enterprises developed and
became public companies. Thomas and Evanson (1987) examined possible
associations between financial reporting and analysis practices and performance
characteristics. The results of a study of 398 small pharmacies located in
Michigan, North Carolina, Nebraska, Rhode Island, and Washington revealed that
there was no significant difference in frequency of obtaining financial statements
between continuing enterprises, those which eventually closed, and those which
changed hands. Using regression analysis, Thomas and Evanson (1987) were
unable to demonstrate a significant association between the number and frequency
of use of financial ratios and enterprise profitability or survival. They
hypothesized that this may have been due to a lack of sophistication in financial
interpretation that prevented usage from making a discernible difference to
performance.
3. Previous research focused on examining performance of SMEs in general without
any emphasis on SME profitability whereas profitability is the final and survival
goal of the business. Peel and Wilson (1996) found that increasing profitability
was ranked higher than other objectives such as increasing sales growth or
increasing employment.
4. Regarding financial characteristics of SMEs, previous researchers only
emphasized differences in financial characteristics between groups of SMEs by
135
conducting comparative studies but did not consider the impact of financial
characteristics on SME performance in general and SME profitability in
particular.
In terms of methodology, McMahon (1998) summarized criticism of the most significant

methodological problems identified in published reviews and surveys of prior SME
research as follows:
• too much focus on exploratory research

• a narrow focus with reliance on a single paradigm or disciplinary frameworks and
insufficient learning from other fields in terms of both content and process
• too many cross-sectional surveys, and far too few longitudinal and field research
studies
• use of small and/or non-representative and/or poorly selected samples
• reliance on data from surveys with poor response rates, and failure to adequately
test for response and non-response bias – thus creating serious misgivings about
the external validity or generalization ability of findings
• poor reporting of definitions used, sampling frames and samples employed, and
other methodological details – so that it becomes difficult to validly compare
research findings and/or replicate them
• reporting with largely descriptive but statistically simplistic and with limited use
of more sophisticated techniques of statistical analysis, and widespread disregard
for the circumstances in which particular forms of analysis may be validly
employed.
In this study, the limitations, as indicated earlier, in terms of research methodology will
be overcome by selecting research designs, incorporating variable definitions and
measurements, developing models, and using appropriate data collection and analysis
methods. These will be examined in the next sections.
136
4.3 RESEARCH DESIGN
This section, firstly, examines the types of business research in terms of classification,
purpose and technique and then, explains how the research design is selected as most
appropriate for the study. Many definitions of “research design” have been advanced, but
no one definition imparts the full range of important aspects (Emory, 1985). Emory
(1985) did not define but reviewed a definition of research design from Kerlinger (1973):
Research design is the plan, structure, and strategy of investigation conceived so

as to obtain answers to research questions and to control variance. The plan is the
overall scheme or program of research. It includes an outline of what the
investigator 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
• 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
• 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
• Exploratory research – to develop hypotheses or questions for

Classification criteria Types of research designs
Degree of problem
crystallization
• Formal research *– to test the hypotheses or answer the research
further research
• Observation – The researcher monitors and records information

questions posed
The method of data
collection
• Survey *– The researcher interrogates subjects and collects their
about subjects without questioning them.
• Experimental design – The researcher attempts to control or

responses.
Researcher’s control of
variables
• Ex post facto design *– Investigators have no control over the
manipulate the variables in the study.
• Descriptive research *– concerned with answering who, what, where,

variables in sense of being able to manipulate them.
The purpose of the
study
• Casual research *– concerned with learning why, i.e., how one
when or how much questions
• Cross-sectional research* – carried out once

variable affects another
The time dimension
• Longitudinal research – repeated and studied changes over time
The topical scope • Statistical study* – emphasis on breadth of coverage and interested
• Case study – emphasis on the detailed analysis a limited number of

in the frequency of certain characteristics or instances
• Field study*
events or conditions and their relationships
The research
environment • Laboratory study
Source: Adapted from Emory (1985)
(*) Selected for this research
139
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?
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
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
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
Table 4.2: Summary of advantages and disadvantages of the most typical surveys
Personal interview Telephone Mail survey
interview
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 Excellent Good Moderate
cooperation
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 Lowest Average Highest
respondents
misunderstood
Degree of interview High Moderate None
influence on answer
Supervision of Moderate High Not applicable
interviewers
Anonymity of Low Moderate High
respondent
Ease of call-back or Difficult Easy Easy, but take time
follow-up
Cost Highest Low to Lowest
moderate
Special features Visual materials may Simplified field- Respondent may answer
be shown or work and questions at own convenience;
demonstrated, supervision of has time to reflect on answer
extended; probing data collection
possible
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
• 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.
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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.
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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
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
Figure 4.2: Survey instrument for measuring accounting information system

Low regard High regard
1. How does your business regard its accounting information 1 2 3 4 5 6 7 8 9
system?
Not frequent at all Very frequent
2. How frequent does your business prepare its accounting 1 2 3 4 5 6 7 8 9
reports?
Not updated at all Very updated
3. How does accounting information system in your business 1 2 3 4 5 6 7 8 9
update the business transactions?
Low involvement High
involvement
4. What is the owner/manager involved in preparing accounting 1 2 3 4 5 6 7 8 9
information?
Low involvement High
involvement
5. What is the owner/manager involved in interpreting and using 1 2 3 4 5 6 7 8 9
accounting information?
Very unacceptable Very acceptable
6. How acceptable is your business’s accounting information 1 2 3 4 5 6 7 8 9
system?
Not useful at all Very useful
7. How useful is your business’s accounting information in 1 2 3 4 5 6 7 8 9
making decisions?
Low High
Computerization computerization
8. How computerized is your business’s accounting information 1 2 3 4 5 6 7 8 9
system?
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.
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
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
particular financial statements (balance sheet, profit and loss statement, funds statement,
cash-flow statement and other statements; Yes = 1, No = 0). The simple financial index
was the sum of the values of these variables, which had a possible range of 0 to 5. Their
study also employed a further historical financial reporting index, based on responses to
the second question presented earlier, asking for the usual frequency of preparation
(annually, semi-annually, quarterly, monthly, weekly, daily, and never) of historical
financial reports. Taken as a whole, responses reflected the perceived financial
information needs of participation of small enterprises from the experienced viewpoint of
their owner-managers. The starting point was 35 dichotomous variables – five financial
reports by seven reporting frequencies – indicating the preparation of particular historical
reports and their frequency of preparation (for each report and frequency combination,
Yes = 1, No = 0).
Unlike McMahon and Davie (1994) study, this study emphasized efficiency of
financial reporting and analysis practices rather than context. The efficiency of financial
reporting and analysis practices was measured by the following indicators:
149
• attitude of owner/manager to financial reporting and analysis

• frequency of financial statement preparation
• owner/manager involvement in preparing financial statements
• owner/manager involvement in the interpretation and use of financial statements
• usefulness of financial statements in managing financial position of the business
• frequency of financial statement analysis
• number of financial ratios (current ratios, debt ratios, activity ratios and
profitability ratios) used for financial statement analysis
• computerization of financial reporting and analysis practices.
Respondents were asked to rate the position of their businesses on nine-point scales
corresponding to each item as listed by Figure 4.3.
Figure 4.3: Survey instrument for measuring financial reporting and analysis
1. How does your business regard financial reporting and 1 2 3 4 5 6 7 8 9
analysis?
2. How frequent does your business prepare financial 1 2 3 4 5 6 7 8 9
statements (balance sheet, income statements, statements
of cash flows)?
Low involvement High involvement
3. How involved is the owner/manager in preparing 1 2 3 4 5 6 7 8 9
financial statements?
4. How involved the owner/manager in interpreting and 1 2 3 4 5 6 7 8 9
using financial statements?
5. How useful are the financial statements of your business 1 2 3 4 5 6 7 8 9
in providing information for making decisions?
6. How frequent does your business analyze financial 1 2 3 4 5 6 7 8 9
statements (balance sheet, income statements, statements
of cash flows)?
7. How useful are financial ratios applied in financial 1 2 3 4 5 6 7 8 9
analysis of your business?
Low High
computerization computerization
8. How computerized are the financial reporting and 1 2 3 4 5 6 7 8 9
analysis practices in your business?
150
The extent of efficiency of financial reporting and analysis was measured by the
sum of values of eight of indicators as presented in Figure 4.3. This sum had a possible
range from 8 to 72 points, and the more points a business recorded, the higher its
efficiency of financial reporting and analysis. The financial reporting and analysis
practices of a business were said to be “efficient” if the sum of points is greater than the
average point of 40. Conversely, if the sum of points is less than the average point of 40,
the business was said to be “inefficient” in practising financial report and analysis.
Firstly, components of working capital management are clarified. Most researchers, for
example, Burns and Walker (1991), Belt and Smith (1992), Khoury, Smith, and MacKay
(1999) agreed that working capital management includes three components: cash
management, receivable management, and inventory management.
a) Cash management practices
In their survey, Cooley and Pullen (1979) 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. Anvari and Gopal (1983) 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. Burns and Walker (1991)
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.
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. The extent of efficiency of cash management practices was measured by the
following indicators:
151
• 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
Respondents were asked to rate the position of their businesses on the nine-point scale
corresponding to each item as presented by Figure 4.4.
Figure 4.4: Survey instrument for measuring cash management practices

1. How does your business regard its cash 1 2 3 4 5 6 7 8 9
management practices?
2. How frequent does your business prepare its cash 1 2 3 4 5 6 7 8 9
budgets?
3. How involved is the owner/manager in preparing 1 2 3 4 5 6 7 8 9
cash budgets?
4. How involved is the owner/manager in interpreting 1 2 3 4 5 6 7 8 9
and using cash budgets?
5. How useful are cash budgets of your business in 1 2 3 4 5 6 7 8 9
providing information for making decisions?
Very poorly Very well
6. How does your business apply theories of cash 1 2 3 4 5 6 7 8 9
management in determining the target cash balance?
7. How acceptable is the target cash balance 1 2 3 4 5 6 7 8 9
determined in your business?
Low High
8. How computerized are cash management practices 1 2 3 4 5 6 7 8 9
in your business?
152
The extent of efficiency of cash management practices was measured by the sum
of values of eight indicators, which had a possible range from 8 to 72 and are measured
by the survey instrument as designed in Figure 4.4. The more points a business recorded
the higher its efficiency of cash management practices, and the cash management
practices of a business were said to be “efficient”, if the sum of points is greater than the
average point of 40. Conversely, if the sum of points is less than the average point of 40,
the business was said to be “inefficient” in practising cash management practices.
b) Receivable management practices
Peel and Wilson (1996) examined the working capital management and capital budgeting
practices of a sample of small firms based in the North of England. 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.
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 nine-point scales (1 = never review/very unacceptable, to 9 = very often/ very
acceptable) the frequency of review and extent of acceptability of 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
• utilizing receivable management theories
153
• computerization of receivable management
Respondents were asked to rate the position of their businesses on the nine-point scale
corresponding to each item listed by Figure 4.5 and the interviewer circled the
appropriate number depending on their answers.
Figure 4.5: Survey instrument for measuring receivable management practices

1. How does your business regard receivables 1 2 3 4 5 6 7 8 9
Not regularly at all Very regularly
2. How regularly does your business review debtors’ 1 2 3 4 5 6 7 8 9
credit period?
Not reasonable at all Very reasonable
3. How reasonable is debtors’ credit period in your 1 2 3 4 5 6 7 8 9
business?
Not regular at all Very regular
4. How regular does your business review debtors’ 1 2 3 4 5 6 7 8 9
discount policy?
5. How reasonable is debtors’ discount policy in your 1 2 3 4 5 6 7 8 9
business
6. How regular does your business review percentage of 1 2 3 4 5 6 7 8 9
bad debts?
7. How reasonable is the percentage of bad debts in 1 2 3 4 5 6 7 8 9
your business
8. How frequent does your business implement theories 1 2 3 4 5 6 7 8 9
of receivables management?
Low High
9. How computerized are receivable management 1 2 3 4 5 6 7 8 9
practices in your business?
The extent of efficiency of receivable management practices was measured by the

sum of values of nine of indicators as described in Figure 4.5. This sum had a possible
range from 9 to 81 and the more points a business recorded, the higher its efficiency of
receivable management practices. Receivable management practices of a business were
said to be “efficient” if the sum of points was greater than the average points of 45 (9 x 5
point average) and conversely.
154
c) Inventory management practices
In examining inventory management practices, Peel and Wilson (1996) 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 Peel and Wilson (1996), 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
Respondents were asked to answer the questions listed in Figure 4.6 (page 156) and
based on their ratings the interviewer circled the appropriate number on the scale
corresponding to each item.
The extent of efficiency of inventory management was measured by the sum of
values of eight indicators designed as in Figure 4.6. This sum had a possible range from 8
to 72 and the more points a business recorded, the higher its efficiency of inventory
In this way, inventory management practices of a business were said to be
“efficient” if its sum of points is greater than the average point of 40. Conversely, if its
sum of points was lower than the average point, the business was said to be “not
efficient” or “inefficient” in practising inventory management.
155
Figure 4.6: Survey instrument for measuring inventory management practices

1. How does your business regard inventory 1 2 3 4 5 6 7 8 9
2. How regularly does your business review inventory 1 2 3 4 5 6 7 8 9
turnover?
3. How regularly does your business review inventory 1 2 3 4 5 6 7 8 9
level?
Very slow Very fast
4. How fast is inventory turnover of your business? 1 2 3 4 5 6 7 8 9
5. How acceptable is inventory level of your business? 1 2 3 4 5 6 7 8 9
6. How are inventory budgets of your business useful 1 2 3 4 5 6 7 8 9
in providing information for making decisions?
7. How does your business apply theories of inventory 1 2 3 4 5 6 7 8 9
management in determining the inventory level?
Low High
8. How computerized are inventory management 1 2 3 4 5 6 7 8 9
Fixed-asset management practices
McMahon (1998) 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 nine-point scales:
156
• 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.
Respondents were asked to rate the position of their businesses on the scale
corresponding to each item listed by Figure 4.7.
Figure 4.7: Survey instrument for measuring fixed asset management

1. How does your business regard fixed asset management 1 2 3 4 5 6 7 8 9
practices?
2. How does your business regard assessing capital project 1 2 3 4 5 6 7 8 9
before making investment decisions?
3. How regularly does your business review capital projects? 1 2 3 4 5 6 7 8 9
4. How acceptable is capital budgeting utilized in your 1 2 3 4 5 6 7 8 9
business?
Not advanced at all Very advanced
5. How advanced does your business apply techniques of 1 2 3 4 5 6 7 8 9
capital budgeting in determining capital investment projects?
Very unreasonable Very reasonable
6. How reasonable are fixed assets of your business utilized? 1 2 3 4 5 6 7 8 9
7. How useful are fixed assets acquired in your business? 1 2 3 4 5 6 7 8 9
Low High
8. How computerized are fixed asset management practices 1 2 3 4 5 6 7 8 9
in your business?
157
The extent of efficiency of fixed asset management was measured by the sum of
values of eight indicators designed as in Figure 4.7 (page 157). This sum had a possible
range from 8 to 72 and the more points a business recorded, the higher its efficiency of
fixed asset management practices. Fixed asset management practices of a business were
said to be “efficient” if its sum of points was greater than the average point of 40.
Conversely, if its sum of points is not greater than the average point, the business was
said to be not efficient or inefficient in fixed asset management practices.
McMahon (1998) examined financial planning and control including financial objectives
and targets, cost-volume-profit analysis, pricing, financial budgeting and control, and
managerial responsibility centers. These were the main contexts of financial planning.
The current study was concerned with not only the context but also efficiency of financial
planning practices. The efficiency of financial planning was defined as its quality and
benefit and measured by the following indicators on nine-point scales:
• attitude of owner/manager to financial planning

• frequency of preparing master budgets
• involvement of owner/manager in preparing master budgets
• involvement of owner/manager in interpreting and using master budgets
• usefulness of master budgets in providing information for making decisions
• frequency of comparing budgeted and actual results
• reasonability of financial planning techniques applied in financial analysis
• computerization of financial planning.
Respondents were asked to rate the position of their businesses on the scale
corresponding to each item as designed in Figure 4.8 (page 159). The extent of efficiency
of financial planning practices was measured by the sum of values of eight indicators
designed as in Figure 4.8. This sum had a possible range from 8 to 72, and the more
points a business obtained, the higher its efficiency of financial planning practices.
158
Financial planning practices of a business were said to be “efficient” if its sum of points
was greater than the average point of 40 and conversely.
Figure 4.8: Survey instrument for measuring financial planning

1. How does your business regard financial planning? 1 2 3 4 5 6 7 8 9
2. How regularly does your business prepare its financial 1 2 3 4 5 6 7 8 9
budgets?
3. How involved is the owner/manager in preparing financial 1 2 3 4 5 6 7 8 9
budgets?
4. How involved is the owner/manager in interpreting and 1 2 3 4 5 6 7 8 9
using financial budgets?
5. How useful are the financial budgets of your business 1 2 3 4 5 6 7 8 9
useful in providing information for making decisions?
6. How regularly does your business compare between actual 1 2 3 4 5 6 7 8 9
and budgeted results?
7. How reasonable are financial planning techniques applied 1 2 3 4 5 6 7 8 9
in financial analysis of your business?
Low High
8. How computerized are the financial reporting and analysis 1 2 3 4 5 6 7 8 9
Based on the measurements of each component of financial management practices

as indicated earlier, the efficiency of financial management practices of SMEs was
measured by 57 items consisting of 8 items of accounting information system, 8 items of
financial reporting and analysis, 8 items of cash management practices, 9 items of
receivable management practices, 8 items of inventory management practices, 8 items of
fixed asset management practices, and 8 items of financial planning practices. These
components were strongly correlated. To avoid multicollinearity phenomena, factor
analysis was applied to extract the strongly correlated items and group them into the main
components, which were finally used as independent variables that defined the efficiency
of financial management practices in the regression model.
159
2. Independent variable related to financial characteristics
Current ratio (CUR)
Liquidity refers to the overall level of cash and near cash assets (such as debtors and
stock) held and to cash inflows and outflows that add to and subtract from the sum of
these assets (McMahon and Stanger, 1995, p.24). When used for determining the
financial characteristics, liquidity is often measured in the form of ratios. Two kinds of
ratios: current ratio and quick ratio were used by several previous researchers such as
Stevens (1973), Burns (1985), Jaggi and Considine (1990), Hutchinson and Mengersen
(1993), Meric et al (1997). In the current study, liquidity was viewed as an independent
variable and measured by current ratio, which was derived from financial statements by
dividing current assets by current liabilities.
Debt ratio (DER)
Walker and Petty (1978, p.145) defined financial leverage to be the process of using
senior (debt or equity capital with a fixed return) capital to increase the rate of return on
junior securities. Brigham (1995, p. 429) indicated that financial leverage is the extent to
which fixed-income securities (debt and preferred stock) are used in a firm’s capital
structure. Similarly, Ross, Westerfield and Jaffe (1999, p.33) said that financial leverage
is related to the extent to which a firm relies on debt financing rather than equity.
When financial leverage is used to identify the financial characteristics of the
firm, it is often measured by the following ratios:
• Equity ratio = equity/total asset, used by Hutchinson, Meric and Meric (1988),
Meric et al (1997)
• Long-term debt ratio = long-term debt/total capital, used by Burns (1985), Meric
et al (1997)
• Long-term debt to equity ratio = long-term debt/common stock equity, used by
Jaggi and Considine (1990)
160
• Debt ratio = total debt /total assets, and

• Debt-to-equity ratio = total debt /total equity, used by Brigham (1995) and Ross,
This study examined the impact of financial leverage ratio on profitability in which
financial leverage ratio was considered an independent variable and measured by the debt
ratio, which was derived from financial statements by dividing total debt by total equity.
Total asset turnover (TAT)
Activity ratio is considered the variable to determine the financial characteristics of the
firm. Hutchinson, Meric and Meric (1988) measured activity by the following ratios:
• Inventory ratio = Inventory/sales

• Receivables ratio = Accounts receivable/sales
• Fixed assets ratio = Fixed assets/sales
• Total asset turnover = Sales /total assets
Meric et al (1997) only used two ratios of activity: total asset turnover (sales/total assets)
and inventory turnover. Noticeably, Ross, Westerfield, and Jaffe (1999) and Meric et al.
(1997) use inventory turnover in lieu of inventory ratio. Inventory ratio is calculated by
dividing the cost of goods sold by average inventory whereas inventory ratio is calculated
by dividing inventory by sales. This study examined the impact of activity ratio on
profitability in which activity ratio was measured by total asset turnover, which was
derived form financial statement by dividing sales by total assets.
In summary, in this research study, profitability measured by ROS, ROA and
ROE was defined as the dependent variable whereas the efficiency of financial
management practices, current ratio, debt ratio and total asset turnover were defined as
the independent variables. These variables were used to test the model of the impact of
financial management practices and financial characteristics on SME profitability. This
model was developed in section 4.4.2.
161
4.4.2 Model development
This subsection discusses the basic concepts of models and develops a model for this
research. Objectives are to review types of models and to build a model for this study
based on the literature reviewed in chapter 3 and variables defined in subsection 4.4.1.
4.4.2.1 Model classification
According to Pattillo (1980), in general, a model is a representation of real-world

phenomena as they exist (descriptive models) or as they ought to exist (normative
models). A model is defined as any highly formalized representation of a theoretical
system, usually designated through the use of symbols (Davis, 1996, p.300). Davis (1996,
p. 301) emphasized the importance of models to decision-makers as follows:
Models are extremely important to decisions-makers because they form the basis
for the development of decision support system.
There are a variety of ways to classify models. According to Davis (1996) all useful
classification schemes have three elements in common: (1) level of aggregation, (2) time
dimension, and (3) degree of uncertainty in the process being modeled. Based on these
elements, Davis (1996) provided a model classification as summarized in Table 4.3 (page
163).
Based on the basic forms of decision models, Davis (1996) classified models into
two types: verbal and mathematical models. Each can be used to transform a complex
real-world process into a more manageable representation of that process. The verbal
model has broad appeal in that it is more easily understood by decision makers but it is
quite difficult to implement, since many implied variables and relationships that affect
the objective are omitted (Davis, 1996, p. 302).
162
Table 4.3: Model classification

Element Type Characteristics Examples
Level of Dis-aggregate Models individual Consumer choice models,
aggregation (micro) processes with outcomes forecasting model for demand of
one firm
Aggregate Models a system, or firms Economic models of an industry
(macro) interacting in
environment with
outcomes, or outcomes is
group-related
Time Dynamic Changes in the process Multiple-period inventory
dimension due to time models, time series forecasting
Changes in variable models
specification
Static Outcome static in nature One-period inventory model,
due to static one-period mathematical
measurements of programming models
specified variables
Degree of Deterministic All parameters are known Linear programming product-
uncertainty with certainty mix model, inventory model with
known demand
Probabilistic
Parameters vary Risk analysis for capital
according to an assumed budgeting, inventory model with
known probability random demand levels described
distribution by a probability distribution
Source: Adapted from Davis (1996, p. 306)
The generalized mathematical model form can symbolically be represented as

follows:
OI = f(Ai, Bj) (Eq. 4.1)
where:
OI = outcome information or objective from the model to be used by the decision
maker or the dependent variable
Ai = controllable independent decision variables in the process being modeled
Bj = uncontrollable independent variables influencing the process being modeled,
B
or the environment variables

f = functional relationship between the outcome information variable (the
dependent variable) and the independent variables Ai and Bj (Davis, 1996, p. 303).
B
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4.4.2.2 Model development for this study
Based on the generalized mathematical model form as indicated by Davis (1996) and the
variables defined in subsection 4.4.1, the model of the impact of financial management
practices and financial characteristics on SME profitability was developed as follows:
PRO = f(CUR, DER, TAT, EFF) (Eq. 4.2)
where:
PRO = Profitability = Average (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
CUR = Current ratio (= Current assets/Current liabilities)
DER = Debt ratio (= Total debt/Total assets)
TAT = Total asset turnover (= Sales/Total assets)
EFF = The efficiency of financial management practices
In this model, by making some standard assumptions, equation 4.2 can be restructured
into linear multiple regression equation (Eq.4.3) as follows:
PRO = b0 + b1CUR + b2DER + b3TAT + b4EFF + ε (Eq. 4.3)
where: bi (i = 0, 1, 2....) are the coefficients, ε is the error variable, CUR, DER and TAT
are the independent variables measured by ratio scale, and EFF is a multi-dimension
construct measured by 57 items related to financial management practices on the 9-point
scales. Factor analysis was used as a tool to extract and group items that are strongly
correlated into the main components defined the efficiency of financial management
practices.
The required assumptions of this multiple regression model are that (1) the error
variable (ε) is normally distributed, (2) the mean value of the error variable is zero, (3)
164
the variance of the error variable is a fixed but unknown value, (4) the values of the error
variable are independent of one another, and (5) relationship between profitability and
variables of financial management practices is linear. Chapter 5 will discuss how the
research recognized whether or not these assumptions were satisfied and how to
overcome the problem if these assumptions were not satisfied.
The mathematical model mentioned earlier may be described by the visual model
as in Figure 4.9 below.
Figure 4.9: Analytical model for the research study
Current ratio (CUR)

The efficiency of financial
management practices
(EFF):
• Accounting information
•
system
SME profitability: Debt
Financial reporting and
ratio
•
(PRO)
•
analysis
(D
•
Return on sales
•
Cash management practices
E
•
Receivable management Return on assets
Return on equity R)
•
practices
Inventory management
•
practices
•
practices
4.4.3 Hypothesis statements
A hypothesis is a proposition that is empirically testable. It is an empirical statement

concerned with the relationship among variables (Zikmund, 1997, p. 25). Hypotheses to
test the relationships SME profitability and current ratio, debt ratio, total asset turnover,
165
and the efficiency of financial management practices as described in the model illustrated
by Figure 4.9 were respectively stated in this subsection.
Van Horne (1986, p. 145) indicated the relationship between liquidity and
profitability:
cash… profitability unfortunately, also will be less … resolution of the trade-off
Based on the exploratory research conducted by Kack and Lindgren (1999) and
findings of Vuong Quan Hoang (1998), it was found that SMEs in Vietnam seem likely
to maintain excessively high current ratios and the financial management practices might
adversely affect SME profitability. As reviewed in the literature, liquidity is measured by
current and quick ratio and the two ratios are high correlated each other. Thus, this study
only used current ratio as a measure to define liquidity and the hypothesis to test the
relationship between profitability and current ratio is stated as follows:
Hypothesis 1: Profitability of SMEs is negatively related to the current ratio.
Regarding the relationship between financial leverage and profitability, Edwards

and Cooley (1979) indicated that the effects of financial leverage on return available to
equity holders are typically analyzed in either one of two contexts. In many financial
management books, financial leverage was examined in a net-operating-income (NOI) or
equivalent context for its effects on rates of return available to stockholders. In the
literature of real estate finance, the effects of leverage on equity return were evaluated in
cash flow (CF) context. In both settings, the evaluation of leverage effect reduced to a
convenient rule exemplified by the following statement (Edward and Cooley, 1979,
p.12):
favorable, and the higher leverage factor, the higher the rate of return on
common equity.
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Additionally, in many financial management books, debt is viewed as deductible

factors, which helps the firm to save its income tax, and thus, to increase net profit
(Brigham, 1995, Ross, Westerfield and Jaffe, 1999). These conclusions are the basis for
the hypothesis to test the relationship between profitability and financial leverage, which
was measured by the debt ratio in this study. Thus, the second hypothesis in this study is
as follows:
Hypothesis 2: Profitability of SMEs is positively related to the debt ratio.
Profitability of SMEs was assumed to relate to activity ratios. Hutchinson, Meric

and Meric (1988) measured activity by inventory ratios, receivable ratios, fixed asset
ratios, and total asset turnover whereas Meric et al (1997) only used two ratios: total asset
turnover and inventory turnover. For simplicity purpose, this research study used total
asset turnover as a ratio to measure activity characteristics. Total asset turnover is the
ratio between sales and total assets. It measures the efficiency of total asset utility by
representing how many sales are produced by one unit of total asset value. The higher
total asset turnover, the higher sales are produced by one unit of total asset value. On the
other hand, high sales produce high profits for the business. As a result, profitability was
assumed to positively relate to total asset turnover and the hypothesis to test the
relationship between profitability and total asset turnover is stated as follows:
Hypothesis 3: Profitability of SMEs is positively related to total asset turnover.
From the literature, the final goal of financial management is to maximize the
financial wealth of the business owner and this general goal can be viewed in terms of
two specific objectives: profitability and liquidity (McMahon, 1995). DuPont analysis
reviewed in chapter 3 provided a quick insight of factors affecting SME profitability
including gross margin, operating expenses, interest, taxes, accounts receivable days,
inventory days, fixed-asset turnover, leverage and coverage. These factors negatively or
positively affect SME profitability depending on the efficiency of financial management
167
practices. Therefore, the hypothesis to test the relationship between profitability and the
efficiency of financial management practices is as follows:
Hypothesis 4: Profitability of SMEs is positively related to the efficiency of

financial management practices.
As indicated in subsection 4.4.1 the efficiency of a specific area of financial

management practices such as accounting information systems, financial reporting and
analysis, cash management, receivable management, inventory management, fixed asset
management, and financial planning was measured by the sum of points of 8 or 9 items.
A specific area of financial management practices was said to be “efficient” if its sum of
points is greater than the average points and conversely. In generalization, a business was
said to be “efficient” in financial management practices if all specific areas of financial
management practices are efficient. Based on this criterion, SMEs in the sample were
divided into two groups. The first group consists of SMEs that are “efficient” and the
second group consists of SMEs that are “inefficient” in financial management practices.
This study was also designed to test the hypothesis of differences in average profits of
two groups of SMEs.
Hypothesis 5: The average profit of efficient financial management SMEs differs

from that of inefficient financial management SMEs.
In summary, there are five hypotheses that were tested in this study. The first four
hypotheses were to test the relationship between financial characteristics, financial
management practices and SME profitability. The last hypothesis was to test the
difference in average profits of two groups of SMEs.
4.5 DATA COLLECTION METHODS
This section discusses how relevant data was collected for testing the model developed in
section 4.4. According to Hussey and Hussey (1997), data refers to known facts or things
168
used as a basic for inference or reckoning. Data can be described as qualitative or

quantitative. Qualitative data is concerned with qualities and non-numerical
characteristics, whilst quantitative data is all data that is collected in numerical form.
Hussey and Hussey (1997, p. 150) indicated that there will always be a combination of
quantitative and qualitative data in a research study no matter what paradigm is being
followed.
Whether you are following a broadly positivist or phenomenological paradigm,

there will always be a combination of quantitative and qualitative inputs into your
data generating activities.
In terms of data sources, there are two main sources of data: primary data and secondary
data. As mentioned in section 4.3, this study used both types of data: secondary and
primary data. Secondary data collection is examined in subsection 4.5.1 and primary data
collection will be examined in subsection 4.5.2.
4.5.1 Secondary data collection
Zikmund (1997, p.143) defined secondary data as data gathered and recorded by someone
else prior to the current needs of the researchers. Secondary data are usually historical,
already assembled, and do not require access to respondents or subjects. In this study,
major secondary data were mainly used to derive the financial ratios measuring liquidity,
financial leverage, activity and profitability of SMEs.
This method has been popularly used by previous researchers in examining the
financial characteristics of SMEs. For example, Osteryoung, Constand, and Nast (1992)
used two sources of secondary data for their study of financial ratios in large public and
small private firms. The small firm data sample was drawn from the Financial Studies of
the Small Business (FSSB) published by Financial Research Associates and the raw data
for the large firm sample was collected from the COMPUSTAT PC PLUS database.
Meric et al. (1997) used secondary data drawn from the DISCLOSURE
Worldscope/Global data file in a comparative study of the financial characteristics of
U.S.A and Japanese chemical firms. Van Auken, Doran, and Yoon (1993) used financial
169
position statement data for the year 1988 obtained from An Annual Report of Korean
Companies, published by the Korean Productivity Center in 1990 in their study of
financial comparison between Korean and USA firms.
To date, a database of financial performances of SMEs has not been available in
Vietnam. However, the possibility of financial statement collection from which financial
ratios can be derived was feasible. In Ho Chi Minh City, these financial statements can be
obtained from the following organizations:
• Ho Chi Minh City Department of Taxation

• Vietnam Bank for Non-state Enterprises (VP Bank)
• Faculty of Accounting, Finance and Banking – Ho Chi Minh City University of
Economics.
4.5.2 Primary data collection
Section 4.5.1 explained how secondary data could be collected to reflect financial
characteristic variables. However, in Vietnam, such sources of data have not been
available for collecting data that reflects the variables of financial management practices.
In this case primary data is viewed as an appropriate source. Zikmund (1997, p. 46)
defined primary data as data gathered and assembled specifically for the project at hand.
Section 4.3, explained why this study used survey as a method of data collection to
answer the research questions outlined in chapter 1. This section further explains how
primary data was collected in the survey.
4.5.2.1 Target population
Target population is the complete group of specific population elements relevant to the
research (Zikmund, 1997). Due to limitations of time and funds, the target population in
this research could not cover all SMEs in Vietnam. Moreover, this research was not
designed to study all SMEs in Vietnam but was only designed to study the impact of
financial management on SME profitability with evidence from Vietnam. It is not
170
therefore necessary to define the target population as the whole of SMEs in Vietnam.
Vietnam has four large cities (Ho Chi Minh City, Hanoi, Hai Phong and Da Nang) and 57
provinces. Ho Chi Minh City is the biggest city in term of numbers of SMEs, labor force,
industrial outputs, trading and service volumes (Statistical Yearbook, 1998). Typically,
SMEs in Ho Chi Minh City may be viewed as representative of SMEs in the country.
Therefore, in this research, SMEs in Ho Chi Minh City were defined as the target
population from where the sample was drawn for research.
Figure 4.10: Structure of SMEs in Vietnam and the target population
SMEs in Vietnam
SMEs located in Ho Chi + SMEs not located in Ho Chi

Minh City Minh City
Private Limited Joint stock State

enterprises companies companies enterprises
The target population
As examined chapter 2, in Vietnam SMEs include many forms of business such as

state enterprises, private enterprises, limited liability companies (or limited companies),
joint stock companies, cooperatives and business households or family business.
However, 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, financial reporting and analysis, working capital
management, fixed-asset management, capital structure management, and financial
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planning were included in this study. As indicated in chapter 2, only private enterprises,
limited companies, and joint stock companies satisfy this criterion were, therefore,
viewed as the target population (Figure 4.10, page 171) whereas other businesses
including cooperatives and family business were beyond the limits of this study.
4.5.2.2 Sampling frame
Selecting a sampling frame was the next step after determining the target population. A
sampling frame is the list of elements from which the sample may be drawn (Zikmund,
1997, p.420). In this research, the List of Businesses provided by Ho Chi Minh City
Department of Investment and Planning in 2000 was chosen as the sampling frame from
which the sample of SMEs was drawn for interviewing. Generally, it was not feasible to
compile a list that did not exclude some members of the population (Zikmund, 1997, p.
420). Thus, sampling frame error was unavoidable. For example, the List of Businesses
in 2000 may exclude SMEs, which registered late, did not register or exist due to other
reasons.
4.5.2.3 Sampling methods
There are several alternative methods of selecting a sample. In general, these methods
may be grouped into two: probability and non-probability techniques. A probability
sample is one in which each element (person or company) in the population has an equal,
or at least a known, chance of being selected while in a non-probability sample some
elements have a greater, but unknown, chance than others of selection (De Vaus, 1985,
p.60). All probability samples are based on chance selection procedures. This eliminates
the bias inherent in the non-probability sampling procedures because the probability
sampling process is random (Zikmund, 1997).
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 (Zikmund, 1997).
• Simple random sampling – A sampling procedure that assures each element in the
population an equal chance of being included in the sample. For simple random
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sampling, the sampling process is straight forward (Zikmund, 1997, p.431) but is
most appropriate when a good sampling frame exists and when the population is
geographically concentrated or the data collection technique does not involve
travelling (De Vaus, 1985, p. 64). Because of these limitations, simple random
sampling is not appropriate in this study.
• Systematic sampling – A sampling procedure in which an initial starting point is
selected by a random process, and then every “nth number” on the list is selected
(Zikmund, 1997, p.432). Systematic sampling is similar to simple random
sampling and has the same limitations (De Vaus, 1985, p.65).
• Stratified sampling – A probability sampling procedure in which sub-samples are
drawn from samples within different strata that are more or less equal on some
characteristics. The reasons for taking a stratified sample are (1) to have a more
efficient sample than could be taken on the basis of simple random sampling, and
(2) to assure that the sample will accurately reflect the population on the basis of
the criterion or criteria used for stratification (Zikmund, 1997, p. 433). Stratified
sampling is a modification of simple random and systematic sampling designed to
produce more representative and thus more accurate samples (De Vaus, 1985, p.
65).
• Cluster sampling – An economically efficient sampling technique in which the
primary sampling unit is not the individual element in the population but a large
cluster of elements (Zikmund, 1997, p. 435). The problem of cluster sampling is
that travel costs are likely to be enormous because the amount of time spent
travelling will be substantially greater than the time spent in the interviewing
process (Zikmund, 1997).
In selection for sampling techniques, this study was concerned with two important
principles. The first was that the sample had to reflect the population. The second was
that the sampling technique did not cause an increase in travelling costs. Based on these
principles and characteristics of sampling techniques as discussed above, stratified
sampling was seen as most appropriate in this study. Moreover, as examined in chapter 1
and subsection 4.5.2.1 (page 170) this study was only concerned with private enterprises,
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limited liability companies and joint stock companies. Stratified sampling can help to
assure the proportions of these groups of SMEs in a sample being the same in the
population.
4.5.2.4 Sampling units
The sampling unit is a simple element or group of elements subject to selection in the
sample (Zikmund, 1997, p. 23). This research used the stratified sampling technique with
the fraction of 90 to select the sample. The plan procedure for selecting sampling units is
presented in Table 4.4.
Table 4.4: Number and percentage of SME sample and population

Business type Population Sample
Number Percentage Fraction Number Percentage
Manufacturing 5,170 35.8% 1/90 57 35.8%
Stock companies 208 1.4% 1/90 2 1.4%
Limited companies 4,049 28.1% 1/90 45 28.1%
Private enterprises 913 6.3% 1/90 10 6.3%
Trading 9,254 64.2% 1/90 103 64.2%
Stock companies 185 1.3% 1/90 2 1.3%
Limited companies 5,729 39.7% 1/90 64 39.7%
Private enterprises 3,340 23.2% 1/90 37 23.2%
Total 14,424 100.0% 160 100.0%
4.6 DATA TRANSFORMATION
This section examines aspects of data transformation including purpose and methods of
data transformation. Zikmund (1997, p.540) defined data transformation as the process of
changing data’s original form to a format that is more suitable to perform a data analysis
that will achieve research objectives. Zikmund’s (1997) definition indicated the purpose
of data transformation was to create a more suitable format for data analysis.
Section 4.4.1 introduced variable definitions and measurements in which the nine-
point numerical scales were applied. These scales were constructed to collect raw data
from the respondents, however, these data need to be transformed into a suitable format
before analysis. For example, because scales, as constructed above, only provide the
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values of indicated variables, these values were transformed into the values of the latent
variables through a summative score (Zikmund, 1997, p.541).
Summative score = Sum (indicated variable 1, 2, 3, …n)
As indicated in section 4.4.2 (page 162) the resumed model was based on assumptions of
normal distributions and linear relations of variables. Chapter 5 will test whether these
assumptions are satisfied. Otherwise, data transformation will be applied to create more
suitable data for analysis.
In addition, this study used the ratios: return on sales, return on assets, return on
equity as dependent variables, and liquidity ratio, financial leverage, ratio and activity
ratio as the independent variables. These ratios are derived from financial statements
collected from SMEs directly or indirectly. The process of deriving these ratios required a
transformation of raw data into more suitable data for analysis. Computer package
(Excel) will help this data transformation easily and quickly.
4.7 DATA ANALYSIS
This section briefly discusses data analysis methods whereas details of techniques used
and results of data analysis will be reported in chapter 5. Objectives of this section are (1)
to outline the data analysis techniques that will be particularly applied in chapter 5 and
(2) to appropriately match selected data analysis methods to types of data collected.
4.7.1 General consideration
The purpose of analytic methods is to convert data into information needed to make
decisions (Davis, 1996, p. 356). According to Zikmund (1997), the choice of the methods
of statistical analysis depends on (1) the type of question to be answered, (2) the number
of variables, and (3) the scale of measurement.
175
• Type of question the researcher is attempting to answer is a consideration in

choice of statistical technique. Based on this factor, the researcher may be
concerned about the central tendency of a variable or the distribution of that
variable.
• Numbers of variables are also considered to determine whether the statistical
techniques applied should be univariate data analysis, bivariate data analysis or
multivariate data analysis.
• Scale of measurement on which the data are based or the type of measurement
reflected in the data determines the permissible statistical technique and whether
the appropriate empirical operation may be performed.
This study was concerned with two main research questions. The first is how to describe
the financial management practices and financial characteristics of SMEs in Vietnam.
The second is to determine whether efficient financial management practices positively
affect on SME profitability and how to explain the relationships between efficient
financial management practices and SME profitability. Descriptive statistics and
hypothesis testing were two main methods of data analysis that are suitable to these
research questions.
In terms of number of variables and scale of measurements, this study was
concerned with simultaneous investigation of the impact of several independent
variables, measured by nine-point numerical scales and ratios, on the dependent variable,
measured by the ratios. Multivariate data analysis is the appropriate match for this study
(Zikmund, 1997). Specifically, multiple linear regression was developed and tested to
explain the relationships between the financial management practices and SME
profitability.
4.7.2 Descriptive statistics
As indicated in section 4.3 (page 137), this study was designed as a combination of
descriptive and explanatory research. Descriptive statistics were applied to investigate
and describe characteristics of financial management practices of SMEs in the sample.
176
Descriptive analysis refers to the transformation of the raw data into a form that will
make them easy to understand and interpret. Describing responses or observations is
typically the first form of analysis (Zikmund, 1997, p.533).
In this study, the following statistical techniques were used (in chapter 5) as the
tools of descriptive analysis:
• calculation of averages, frequency distribution, and percentage distribution used

as a form of summarizing data
• tabulation used as the orderly arrangement of data in a table or summary format
• cross-tabulation used to allow the inspection of differences and to make
comparisons between two groups of SMEs, with and without efficient financial
management.
4.7.3 Bivariate data analysis
Zikmund (1997, p.567) defined bivariate data analysis as data analysis and hypothesis
testing when the investigation concerns simultaneous investigation of two variables using
tests of differences or measures of association between two variables at a time. This
section examines how bivariate data analysis can be used in this study.
4.7.3.1 Measures of association
Measures of association are statistical values designed to represent co-variation between

variables (Zikmund, 1997). As indicated in section 4.5 (page 162), the measurement
levels used in this study included interval and ratio measures. This allows the use of
Pearson’s correlation coefficient for measuring association among variables. The results
of correlation coefficients were presented by under standard form of reporting correlation
results – the correlation matrix. The correlation matrix would be used to present the
measures of association among the variables as outlined in section 4.5 (page 168).
177
This correlation matrix was also used as a tool to recognize whether

multicollinearity occurs in the multiple regression equation (Eq. 4.3). Murphy (1989, p.
504) indicated how the correlation matrix can be used to recognize multicollinearity.
The correlation matrix should be examined on the computer printout to determine
which, if any, independent variables are substantially related. A general rule is
that if a correlation between any two independent variables is greater than or
equal 0.70, then a high degree of interrelationship can be inferred, and the
possibility of multicollinearity exists.
4.7.3.2 Test of differences
Zikmund (1997, p. 586) defined test of differences as an investigation of hypotheses that

state that two or more groups differ with respect to measures of a variable. This study
was also concerned with examining whether the average profitability of SEMs achieved
the efficient financial management practices differs that of SMEs which do not. The t-test
may be used to test this hypothesis. The t-test for differences in two means is a technique
used to test the hypothesis that the mean scores on some interval-scaled variable will be
significantly different for two independent samples or groups (Zikmund, 1997, p.591).
4.7.4 Multivariate analysis
4.7.4.1 Overview
Like most other business problems, profitability is inherently multidimensional. It can be

simultaneously influenced by many dimensions. In term of management, profitability can
be influenced by the efficiency of marketing management, financial management,
production management, and quality management. By assuming other things hold equal,
this study concentrated on examining the effect of financial management on SME
profitability. Even though this assumption is held, the effect of financial management on
SME profitability still has a multidimensional characteristic since profitability can be
influenced by the efficiency of accounting information system, financial reporting and
analysis, working capital management practices, fixed-asset management practices,
178
financial planning practices, liquidity, financial leverage and business industry.

Therefore, multivariate analysis was utilized in this research (Davis, 1996).
When problems are multidimensional and three or more are involved, we utilize
multivariate analysis. Multivariate statistical methods allow the effects of more
than one variable to be considered at one time (Zikmund, 1997, p. 656).
There are many multivariate techniques, however, two basic groups of multivariate
techniques are classified: dependence methods and interdependence methods. Figure 4.11
adapted from Zikmund (1997, p.657) presents a classification and selection of
multivariate methods.
Figure 4.11: A classification of multivariate methods
All multivariate methods
Are some of the

variables dependent
on others?
Yes No
Dependence methods Interdependence methods
Source: Adapted from Zikmund (1996, p.657)
This study was concerned with investigating and explaining the effects of a large
number of variables of financial management practices and financial characteristics on
profitability. Multivariate dependence analysis was appropriate to be selected in this
study. Zikmund (1997, p.657) defined dependence analysis as a multivariate statistical
179
technique that attempts to explain or predict the dependent variable on the basis of two or
more independent variables. Dependence analysis consists of multiple regression
analysis, multiple discriminant analysis, multivariate analysis of variance, and canonical
correlation analysis.
• Multiple regression analysis is an analysis of association that simultaneously

investigates the effect of two or more independent variables on a single, interval-
scaled or ratio-scaled dependent variable (Zikmund, 1997, p. 659).
• Multiple discriminant analysis is a statistical technique for predicting the
probability of objects belonging in two or more mutually exclusive categories
based on several independent variables (Zikmund, 1997, p. 662).
• Multivariate analysis of variance is a statistical technique that provides a
simultaneous significance test of mean difference between groups, made for two
or more dependent variables (Zikmund, 1997, p. 668).
• Canonical correlation analysis is a technique used to determine the degree of
linear association between two sets of variables, each consisting of several
variables (Zikmund, 1997, p. 667).
In summary, there are many multivariate analysis techniques and each is appropriate with
a specific purpose of investigation. Table 4. 5 (page 181) adapted from Zikmund (1997,
p. 669) summarizes multivariate techniques for the analysis of dependence and indicates
how to select the appropriate technique for utility. This study investigates the
simultaneous effect of several independent variables (CUR, DER, TAT and EFF) on a
dependent variable (PRO). Multiple regression is appropriate to be selected in this study.
However, as presented in subsection 4.4.1, because the efficiency of financial
management practices (EFF) is a multi-dimension construct measured by 57 items related
to financial management, factor analysis was applied to group strongly correlated items
into some main components or factors. This assisted the researcher to reduce a large
number of variables into few factors and avoid multicollinearity phenomena in multiple
regression analysis (Lehmann, Gupta, and Steckel, 1998, Laitinen, 1991, Murphy III,
1989).
180
Table 4.5: Summary of multivariate techniques for the analysis of dependence

Number of Number of
Technique Purpose dependent independent Type of measurement
variables variables
Dependent Independent
Multiple To simultaneously 1 2 or more Interval or Interval or
regression investigate the effect of ratios ratio
several independent
variables on a dependent
variable
Discriminant To predict the probability 1 2 or more Nominal Interval or
analysis of objects or individual ratio
belonging in two or more
mutually exclusive
categories based on
several independent
variables
Canonical To determine the degree 2 or more 2 or more Interval or Interval or
correlation of linear association ratio ratio
between two sets of
variables, each consisting
of several variables
Multi analysis To determine if 2 or more 1 Interval or Nominal
of variance statistically significant ratio
differences of means of
several variables occur
simultaneously between
two levels of a variable
Source: Adapted from Zikmund (1997, p.669)
4.7.4.2 Factor analysis
Zikmund (1997, p. 669) defined factor analysis as a type of analysis used to discern the
underlying dimensions or regularity in phenomena. Its purpose is to summarize the
information contained in a large number of variables into a smaller number of factors. In
this study, factor analysis would be utilized before testing the multiple regression models.
Its objectives are as follows:
• to determine linear combinations of variables that aid in investigating the

interrelationships (Zikmund, 1997, p. 669)
• to reduce the problem of multicollinearity in multiple regression model (Zikmund,
1997. P. 672).
181
Chapter 5 will detail the aspects of factor analysis techniques, which are applied to
extract and group the high correlation items into the principal components of financial
4.7.4.3 Multiple regression analysis
As indicated in chapter 1 (page 4), the research problem in this study is to determine
whether a relationship exists between financial management practices, financial
characteristic ratios and profitability. Multiple regression analysis is an appropriate
statistical technique for examining this research problem. Murphy III (1989) indicated
multiple regression analysis allows the appraiser to determine whether a relationship
exists between several independent variables and a dependent variable.
This study used multiple regression analysis to investigate simultaneous effects of
(1) current ratio (CUR), debt ratio (DER), total asset turnover (TAT) and efficiency of
financial management practice (EFF) on SME profitability (PRO).
As indicated in section 4.4.2, the multiple regression equation in this study was as
follows:
PRO = b0 + b1CUR + b2DER + b3TAT + b4EFF + ε
where: bi (i = 0, 1, 2....) are the coefficients and ε is the error variable. Chapter 5 will
discuss testing this model with empirical data to explain and determine the degree of
association between financial management and profitability of SMEs.
In summary, descriptive statistical techniques such as frequencies, descriptive
statistics and cross tabulation, bivariate analysis including test of association and test of
differences, and multivariate analysis including factor and multiple regression analysis
were the main techniques of analysis applied in this study. Chapter 5 will present, in
more detail, how these techniques are applied to analyze the data collected.
182
4.8 CONCLUSIONS
This chapter examined aspects of research methodology for this study, including research
designs, variable definitions and measurements, model development, data collection
methods, and data analysis. As respectively indicated by sections, this study was a
combination of descriptive and explanatory research in which the stratified sampling
technique was used to draw a sample of 160 SMEs located in Ho Chi Minh City for data
collection via personal interview.
Personal interview provided information of financial management practices of
SMEs in the sample. In addition, secondary data was used to derive financial ratios such
as liquidity, financial leverage, activity ratios from financial statements (balance sheets
and income statements) collected directly and indirectly from SMEs.
Data collected was transformed into more suitable format for analysis by utilizing
Excel software. After data processing, the Statistic Package for Social Science (SPSS)
was utilized for data analysis. Statistical techniques used in this study included
descriptive and inference statistics.
Descriptive statistics such as means, frequency, tabulation, cross-tabulation were
used to summarize and describe characteristics of financial management practices of
SMEs in sample. More complicated statistical analysis techniques such as bivariate
analysis, multivariate analysis, factor analysis were used to determine whether a
relationship exists between efficient financial management and SME profitability, and to
explain this relationship. Results of the survey and findings of the relationships between
financial management practices, financial characteristics and SME profitability will be
presented in chapter 5: “Data Analysis and Findings”.
183
Chapter Five:
Data Analysis And Findings
5.1 INTRODUCTION
Chapter 4 presented aspects of research methodology including research design, data

collection and data analysis methods, and hypothesis testing as support for the model. A
model of the impact of financial characteristics and financial management practices on
SME profitability was created at the end of chapter 4 (page 165). Chapter 5 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 as results of data
analysis, (3) to present the results of testing the model for SME profitability, and (4) to
explain how the model developed from a literature review, was supported by data
analysis.
Chapter 5 is structured into 5 main sections. Section 5.1 and 5.2 respectively
introduce the chapter and links between research objectives and data analysis. Section 5.3
presents descriptive findings of financial management practices, financial characteristics,
and findings of SME profitability. Section 5.4 presents the findings of relationships
between financial management practices, financial characteristics and SME profitability
based on bivariate analysis and findings of simultaneous impact of financial management
practices and financial characteristics on SME profitability based on multivariate
analysis. Section 5.5 ends the chapter with conclusions drawn from descriptive findings
of financial management practices, financial characteristics and their impact on SME
profitability. Figure 5.1 (page 185) provides a visual picture of the chapter outline and the
links among sections as indicated earlier.
Chapter Five: Data Analysis and Findings
5.1 Introduction
5.2 Links between data analysis and research objectives
5.3 Descriptive findings of the research study
5.3.1 Sample descriptions and SME 5.3.2 Descriptive findings of financial

characteristics management practices
5.3.3 Descriptive findings of financial 5.3.4 Descriptive findings of

characteristics profitability
5.4 Associative analysis and findings of the research study
5.4.1 Factor analysis and findings 5.4.2 Bivariate analysis and findings
5.4.4 Test for difference in average

5.4.3 Multi regression analysis and profits between efficient and
findings inefficient financial management
groups of SMEs
5.5 Conclusions
185
5.2 LINKS BETWEEN DATA ANALYSIS AND RESEARCH OBJECTIVES

AND QUESTIONS
As indicated in chapter 1, the objectives of this research study are (1) to collect the
descriptive evidence on financial management practices, financial characteristics and
profitability of SMEs in Vietnam, and (2) to develop the model of the simultaneous
impact of financial management practices and financial characteristics on SME
profitability. Additionally, this research study is designed to answer two main questions
as follows:
characteristics and SME profitability?
• How do financial management practices and financial characteristics
simultaneously affect SME profitability?
The results of data analysis and findings presented in this chapter are linked to the
research questions and objectives as mentioned above. Firstly, descriptive findings of the
research study including findings of sample and SME characteristics, financial
management practices, financial characteristics and findings of SME profitability will be
presented respectively in section 5.3, particularly from subsections 5.3.1 to 5.3.4.
Findings presented in these subsections are linked to the objective of descriptive evidence
collection of financial management practices, financial characteristics and profitability of
SMEs in Vietnam.
Associative findings of the research study will be presented in section 5.4, in
which bivariate analysis, factor analysis and multiple regression analysis are applied to
investigate the relationships between financial characteristics, financial management
practices and SME profitability. These findings are linked to the objective of developing
and testing the model of the simultaneous impact of financial management practices and
financial characteristics on profitability. Finally, the hypothesis of difference between
mean profitability of SMEs that were efficient in financial management practices and that
of SMEs that were not efficient in financial management practices, will be tested to
provide further evidence of supporting the model. Following in this chapter is a report of
findings linked to the objectives of the research study.
186
5.3 DESCRIPTIVE FINDINGS OF THE RESEARCH STUDY
Investigating financial management practices and financial characteristics of SMEs is one

of the objectives of this research study. This section presents descriptive findings of the
research study, which are linked to the objective of describing financial management
practices and financial characteristics of SMEs in Vietnam.
5.3.1 Sample descriptions and SME characteristics
5.3.1.1 Sample descriptions
As indicated in chapter 4, this research study used the stratified sampling technique with
the fraction of 90 to select the sample and the plan procedure for selecting sampling units
was presented in Table 4.4 (page 174). Based on the list of businesses provided by the Ho
Chi Minh City Department of Investment and Planning, 14,424 SMEs operating in Ho
Chi Minh City consisting of 5,170 manufacturing (accounting for 35.8%) and 9,254
trading (accounting for 64.2%) SMEs were defined as the target population. Using a
random digit table, a sample of 400 SMEs was randomly selected from the list for
personal interview aiming at obtaining a sample size of 160 SMEs as described by Table
4.4 (page 174). Thirty interviewers were recruited and trained to contact and interview
SMEs selected. One hundred sixty-two of 400 SMEs contacted (a response rate of 40
percent) participated in the survey. After data editing, twelve cases were not usable
because of important data omission, and thus eliminated from the data set. As a result, a
sample of 150 SMEs was used for data analysis in this study. Structure of SMEs by type
of industry and form of ownership in the sample is described in Table 5.1.
Table 5.1: Structure of SMEs in the sample by type of industry and form of ownership
Number of firms Percentage
Type of industry Trading 99 66.0%
Manufacturing 51 34.0%
Total 150 100.0%
The form of ownership Private enterprise 40 26.7%
Limited company 105 70.0%
Joint stock company 5 3.3%
Total 150 100.0%
Source: Data analysis for the study
187
Table 5.1 (page 187) reports the distribution of the sample of responding firms in
terms of type of industry and form of ownership. Sixty-six percent of businesses in the
study sample are trading enterprises, 34 percent are manufacturing, while other industries
are beyond the research study. Compared with the planned structure as indicated in the
sampling procedure (chapter 4, page 174), the actual relationship between trading (66%)
and manufacturing (34%) was not considerably changed. Figure 5.2 and 5.3 provide a
visual distribution of sample in term of business structure.
Figure 5.2: Distribution of sample by industry Figure 5.3: Distribution of sample by ownership
Joint stock company
3.3%
Manufacturing Private enterprise
34.0% 26.7%
Trading
Limited company
66.0%
70.0%
Figure 5.3 represents the business structure of SMEs by form of ownership by

which 70 percent of businesses in the sample are limited liability companies and 30
percent are private enterprises (26.7%) and joint stock companies (3.3%). These
proportions were not significantly changed in comparing with the fractions planned in the
sampling procedure. Therefore, they provide assurance that the sample accurately
reflected the target population on the basis of the criteria used for the stratified sampling
technique.
Table 5.2 (page 189) provides the number and percentage of firms by form of
ownership within each industry. For both manufacturing and trading industries, the
percentage of limited companies is highest (65.7% and 78.4% respectively) whereas the
percentage of joint stock companies is lowest (3.0 and 3.9% respectively) compared
within each industry. These percentages are consistent with the proportion of each form
of ownership in the target population as presented in the sample-selecting procedure in
chapter 4.
188
Table 5.2: Sample distribution by form of ownership within industry

Type of industry
Trading Manufacturing
The form of ownership Number of firms Percentage Number of firms Percentage
Private enterprise 31 31.3% 9 17.6%
Limited company 65 65.7% 40 78.4%
Joint stock company 3 3.0% 2 3.9%
Total 99 100.0% 51 100.0%
5.3.1.2 SME characteristics
Table 5.3 provides an insight/review of business characteristics of SMEs in the sample.

Ninety-six percent of SMEs reported the age of the business as less than 10 years, only 4
percent operating for more than 10 years. In term of size, 92 percent of businesses had
not more than 100 employees and 95 percent had total assets less than VND10 billion 1 .
These businesses satisfy the criteria of SME definitions in Vietnam. Additionally, 73.3
percent of SMEs had annual sales less than VND5 billion, 22 percent had annual sales
Table 5.3: Business characteristics of SMEs in the sample

No. of firms Percentage
Age of business Less than 2 years 47 31.3%
2 -5 years 55 36.7%
6 -10 years 42 28.0%
More than 10 years 6 4.0%
Total 150 100.0%
Annual sales Less than 5 billion dong 110 73.3%
5 to 30 billion dong 33 22.0%
31 to 50 billion dong 2 1.3%
More than 50 billion dong 5 3.3%
Total 150 100.0%
Total assets Less than 5 billion dong 135 90.0%
5 To 10 billion dong 8 5.3%
More than 10 billion dong 7 4.7%
Total 150 100.0%
Labour 1 to 10 employees 66 44.6%
11 to 30 employees 52 35.1%
101 to 250 employees 10 6.8%
More than 250 employees 2 1.4%
from 5 to VND30 billion, and less than 5 percent hadTotal 148over VND30
annual sales 100.0%
billion.
1
At the current rate of exchange, USD1 = VND14, 000
189
In summary, Table 5.3 (page 189) indicates that most SMEs in Vietnam are very
young in term of number of business operating years and small in terms of total assets,
number of employees, and annual sales compared with SMEs in other countries. The next
section will consider whether these business characteristics of SMEs affect financial
characteristics and financial management practices.
5.3.2 Descriptive findings of financial management practices
5.3.2.1 Accounting information system practices
This section respectively presents descriptive findings of accounting information system

practices of SMEs in the sample. All SMEs are found to have accounting information
systems organized formally (Table 5.4). This is a legal requirement for SMEs that are
organized in the form of private enterprises, limited liability companies or joint stock
companies because these SMEs are required to prepare and submit financial statements to
departments of taxation frequently and regularly.
Table 5.4: Characteristics of accounting system organization

Characteristics of accounting system organization Formal 150 100.0%
Informal 0 0.0%
Total 150 100.0%
Regarding the responsibility for accounting information systems, Table 5.5 (page
191) reveals that 88 percent of SMEs in the sample used an employed or in-house
accountant to record business transactions whereas less than 2 percent used an external
accountant or the owner himself or herself. “Chief-accountant” was often used for the
more complicated responsibilities, for example, 15.3 percent of SMEs required the chief-
accountant to prepare accounting reports whereas only 6.7 percent used the chief-
accountant in recording business transactions. For enterprise reporting, up to 41.3 percent
of SMEs used the chief-accountant in interpreting and using the accounting information
for decision-making.
190
Additionally, less than 2 percent of respondents answered that they used external
(or outside) accountants to record business transactions, prepare accounting reports or
interpret accounting information. SMEs in Vietnam appear to be unfamiliar with using
external accountants in their accounting information systems. This finding is similar to
DeThomas and Fredenberger’s (1985) findings in a survey of over 360 SMEs in Georgia
(USA), which revealed that only 4 percent of responding firms used external accountants.
Table 5.5: Responsibility – accounting information system

Recording business transactions Owner 3 2.0%
Manager 3 2.0%
Chief-accountant 10 6.7%
Employed accountant 132 88.0%
External accountant 2 1.3%
Total 150 100.0%
Preparing accounting reports Owner 2 1.3%
Manager 1 0.7%
Total 150 100.0%
Interpreting and using accounting Owner 5 3.3%
information
Manager 3 2.0%
Total 150 100.0%
In examining the application of computers in accounting information system,

Table 5.6 (page 192) shows that 50 percent of respondents “often”, 37 percent “always”,
and only 0.7 percent “never” use computers in their accounting systems. However, while
about 91% apply computers to the production of accounting reports, only a small
percentage of SMEs in the sample apply computers to related fields such as payroll, cash
flows, asset management and business transaction recording.
191
Table 5.6: Using computer in accounting information system

Frequency of computer Never 1 0.7%
application
Rarely 7 4.7%
Sometimes 10 6.7%
Often 76 50.7%
Always 56 37.3%
Total 150 100.0%
Computer application fields Recording business transactions 8 5.3%
Preparing accounting reports 136 90.7%
Managing assets 1 0.7%
Controlling payroll 2 1.3%
Controlling cash flows 1 0.7%
Others 1 0.7%
No answer 1 0.7%
Total 150 100.0%
After analyzing the results of respondents questions concerning accounting

information system practices, the typical characteristics of accounting information
systems of SMEs in the sample are summarized as follows:
• 100 percent of SMEs have systems of accounting information organized formally.

• Employed accountants and chief-accountant still play an important role in
carrying out most accounting responsibilities whereas external accountants have
not frequently been used.
• Most SMEs have applied computers to their accounting information systems and
the most frequent application of computers is to prepare accounting reports.
5.3.2.2 Financial reporting and analysis practices
Financial reporting and analysis practices of SMEs in the sample are respectively
analyzed and presented in this subsection. The first finding is that over 93 percent of
SMEs focus on two traditionally main types of financial statements, balance sheets and
income statements, which are prepared regularly (Table 5.7, page 193). This
demonstrates that SMEs strongly favour organizing financial information systems, which
192
produce reports to help the owner/managers control financial position and performance of
the business.
Table 5.7: Kinds of financial statements prepared

Balance sheet 140 93.3%
Income statement (Profit and loss statement) 146 97.3%
Statement of cash flows 87 58.0%
Statement of funds 92 61.3%
Others 11 7.3%
Total cases 150
Secondly, preparing and analyzing financial statements are frequently conducted

with SMEs. About 70 percent of respondents have financial statements prepared and
analyzed monthly, while only 3 percent of SMEs have never analyzed financial
statements (Table 5.8).
Table 5.8: Frequency of preparing and analyzing financial statements

Preparing financial statements Monthly 115 76.7%
Quarterly 28 18.7%
Semiannually 4 2.7%
Annually 3 2.0%
Total 150 100.0%
Analyzing financial statements Monthly 97 64.7%
Quarterly 35 23.3%
Semiannually 6 4.0%
Annually 7 4.7%
Never 5 3.3%
Total 150 100.0%
Thirdly, like accounting information system practices, responsibility for preparing

and analyzing financial statements is often left to the chief-accountant and/or employed
accountants (Table 5.9, page 154). One hundred and fourteen of 150 respondents (76%)
reported that employed accountants were in charge of preparing financial statements
compared with nearly 2 percent of respondents who said that the owner or external
accountants were responsible (Table 5.9, page 194). This finding is similar to DeThomas
and Fredenberger’s (1985) finding in that SMEs have rarely asked the external
accountants to analyze and interpret financial statements.
193
Table 5.9: Responsibility – preparing and analyzing financial statements

Preparing financial statements Owner 2 1.3%
Manager 1 0.7%
Analyzing financial statements Owner 3 2.0%
Manager 4 2.7%
Never do it 5 3.3%
Total 150 100.0%
When conducting financial analysis, more than half of the SMEs in the sample
apply two types of financial analysis techniques (trend and ratio analysis), while only 5
percent answered that they have never applied any analysis technique. When asked what
kinds of financial ratio they have ever used, about half of respondents replied they have
used the short-term debt ratio, current ratio, total asset turnover, and fixed asset turnover
whereas only 10 percent used the long-term debt ratio (Table 5.10). This may be
consistent with the current difficulty of Vietnam SMEs in obtaining long-term loans and
the uncertainty of Vietnam’s business environment, which cause investors and bankers to
hesitate in offering long-term debts.
Table 5.10: Kinds of financial analysis and ratios used

Kinds of financial analysis used Ratio analysis 57 38.0%
Trend analysis 8 5.3%
Both ratio and trend analysis 81 54.0%
Never 8 5.3%
Kinds of financial ratios used Current ratio 71 47.3%
Quick ratio 50 33.3%
Debt ratio 61 40.7%
Debt-to-equity ratio 53 35.3%
Short-term debt ratio 82 54.7%
Long-term debt ratio 15 10.0%
Receivable turnover 92 61.3%
Inventory turnover 97 64.7%
Fixed asset turnover 73 48.7%
Total asset turnover 76 50.7%
Return on sales 50 33.3%
Return on assets 30 20.0%
Return on equity 34 22.7%
194
In summary, after conducting the survey and data analysis, this study has
provided insight into financial reporting and analysis practices of SMEs with empirical
evidence from Vietnam. Descriptive findings of financial reporting and analysis are
summarized as follows:
• Near 100 percent of SMEs have frequently and regularly prepared and analyzed
financial statements including balance sheets and income (profit and loss)
statements.
• Most SMEs (about 70 percent) have prepared and analyzed their financial
statements based on monthly periods. Nevertheless, about 2 percent of SMEs
have never analyzed financial statements.
• In financial analysis, about a half of SMEs in the sample have frequently applied
both trend and ratio analyses.
• Ratios of activity such as receivable turnover, inventory turnover, and total asset
turnover are most frequently used, followed by ratios of liquidity and the least
used are ratios of long-term debt, and profitability of sales, assets and equity.
5.3.2.3 Cash management practices
As indicated in chapter 3, examination of cash management practices by previous

researchers have mainly focussed on examining areas such as cash budgets, cash balance
and cash surplus or shortage. This subsection presents descriptive findings of cash
management practices of the sample of 99 trading and 51 manufacturing SMEs in
Vietnam.
Table 5.11 (page 196) indicates 38 percent of respondents always prepare cash
budgets, whereas about 5 percent never prepare the budgets. On the other hand, Table
5.11 (page 196) reveals that 76 percent of SMEs prepare cash budgets monthly, 11
percent weekly, about 5 percent by quarterly periods and the balance prepares cash
budgets by semiannually and annually periods. As such, the monthly period is most
frequently used by SMEs in preparing cash budgets.
195
Table 5.11: Preparing cash budgets

Frequency of preparing cash budgets Never 8 5.4%
Rarely 7 4.7%
Sometimes 17 11.4%
Often 61 40.9%
Always 56 37.6%
Total 149 100.0%
Period for preparing cash budget Never 9 6.0%
Weekly 16 10.7%
Monthly 114 76.0%
Quarterly 7 4.7%
Semiannually 2 1.3%
Annually 2 1.3%
Total 150 100.0%
On cash balance determination, Table 5.12 reveals that only 12.6 percent of
responding firms “often or always”, while about 40 percent “rarely or never” determine
the target cash balance. This finding is consistent with the common trend that SMEs
rarely pay attention to setting up a cash-balance policy. Most SMEs simply consider
cash-balance as the result of differences in cash inflows and outflows without any
policies.
Table 5.12: Cash balance determination
Determining the target cash balance Never 12 8.0%
Rarely 46 30.7%
Sometimes 73 48.7%
Often 14 9.3%
Always 5 3.3%
Total 150 100.0%
Cash balance determination Based on theories of cash 1 0.7%
management
Based on historical data 21 14.0%
Based on owner/manager 's 124 82.7%
experience
Others 2 1.3%
No answer 2 1.3%
Total 150 100.0%
Additionally, Table 5.12 indicates that 83 percent of SMEs that often or always
set up their cash balance policy were based on the owner/manger’s experience in
determining the target cash balance. Percentage of SMEs applying theories of cash
196
management in determining the target cash balance is not significant. This reveals that
theories of cash management have not been popularly implemented in practices in
Vietnam.
For cash shortage phenomena, 20 percent of enterprises never or rarely have been
short of cash, only 2.7 percent of responding SMEs often or always have insufficient cash
for expenditure (Table 5.13). Conversely, about 40 percent of SMEs in the sample
reported that they have a surplus of cash “sometimes or often or always” (Table 5.13).
This finding is consistent with Kack and Lindgren (1999), and Vuong Quan Hoang
(1998) findings, which indicated SMEs in Vietnam seems likely to reserve cash and
maintain relatively high current ratios (chapter 2, page 55).
Table 5.13: Cash surplus or shortage
Number of firms Percentage
Occurring cash shortage Never 12 8.0%
Rarely 18 12.0%
Sometimes 116 77.3%
Often 3 2.0%
Always 1 0.7%
Total 150 100.0%
Occurring cash surplus Never 7 4.7%
Rarely 82 54.7%
Sometimes 51 34.0%
Often 6 4.0%
Always 4 2.7%
Total 150 100.0%
Cash surplus investment Bank deposit 28 18.7%
Treasury bill purchase 1 0.7%
No investment 113 75.3%
Others 1 0.7%
Not cash surplus 7 4.7%
Total 150 100.0%
Regarding cash surplus investment, it is surprising that up to 75 percent of

responding SMEs did not invest cash surplus for profit purposes. About 19 percent
deposit cash surplus in bank accounts for interest and almost no firms used the cash
surplus to buy money-market instruments such as treasury bills, commercial papers or
others (Table 5.13). This can be explained, because the money market in Vietnam has not
developed, therefore, firms could not use cash surplus to purchase short-term investment
instruments for profit purposes.
197
Below is a summary of descriptive findings related to cash management practices

that SMEs in the sample:
• In general, about 80 percent of SMEs always or often prepare cash budgets, and
preparing and reviewing cash budgets are frequently based on monthly periods.
• Only 2.7 percent of responding SMEs always or often have shortage of cash while
about 40 percent always or often have a surplus of cash. Nevertheless, only 19
percent of SMEs deposit their cash surplus into bank accounts while up to 75
percent did not invest the temporarily cash surplus for profitable purposes.
5.3.2.4 Receivable management practices
On receivable management practices, respondents were asked questions concerned with

credit sales and policies, reviewing levels of receivables and bad debts, and percentage of
bad debts compared with sales. Below are descriptive findings of receivable management
practices of SMEs in the sample.
Table 5.14 demonstrates 80 percent of respondents “always or often” sell their
products or services on credit, only 2 percent “never” use credit sales. However, only 63
percent of SMEs which always or often sell products on credit, answered that they
“always or often” set up a credit policy for the customers. Seven percent never have
credit policies for the customers but they tend to sell on credit to anyone who wishes to
buy.
Table 5.14: Sales on credit and credit polices

Sell products or services on credit Never 3 2.0%
Rarely 7 4.7%
Sometimes 19 12.7%
Often 78 52.0%
Always 43 28.7%
Total 150 100.0%
Set up credit policy to the customers Never 11 7.3%
Rarely 15 10.0%
Sometimes 30 20.0%
Often 60 40.0%
Always 34 22.7%
Total 150 100.0%
198
In reviewing receivable levels and bad debts, a relatively high percentage of

SMEs (about 80%) in the sample review their receivable levels and bad debts based on
monthly periods. However, 4.7 percent answered that they never review their bad debts
(Table 5.15). As such, like cash management practices, monthly periods are still
popularly used by SMEs in reviewing receivable levels and bad debts.
Table 5.15: Frequency of reviewing receivable levels and bad debts

Review levels of receivables Weekly 16 10.7%
Monthly 124 82.7%
Quarterly 8 5.3%
Annually 1 0.7%
No answer 1 0.7%
Total 150 100.0%
Review bad debts Never 7 4.7%
Weekly 9 6.0%
Monthly 120 80.0%
Quarterly 7 4.7%
Semiannually 3 2.0%
Annually 3 2.0%
No answer 1 0.7%
Total 150 100.0%
When analyzing the percentage of bad debts to sales, 89 percent of responding

firms indicated that their bad debts have not exceeded 10 percent of sales (Table 5.16).
This figure is not high under given conditions of financing source shortages and shows
that SMEs are relatively good in managing receivables. However, a few SMEs answered
that they did not know their percentage of bad debts to sales, and others did not answer
this question.
Table 5.16: Percentage of bad debts compared to sales

Bad debt percentages Less than 5 % of sales 66 44.0%
5 -10% of sales 67 44.7%
10 -20% of sales 12 8.0%
More than 20% of sales 1 0.7%
Don't know 2 1.3%
No answer 2 1.3%
Total 150 100.0%
199
In general, descriptive findings of receivable management practices of SMEs in

the sample revealed the following:
• Eighty percent of SMEs always or often sell their products or services on credit
and 63 percent always or often set up credit polices for the customers. However,
there are still 7 percent of SMEs that tend to sell on credit to anyone who wishes
to buy.
• Most SMEs review their levels of receivables and bad debts monthly. As a result,
the percentage of bad debts is controllable and maintained at a relatively low
level.
5.3.2.5 Inventory management practices
On inventory management practices, respondents were asked questions related to

preparing and reviewing inventory budgets, determining inventory levels, and using the
economic order quantity (EOQ) model. Below are descriptive findings of inventory
management practices of SMEs in the sample.
Table 5.17 shows a relatively high percentage (86%) of SMEs in the sample
always or often review inventory levels and 80.7 percent always or often prepare
inventory budgets. Only about 5 percent never prepare inventory budgets.
Table 5.17: Frequency of reviewing inventory levels and preparing inventory budgets
Review inventory levels Never 2 1.3%
Rarely 8 5.3%
Sometimes 11 7.3%
Often 52 34.7%
Always 77 51.3%
Total 150 100.0%
Prepare inventory budgets Never 7 4.7%
Rarely 9 6.0%
Sometimes 13 8.7%
Often 52 34.7%
Always 69 46.0%
Total 150 100.0%
200
When asked how they determined the level of inventory in preparing inventory
budgets, 94 percent of responding firms answered they determine inventory level based
on owner/manager’s experience, only 2 percent used theories of inventory management
(Table 5.18). On the other hand, SMEs very rarely use the “Economic Order Quantity
Model” in inventory management. About 90 percent of SMEs revealed that they had
never known of the model, 6 percent know of it but never use it, while only 1.3 percent
often used the model.
Table 5.18: Basis of determining inventory levels and using EOQ Model
Inventory level Based on theories of inventory
determination management 3 2.0%
Based on historical data 3 2.0%
Based on owner/management's
experience 141 94.0%
Others 3 2.0%
Total 150 100.0%
Economic Order Quantity Do not know this model 134 89.3%
Model application
Know but never use 9 6.0%
Sometimes use 5 3.3%
Often use 2 1.3%
Total 150 100.0%
Practices of inventory management as reviewed above demonstrate that SMEs

have a very low level of management expertise regarding inventory. They often review
inventory levels and prepare inventory budgets but the ability to applying theories of
inventory management to inventory budgeting is very limited.
5.3.2.6 Fixed asset management practices
On fixed asset management practices, respondents were asked questions related to

frequency of evaluating investment projects and reviewing efficiency in use of fixed
assets after investing, and methods used to evaluate an investment project. Below are the
descriptive findings of fixed asset management practices of SMEs in the sample.
Seventy-nine percent of respondents claimed that they “always or often”
evaluated projects before making capital investment decisions. However, there were also
201
6 percent respondents who claimed that they had made decisions on capital investment
without project evaluation (Table 5.19). For these firms, it seems that they are not
concerned about evaluating projects but are willing to buy fixed assets whenever needed.
On the quality of utilizing fixed assets after investing, 78.8 percent of responding firms
stated that they always or often review the efficiency of utilizing fixed assets after
investing. Only about 5 percent have never reviewed fixed assets utilization after making
decisions of investment (Table 5.19).
Table 5.19: Frequency of evaluating investment projects and reviewing efficiency of using
fixed assets after investing
Evaluate projects before making Never 9 6.0%
capital investment decisions
Rarely 10 6.7%
Sometimes 12 8.0%
Often 29 19.3%
Always 90 60.0%
Total 150 100.0%
Review efficiency of using fixed assets Never 8 5.3%
after investing
Rarely 10 6.7%
Sometimes 14 9.3%
Often 34 22.7%
Always 84 56.0%
Total 150 100.0%
Regarding methods used to evaluate investment projects or capital budgeting

techniques used by the firms in the sample, Table 5.20 (page 203) shows the proportion
of firms using the various techniques. Table 5.20 reveals that 86.7 percent of firms in the
sample claimed to use the payback method, falling to 33.3 percent for discounted
payback period. Only 27.3 percent stated that they use the more sophisticated discounted
cash flows; that is, the net present value (NPV), internal rate of return (IRR) and
modified internal rate of return (MIRR). These results are similar to those of the studies
conducted by Luama (1967), and Peel and Wilson (1996) in that payback period method
are the most popular technique used by small firms while more sophisticated techniques
such as NPV, IRR or MIRR seem to be less frequently used.
202
Table 5.20: Methods used to evaluate investment projects

Methods used to evaluate Payback period 130 86.7%
investment projects
Discounted payback period 50 33.3%
Net present value 34 22.7%
Internal rate of return 5 3.3%
Modified internal rate of
return 2 1.3%
No answer 4 2.7%
Descriptive findings of fixed asset management practices of a sample of 99

trading and 51 manufacturing SMEs in Vietnam are summarized as follows:
• Near 80 percent of SMEs always or often evaluate capital projects before making
decisions on investment and review the efficiency of utilizing fixed assets after
acquisitions.
• 87 percent of SMEs stated that they use payback period technique in capital
budgeting, only 27.3 percent use the more sophisticated discounted cash flows;
that is, the net present value (NPV), internal rate of return (IRR) and modified
internal rate of return (MIRR).
• These findings reveal that SMEs have a relatively strong regard for fixed asset
management.
5.3.2.7 Financial planning practices
To investigate financial planning practices, respondents were asked questions related to

frequency of preparing and reviewing financial budgets, kinds of financial budgets
prepared, responsibility for preparing financial budgets, and frequency of comparing
budgeted and actual results. Listed below are the results of response to the questions that
interviewers raised with SMEs in the sample.
Table 5.21 (page 204) reports the frequency of preparing financial budgets. In line
with prior expectations, only 5.3 percent of SMEs in the sample “never” prepare any kind
of financial budgets. A majority of SMEs in the sample (76.6%) “always or often”
203
prepared financial budgets during business operations. The remainder “rarely or

sometimes” prepared budgets.
Table 5.21: Frequency of preparing and reviewing financial budgets

Preparing financial budgets Never 8 5.3%
Rarely 7 4.7%
Sometimes 20 13.3%
Often 62 41.3%
Always 53 35.3%
Total 150 100.0%
Table 5.22 reports the percentages of SMEs in the sample that prepared types of
budgets. One hundred thirty-one of 150 SMEs asked (87.3%) had prepared sales budgets,
representing the highest percentage, while only 34 and 41 percent had ever prepared
budget balance sheets and budget profit and loss statements respectively. This is
consistent with the reported situation that SMEs in Vietnam rarely prepare budget
balance sheets and income statements though they frequently prepared actual balance
sheets and income statements (Table 5.7, page 192).
Table 5.22: Kinds of financial budgets prepared

Kinds of budget prepared Sales budget 131 87.3%
Manufacturing budget 51 34.0%
Purchase budget 71 47.3%
Labour budget 90 60.0%
Overhead cost budget 86 57.3%
Selling and administration expense
budget 105 70.0%
Cash budget 83 55.3%
Budgeted profit and loss account 62 41.3%
Budgeted balance sheet 52 34.7%
It may be explained that SMEs in Vietnam are unfamiliar with preparing budget
balance sheets and income statements. In contrast, they are relatively familiar with
preparing other kinds of budgets such as sales budgets, selling and administration
expense budgets, labour budgets, overhead cost budgets, and cash budgets.
204
Regarding the responsibility for preparing financial budgets, Table 5.23 reveals
that 62 percent of responding SMEs have employed or internal accountants prepare
financial budgets, falling to 34.7 percent using chief-accountants and 20.6 percent using
owners or managers. Once again, employed accountants are recognized as playing very
important roles in financial management practices while external accountants are rarely
used by SMEs (1.3%).
Table 5.23: Responsibility – preparing financial budgets

Responsibility for preparing budgets Owner 23 15.3%
Financial manager 8 5.3%
In addition to preparing financial budgets, up to 83 percent of SMEs in the sample

frequently compared between budget and actual results, only 2.7 percent rarely conduct
this comparison (Table 5.24). Furthermore, budget periods for comparing budget and
actual results tend to be relatively short. Over seventy-eight percent of SMEs carry out
comparisons of budget/actual results in monthly periods. This helps SMEs quickly to
respond to in achieving budgeted objectives.
Table 5.24: Frequency of comparing between budgeted and actual results

Frequency of actual/budgeted comparison Rarely 4 2.7%
Sometimes 17 11.3%
Often 51 34.0%
Always 74 49.3%
Total 150 100.0%
Periods of actual/budgeted comparison Weekly 9 6.0%
Monthly 118 78.7%
Quarterly 16 10.7%
Semiannually 4 2.7%
Annually 3 2.0%
Total 150 100.0%
In summary, related to financial planning practices of SMEs in the sample, the

following are findings:
205
• A majority of SMEs in the sample (76.6%) “always or often” prepared financial

budgets in the process of business operation.
• Types of budgets such as sales, selling and administration expenses, labour and
cash budgets are prepared by a majority of SMEs whereas fewer SMEs prepare
budget balance sheets and income statements.
• A majority of SMEs has employed accountants and chief-accountants prepare
budgets whereas the number of SMEs using external accountants to prepare
financial budgets is not significant.
• Up to 83 percent of SMEs in the sample frequently compare budget and actual
results monthly.
In addition to financial management practices as reported earlier, this study also aims at
describing financial characteristics of SMEs. The next subsection presents descriptive
findings of financial characteristics of SMEs in the sample.
5.3.3 Descriptive findings of financial characteristics
Four financial ratios used as variables to measure financial characteristics in this study
were current ratio (liquidity measure), debt ratio and debt-to-equity ratio (leverage
measure), and total asset turnover (activity measure). In addition, three other ratios used
as measures of profitability were return on sales (ROS), return on assets (ROA), and
return on equity (ROE). For the purpose of profitability emphasis, profitability ratios will
be examined in subsection 5.3.4.
In this study, data related to financial characteristics were derived from financial
statements of firms. The responding SMEs were asked to use the financial statements of
the current year including balance sheets and income statements to calculate financial
ratios. These ratios were filled into part C of the questionnaire (Appendix 1), which was
designed to collect data regarding financial characteristics. Below are the descriptive
findings of financial characteristics of SMEs in the sample.
206
Table 5.25a: Descriptive statistics of financial ratios

N Minimum Maximum Mean Std. Deviation
Current ratio 150 0.33 12.00 2.4939 1.4980
Debt ratio 150 0.01 1.08 0.2936 0.1822
Debt-to-equity ratio 150 0.01 4.59 0.5396 0.7232
Total asset turnover 150 0.07 36.00 3.8386 5.3630
Return on sales(%) 150 - 3.00 31.50 4.1977 4.6126
Return on assets(%) 150 - 9.00 30.00 7.5131 6.3770
Return on equity (%) 150 -25.00 40.00 10.7515 8.6592
Valid N 150
Source: Data analysis for the study (N= Number of SMEs in the sample)
Table 5.25b: Descriptive statistics of financial ratios of trading SMEs

Current ratio 99 0.33 12.00 2.5049 1.5493
Debt ratio 99 0.01 0.90 0.3080 0.1892
Return on sales (%) 99 -3.00 21.00 3.9125 4.0661
Return on assets (%) 99 -9.00 30.00 7.4743 6.4427
Return on equity (%) 99 -25.00 40.00 10.6208 9.0835
Valid N 99
Source: Data analysis for the study (N= Number of trading SMEs in the sample)
Table 5.25c: Descriptive statistics of financial ratios of manufacturing SMEs

Current ratio 51 1.00 8.00 2.4725 1.4077
Debt ratio 51 0.05 1.08 0.2657 0.1660
Return on sales(%) 51 -2.00 31.50 4.7512 5.5249
Return on assets (%) 51 -1.00 30.00 7.5882 6.3102
Return on equity (%) 51 -4.00 40.00 11.0051 7.8502
Valid N 51
Source: Data analysis for the study (N= Number of manufacturing SMEs in the sample)
Table 5.25a reports descriptive statistics of financial characteristics of the sample

of 150 SMEs without distinction between trading and manufacturing industries while
Table 5.25b and 5.25c respectively report descriptive statistics of financial characteristics
of the trading and manufacturing SMEs. Table 5.25b and 5.25c also demonstrate
differences in means of financial ratios between two groups (trading and manufacturing)
of SMEs. However, Table 5.26 reveals that the results of t-tests applied for testing the
207
differences in the means of financial ratios between two groups report that the differences
do not provide enough statistical evidence to conclude that there are differences between
two the groups.
Table 5.26: Test for difference of means of financial ratios between two groups
t df Sig. (2-tailed) Mean Std. Error
Difference Difference
Current ratio 0.125 148 0.901 3.240E-02 0.2591

Debt ratio 1.352 148 0.178 4.234E-02 3.131E-02
Debt-to-equity ratio 1.744 148 0.083 0.2160 0.1238
Total asset turnover 1.917 148 0.057 1.7566 0.9162
Return on sales (%) -1.055 148 0.293 -0.8387 0.7947
Return on assets (%) -0.103 148 0.918 -0.1139 1.1028
Return on equity (%) -0.257 148 0.798 -0.3843 1.4972
5.3.3.1 Liquidity (Current ratio)
Tables 5.25 (a, b, and c, page 207) report that SMEs in the sample maintain relatively
high liquidity ratios. On average, current ratios of SMEs are 2.50 for trading and 2.47 for
manufacturing. Some SMEs have current ratios up to 12.00. These ratios are higher than
Vuong Quan Hoang (1998)’s findings, which reported that the average current ratio of
SMEs in Vietnam is 2.10 (chapter 2, Table 2.21, page 54).
Table 5.27: Comparison of current ratios

Osteryoung, Constand and Nast (1992)’s research Current research
Industry Cur. Ratio Industry Cur. ratio
Trading (Average) 2.67 Trading 2.50
Apparel 2.60
Building materials and supplies 2.40
Drugs 3.20
Food and beverage 2.50
Furniture/appliances 2.40
Jewelry 3.00
Shoes 2.60
Manufacturing (Average) 2.05 Manufacturing 2.47
Furniture 2.40
Electronic components 1.70
Machine tools and equipment 2.10
Apparel 2.00
Source: Osteryoung, Constand and Nast (1992) research and data analysis for this study
208
However, comparing the current research’s findings with Osteryoung, Constand and Nast
(1992)’s findings (Table 5.27, page 208) reveals that both studies reported current ratios
similar for trading but rather different for manufacturing industry. The current research
finds that, on average, the current ratio of manufacturing SMEs in Vietnam (2.47) is
rather higher that of Osteryoung, Constand and Nast (1992)’s research (2.05).
Table 5.28 reveals that over 90 percent of SMEs in the sample have a current ratio
greater than 1.00, and about 53 percent have a current ratio more than 2.00.
Table 5.28: Descriptive findings of SME current ratios

Current ratio Below 1 15 10.0%
From 1 to 1.5 40 26.7%
Over 1.5 to 2 15 10.0%
More than 2 80 53.3%
Total 150 100.0%
Maintaining excessively high current ratios has two outcomes. On one hand, it
reinforces liquidity, which help SMEs to sustain the uncertainty of business environment.
On the other hand, it affects profitability of SMEs because liquid assets have not been
used as profitable assets. In this context Van Horne (1986, p145) has stated that:
cash … profitability unfortunately, also will be less… resolution of trade-off
If resolving the trade-off between risk and profitability depends upon risk preferences of
management then for SMEs in Vietnam, maintaining excessively high current ratios is
acceptable because they operate in a relatively risky environment. However, from a
profitability perspective, it seems that maintaining high current ratio causes SMEs to be
less profitable than would be expected. This will be analyzed in section 5.4 where
bivariate techniques are used to examine the relationship between liquidity and
profitability of SMEs and the hypothesis of relation between current ratio and
profitability will be tested.
209
5.3.3.2 Financial leverage (Debt and debt-to-equity ratio)
Table 5.25a (page 207) indicates that, the average debt ratio of SMEs in the sample was
30%, that is, 30 percent of total assets of SMEs are financed from debt and 70 percent
from equity. This finding is lower than that reported by Vuong Quan Hoang (1998), who
indicated that the average debt-to-total asset ratio of SMEs in Vietnam was 40 percent
(chapter 2, Table 2.21, page 54). However, a few SMEs have debt ratios as high as 108
percent while others have low debt ratios of 10 percent. Generally speaking, debt ratios of
SMEs in the sample were not high. Table 5.29 reveals that 72 percent of SMEs had debt
ratios below 30% while less than 10 percent had debt ratios over 50%. This is not
surprising because, in the 1990’s, SMEs in Vietnam have extreme difficulty in finding
outside financing sources from commercial banks, credit unions or financial companies.
Table 5.29: Descriptive findings of SME debt ratios

Debt ratio Below 30% 108 72.0%
From 31% to 50% 28 18.7%
From 51% to 80% 11 7.3%
More than 80% 3 2.0%
Total 150 100.0%
Additionally, Table 5.25a (page 207) indicated that, on average, the debt-to-equity
ratio of SMEs in the sample was about 54%. This means that SMEs use about one dollar
of debt corresponding to one dollar of equity to finance their total assets. This feature is
consistent with the current status of SMEs in that they often use assets funded by equity
as collateral to borrow short-term or long-term capital sources. However, this debt-to-
equity ratio is considered relatively low compared with large companies, which often use
about 3 dollars of equity as collateral to borrow up to 7 dollars of debt (Vuong, 1998). In
consequence, the possibility of debt financing depends upon the volume of equity source
and SMEs with limited equity sources may have extreme difficulty in seeking debt-
financing sources for expansion or growth.
210
5.3.3.3 Business activity (Total asset turnover)
Table 5.25a (page 207) shows that the average total asset turnover (Sales/Total assets) of
SMEs in the sample is 3.84 and a few SMEs had total asset turnovers very high up to
36.00. This means that, on average, one dollar of total assets of SMEs produces 3.84
dollars of sales, relatively high efficiency in utilizing assets. Concerned with distribution
of total asset turnover, Table 5.30 reveals that only 18.7 percent of SMEs had total asset
turnovers less than 1 while the remainder had total asset turnovers greater than 1. This
suggests that most SMEs (81.3%) produce more than one dollar of sales from a dollar of
total assets. In addition, Table 5.30 shows that 18.7 percent of SMEs produce more than 5
dollars of sales from a dollar of total assets.
Table 5.30: Descriptive findings of SME activity ratio

Total asset turnover Below or equal 1 28 18.7%
More than 1 to 3 77 51.3%
More than 3 to 5 17 11.3%
More than 5 28 18.7%
Total 150 100.0%
It appears that the efficiency of utilizing total assets of SMEs in the sample is
relatively high. However, this is not sufficient evidence to conclude that SMEs are
profitable. The next subsection analyzes profitability of SMEs in the sample.
5.3.4 Descriptive findings of profitability of SMEs
One of the main objectives of this research study was to investigate profitability of
SMEs. As indicated in chapter 1, this research investigated (1) whether or not SMEs in
Vietnam are profitable, and (2) whether financial management practices and financial
characteristics affect their profitability. Below are descriptive findings related to the first
question while findings to answer the second question will be reported in section 5.4.
211
5.3.4.1 Overview of profitability
As defined in chapter 1, a business is said to be “profitable” if it produces an annual

average profit return that is greater than the free-risk rate of interest, which is estimated
as 5.4 percent in the 1990’s in Vietnam. Conversely, if the annual average profit of a
business is not greater than the free-risk rate of interest, the business is said to be “not
profitable or unprofitable”. The annual average profits are averaged from three
profitability ratios: return on sales, return on assets and return on equity. The free-risk
rate of interest is here defined as the deposit rate of interest of state-owned commercial
banks, which is of 0.45% per month or 5.4% per year in the year 2000.
The arguments for the definition of SME profitability as mentioned above are
based on the following propositions:
• Firstly, the deposit rate of interest offered by state-owned commercial banks is

considered free-risk because these commercial banks are secured by the
Government.
• Secondly, the free-risk rate of interest is considered the opportunity cost of
capital, and SMEs have to produce annual average profits greater than their
opportunity cost, otherwise they should cease operating and deposit money into
the banks for free-risk rate of interest.
Based on the definition of profitability as indicated earlier, Table 5.31 (page 213) reports
that 99 of 150 SMEs surveyed (66%) were profitable. While the remainder (34%) was
not profitable, that is, they could not produce an annual average profit return that was
higher than the free-risk rate of interest. Table 5.31 also shows the size of annual profits
of SMEs. Only about 10 percent of SMEs had annual profits of more than VND500 2
million while about 50 percent have annual profit range from VND50 to VND300
million, and 18 percent annually earn less than VND50 million. Levels of annual profit of
SMEs in Vietnam are small compared to other countries because firm size is low in terms
of total assets and labour.
2
Equivalent of USD35, 714, by the current exchange rate of VND14, 000 for 1USD
212
Table 5.31: Overview of SME profitability

Profitability Not profitable 51 34.0%
Profitable 99 66.0%
Total 150 100.0%
Annual profits Less than 50 million dong 27 18.0%
50 to 300 million dong 74 49.3%
301 to 500 million dong 33 22.0%
More 500 million dong 16 10.7%
Total 150 100.0%
What has been discussed above is only an overview of SME profitability, which
answered the first research question outlined in chapter 1. A more specific analysis was
carried out in subsections 5.3.4.2 and 5.3.4.3 to provide a deeper analysis of profitability
of SMEs in the survey.
5.3.4.2 Profitability and business structure
This subsection analyzes profitability of SMEs in relation to business structure to

investigate which types of SMEs are profitable. Table 5.32 reports relationships between
profitability and type of industry in which manufacturing SMEs are found to be more
profitable than trading. In terms of business structure, manufacturing industry accounted
for 34% of SMEs in the sample but 36.4 percent of manufacturing SMEs are profitable
while trading industry accounted for 66% but only 63.6 percent are profitable.
Conversely, up to 70.6 percent of trading SMEs are not profitable while this percentage is
only 29.4 percent for manufacturing.
Table 5.32: Relationship between profitability and types of business

Not profitable Profitable Total
No. % No. % No. %
Type of industry Trading 36 70.6% 63 63.6% 99 66.0%
Manufacturing 15 29.4% 36 36.4% 51 34.0%
Total 51 100.0% 99 100.0% 150 100.0%
The form of ownership Private enterprise 8 15.7% 32 32.3% 40 26.7%
Limited company 40 78.4% 65 65.7% 105 70.0%
Joint stock company 3 5.9% 2 2.0% 5 3.3%
Total 51 100.0% 99 100.0% 150 100.0%
213
On the other hand, Table 5.32 (page 213) also provides the findings of
relationships between profitability and business structure in which private enterprises are
more profitable than limited and joint stock companies. In term of structure, private
enterprises, limited companies, and joint stock companies accounted for 26.7%; 70.0%;
and 3.3 percent respectively, but the percentage of profitable SMEs are correspondingly
32.3%; 65.7%; and 2.0 percent for private enterprises, limited companies, and joint stock
companies. As such, although limited companies occupy 70.0 percent of SMEs in the
survey, only 65.7 percent are profitable while private enterprises occupy 26.7 percent but
32.3 percent are profitable and 15.7 percent are not profitable.
5.3.4.3 Profitability and business size
This subsection analyzes profitability of SMEs in relation to business size to investigate

which business size groups (very small, small, or medium) are profitable. Table 5.33
reveals smaller businesses in terms of total assets, annual sales, and labour are more
profitable than larger SMEs. For SMEs that have total assets less than VND5 billion, the
percentage of profitable SMEs was higher than that of unprofitable SMEs. These findings
support the view that “small” is profitable.
Table 5.33: Relationship between profitability and business characteristics

Not profitable Profitable Total
No. % No. % No. %
Total assets Less than 5 billion dong 45 88.2% 90 90.9% 135 90.0%
5 To 10 billion dong 3 5.9% 5 5.1% 8 5.3%
More than 10 billion dong 3 5.9% 4 4.0% 7 4.7%
Total 51 100.0% 99 100.0% 150 100.0%
Annual sales Less than 5 billion dong 36 70.6% 74 74.7% 110 73.3%
5 to 30 billion dong 13 25.5% 20 20.2% 33 22.0%
31 to 50 billion dong 1 2.0% 1 1.0% 2 1.3%
More than 50 billion dong 1 2.0% 4 4.0% 5 3.3%
Total 51 100.0% 99 100.0% 150 100.0%
No. of employees 1 to 10 employees 18 35.3% 48 49.5% 66 44.6%
11 to 30 employees 22 43.1% 30 30.9% 52 35.1%
31 to 50 employees 2 3.9% 6 6.2% 8 5.4%
51 to 100 employees 5 9.8% 5 5.2% 10 6.8%
101 to 250 employees 4 7.8% 6 6.2% 10 6.8%
More than 250 employees 2 2.1% 2 1.4%
Total 51 100.0% 97 100.0% 148 100.0%
214
In summary, analysis conducted in subsections 5.3.4.2 and 5.3.4.3 provided

descriptive findings of relationships between profitability and business structure, and
size. These findings are summarized as follows:
• The percentage of profitable SMEs in manufacturing industry is higher than that

of the trading industry.
• In term of form of ownership, the percentage of profitable SMEs is found higher
for private enterprises than that of limited and joint stock companies.
• In term of business size, the percentage of profitable SMEs is found higher for
smaller businesses than that for larger SMEs.
However, these are relatively simple descriptive statistical analysis of relationships

between profitability and business structure, and business size. More sophisticated
statistical analysis related to SME profitability will be examined and reported in section
5.4 in which bivariate analysis and multivariate analysis were applied.
5.4 ASSOCIATIVE ANALYSIS AND FINDINGS OF THE RESEARCH STUDY
This section demonstrates and reports to what extent data collected from the survey of
150 SMEs in Ho Chi Minh City, Vietnam supports the model presented in subsection
4.4.2 and hypotheses outlined in subsection 4.4.3 of chapter 4 (page 165). Firstly,
subsection 5.4.1 used factor analysis to reduce the large number of variables measuring
financial management practices into principal factors or components. Subsection 5.4.2
presents results of using bivariate analysis technique to analyze associations between
financial management practices, financial characteristics and profitability and subsection
5.4.3 reports results using multi-regression analysis to test the model of simultaneous
impact of financial characteristics and financial management practices on SME
profitability. Finally, subsection 5.4.4 reports the result of tests for difference in average
profits between efficient and inefficient financial management groups of SMEs.
215
5.4.1 Factor analysis and principal components of financial management

practices
As indicated in chapter 4, the efficiency of financial management practices is a complex
and multi-dimension construct. In term of context, financial management practices may
be summarized into the following areas: (1) accounting information systems, (2) financial
reporting and analysis, (3) cash management practices, (4) receivable management
practice, (5) inventory management practices, (6) fixed asset management practices, and
(7) financial planning practices (McMahon, 1998). Chapter 4 also indicated the efficiency
of each area of financial management practices was generally measured by 8 items on
nine-point scales. The efficiency of receivable management practices was measured by 9
items on a nine-point scale. In consequence, the efficiency of financial management
practices of SMEs in the survey was measured by index or composite measure of 57
items (8 items of each area plus 9 item of receivable management area) on nine-point
scales.
Using index or composite measurements as mentioned above to measure the
efficiency of financial management practices aims at increasing the validity of
measurements. However, a large number of variables related to financial management
practices made data analysis more difficult and complicated. Factor analysis is often used
to overcome this obstacle by grouping together variables that are highly correlated into
“principal components” and, as a result, bring a simplification to analysis (Lehmann,
Gupta, and Steckel, 1998).
The fifty-seven items (as indicated in section 4.4 of chapter 4) of financial
management practices of 150 SMEs in the sample were used as input for the SPSS
(Statistical Package for Social Science) computer program to obtain the principal
components. Each principal component is a linear combination of items of the financial
management practices. Coefficients of the items of financial management practices used
to construct principal components are called “factor loadings”. The proportion of
variation explained by each principal component is found by dividing the sum of squared
loadings (known as Eigen value) by the number of items of financial management
practices. By using Kaiser’s (1960) significant rule, which suggested principal
components with Eigen values greater than unity should be considered statistical
216
Table 5.34: Total variance explained and three principal components of financial management practices
Initial Eigenvalues Extraction sums of squared loadings Rotation sums of squares loadings
Co. Total % of Cumulative Total % of Variance Cumulative Total % of Variance Cumulative
Variance % % %
1 45.238 79.365 79.365 45.238 79.365 79.365 17.083 29.969 29.969
2 1.655 2.903 82.268 1.655 2.903 82.268 16.128 28.296 58.265
3 1.069 1.876 84.144 1.069 1.876 84.144 14.751 25.879 84.144
4 .893 1.567 85.711
5 .763 1.338 87.049
6 .618 1.085 88.134
7 .491 .861 88.995
8 .439 .770 89.765
9 .418 .734 90.499
10 .354 .622 91.121
11 .320 .562 91.683
12 .314 .551 92.234
13 .286 .502 92.736
14 .267 .469 93.205
15 .256 .449 93.654
16 .243 .425 94.079
17 .210 .368 94.447
18 .198 .347 94.794
19 .181 .318 95.112
20 .175 .306 95.418
21 .173 .304 95.722
22 .165 .290 96.012
23 .150 .264 96.276
24 .145 .255 96.531
25 .137 .240 96.770
26 .129 .226 96.996
27 .119 .209 97.205
28 .112 .196 97.401
29 9.895E-02 .174 97.574
30 9.540E-02 .167 97.742
31 9.099E-02 .160 97.901
32 8.716E-02 .153 98.054
33 8.388E-02 .147 98.201
34 7.860E-02 .138 98.339
35 7.608E-02 .133 98.473
36 7.294E-02 .128 98.601
37 6.485E-02 .114 98.714
38 6.223E-02 .109 98.824
39 6.013E-02 .105 98.929
40 5.706E-02 .100 99.029
41 5.244E-02 9.199E-02 99.121
42 5.004E-02 8.778E-02 99.209
43 4.379E-02 7.683E-02 99.286
44 4.274E-02 7.497E-02 99.361
45 4.213E-02 7.391E-02 99.435
46 3.965E-02 6.957E-02 99.504
47 3.633E-02 6.373E-02 99.568
48 3.499E-02 6.139E-02 99.629
49 3.346E-02 5.870E-02 99.688
50 3.104E-02 5.446E-02 99.743
51 2.986E-02 5.239E-02 99.795
52 2.532E-02 4.442E-02 99.839
53 2.389E-02 4.191E-02 99.881
54 1.960E-02 3.438E-02 99.916
55 1.698E-02 2.979E-02 99.945
56 1.566E-02 2.748E-02 99.973
57 1.541E-02 2.703E-02 100.000
Extraction Method: Principal Component Analysis.
217
significant, three principal components with Eigen values greater than unity were retained
(Table 5.34, page 217). These three principal components account for 84.14 percent of
the variation in the original data set consisting of fifty-seven items of financial
management practices. Cumulative variance explained by the three principal components
and their Eigen values are shown in Table 5.34 (page 217).
Table 5.34 identified three principal components of financial management
practices. However, since all items of financial management practices make a
contribution to each principal component, one of the difficulties in principal component
analysis is the interpretation of principal components. To facilitate an easier interpretation
of principal components, factor rotation methods were developed. This research study
uses varimax orthogonal rotation method developed by Kaiser (1958) because this
method is widely used (Chaganti et al., 1989, Weinrauch et al., 1991, Meric and Meric,
1992, Serwinek, 1992, and Busenitz, 1996). This rotation method is based on the criterion
of maximizing the factor loadings of dominant variables in each principal component.
Kaiser’s (1958) varimax rotation facilitates an easier interpretation of principal
components. The factor loadings of the three principal components are presented in Table
5.35 (page 219). The three principal components representing various financial attributes
of the firms can be named in accordance with the factor loadings of the fifty-seven items
of financial management practices as shown in Table 5.36.
Table 5.36: Three principal components of financial management practices

Com. Name of the principal component Eigen Cumulative variance
value explained (%)
1 Working capital management and short-term
planning practices 45.238 29.969 (~29.97)
2 Fixed asset management and long-term planning
practices 1.655 58.265 (~58.27)
3 Financial and accounting information practices 1.069 84.144 (~84.14)
The product of the squared root of the Eigen value of the principal component and
the factor loadings of each financial management practice items shows the correlation
between the principal component and the financial management practice item. Therefore,
the financial management practice item with the highest factor loadings in the three
statistically significant principal components are presented in Table 5.35 (page 219).
218
Table 5.35: Factor analysis results for measuring financial management practices
Component
1 2 3
Regard accounting information system .389 .336 .764
Prepare accounting information system .410 .285 .783
Update accounting information system .354 .326 .802
Managers/owners involve in preparing accounting information system .440 .372 .698
Managers/owners involve in interpreting accounting information system .447 .420 .685
Acceptability of accounting information system .293 .372 .820
Usefulness of accounting information system .336 .359 .783
Computerization of accounting information system .287 .419 .751
Regard to financial reporting and analysis .525 .486 .582
Frequency of preparing financial statements .503 .422 .631
Owners/managers involve in preparing financial statements .524 .496 .532
Owners/managers involve in interpreting financial statements .565 .537 .477
Usefulness of financial statements .487 .521 .542
Frequency of financial statement analysis .603 .542 .413
Usefulness of financial ratios .452 .605 .527
Computerization of financial reporting & analysis .401 .727 .394
Regard to cash management practices .628 .334 .609
Preparing cash budget .681 .375 .469
Owners/Managers involve in preparing cash budgets .724 .345 .476
Owners/Managers involve in interpreting and using cash budget .728 .343 .488
Usefulness of cash budget .684 .387 .493
Application of cash management theories .566 .486 .553
Acceptability of target cash balance .622 .424 .566
Computerization of cash management .518 .489 .549
Regard to receivables management practices .601 .376 .578
Review debt 's discount period .631 .441 .514
Reasonability of debts' credit period .503 .506 .570
Review debt 's discount policy .618 .535 .427
Discount policy .616 .540 .420
Review percentage of bad debts .618 .485 .473
Reasonability of percentage of bad debts .571 .543 .457
Frequency of implementation of receivable management theories .493 .604 .482
Computerization of receivable management .448 .600 .426
Regard to inventory management practices .681 .436 .435
Review inventory turnover .712 .427 .391
Review inventory level .717 .432 .393
Inventory turnover .670 .498 .394
Acceptability of inventory level .623 .516 .416
Usefulness of inventory budgets .662 .509 .342
Application of inventory management theories .514 .602 .443
Computerization of inventory management .387 .558 .463
Regard to fixed asset management .516 .677 .385
Regard to assessing capital projects .514 .660 .347
Review capital projects .483 .672 .376
Acceptability of capital budgeting .513 .697 .374
Apply techniques of capital budgeting .409 .763 .386
Reasonability of utilizing fixed assets .508 .637 .396
Usefulness of fixed assets acquired .511 .640 .347
Computerization of fixed assets management .270 .746 .438
Regard to financial planning .602 .597 .424
Prepare financial budgets .591 .630 .367
Owner/manager involve in preparing financial budgets .705 .478 .363
Owner/manager involve in interpreting and using financial budgets .686 .511 .395
Usefulness of financial budgets in providing information for making decisions .600 .586 .391
Compare between actual and budgeted results .569 .612 .393
Acceptability of financial planning techniques used .484 .741 .294
Computerization of financial planning .199 .803 .301
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.
219
The names given to the three statistically significant principal components are
shown in Table 5.36 (page 218). In accordance with the factor loadings of financial
management items making the greatest contribution to the first principal component, it
was named “Working Capital Management and Short-term Planning Practices”. This
principal component accounts for 29.97 percent of the total variation in the original data
set. Similarly, the factor loadings of financial management items making the greatest
contribution to the second principal component, it was named “Fixed Asset Management
and Long-term Planning Practices”. The second principal component accounts for
28.30% (58.27% minus 29.97%) of the total variation in the original data set. Finally, the
factor loadings of financial management items making the greatest contribution to the
third principal component, it was named “Financial and Accounting Information
System”. The third principal component explains 25.87% (84.14% minus 58.27%) of the
total variation in the original data set. Cumulatively, three principal components
explained 84.14 percent of the total variation in the original data set.
In summary, factor analysis is a useful statistical tool to reduce a large set of
correlated variables to fewer unrelated dimensions and identifies a typology (Laitinen,
1991). In this study, factor analysis was used to group and reduce fifty-seven financial
management practice items, which were used to measure the efficiency of financial
management practices, in the original data set into three principal components of
financial management practices. Three principal components include (1) working capital
management and short-term planning practices (WCSP), (2) fixed asset management and
long-term planning practices (FALP), and (3) financial and accounting information
system (FAIS). These principal components will be used as the independent variables
replacing the fifty-seven items related to financial management practices and the variable
measuring the efficiency of financial management practices (EFF), which was developed
in chapter 4 to measure the efficiency of financial management practices. In subsections
5.4.2 and 5.4.3, as examining the relationship between profitability and financial
management, the three variables: WCSP, FALP, and FAIS are used as the independent
variables together with other independent variables such as current ratio (CUR), debt
ratio (DER) and total asset turnover (TAT).
220
5.4.2 Bivariate analysis and findings
Bivariate analysis is used for tests of association to investigate the relationships between
variables and reports the results on a correlation matrix before utilizing multiple
regression analysis. This is widely used by previous researchers (Murphy III, 1989; Litz
and Stewart, 2000). As indicated in chapter 4 and subsection 5.4.1, variables used in this
research study include the following:
• Dependent variables consisting of return on sales (ROS), return on assets (ROA),

return on equity (ROE), and profitability (PRO) defined as the average of ROS,
ROA and ROE
• Independent variables consisting of current ratio (CUR), debt ratio (DER), total
asset turnover (TAT), working capital management and short-term planning
practices (WCSP), fixed asset management and long-term planning practices
(FALP), and financial and accounting information system (FAIS).
Correlation matrixes are used for association analysis to determine whether correlation
and multicollinearity exist between variables.
5.4.2.1 Association between profitability and return on sales, return on assets and
return on equity
As indicated in chapter 4, this research study uses four variables: ROS, ROA, ROE, and
PRO as variables to measure profitability of SMEs. The correlation matrix of PRO, ROS,
ROA, and ROE are created to analyse correlation between these variables. The objective
of this analysis is to determine whether a single measure or many measures of
profitability should be used and, as a result, one model or many models should be tested.
In measuring correlation between these variables, the Pearson’s correlation coefficient is
widely used for variables measured by ratio or interval scales (Emory, 1985; Davis, 1996;
and Zikmund, 1997, p.627). Table 5.37 (page 222) below presents the correlation matrix
of variables measuring profitability of SMEs in the sample.
221
Table 5. 37: Correlation matrix of PRO, ROS, ROA, and ROE

Profitability Return on sales Return on assets Return on equity
(%) (%) (%)
Profitability (PRO) 1.000 .400** .924** .942**
Return on sales (ROS) .400** 1.000 .107 .122
Return on assets (ROA) .924** .107 1.000 .902**
Return on equity (ROE) .942** .122 .902** 1.000
** Correlation is significant at the 0.01 level (2-tailed).
The correlation matrix (Table 5.37) shows that profitability (PRO) and return on
sales (ROS), return on asset (ROA), and return on equity (ROE) are positively correlated
with the correlation coefficients r = 0.400, 0.924 and 0.942 (at 0.01 significant level)
respectively. Very high correlation coefficients between profitability and return on asset
and between profitability and return on equity are considered sufficient to warrant that
only one variable (PRO) needs to be analysed. However, the positive relationship with
correlation coefficient r = 0.400 between profitability and return on sales is not
considered sufficiently high to warrant only one measure of profitability and, thus, the
measures are analysed independently.
As such, after examining the correlation between dependent variables, two
variables: ROA and ROE were dropped because they are highly correlated with PRO.
Consequently, only ROS and PRO are used as dependent variables to measure
profitability of SMEs and two models of SME profitability are tested in this research.
5.4.2.2 Association between financial management practices, financial characteristics

and profitability
This subsection uses correlation matrix to investigate the correlation between financial
management practices, financial characteristics and profitability of SMEs. Objectives of
this analysis are to discover the relationship between the dependent variable (ROS or
PRO) and independent variables and to determine whether the multicollinearity exists.
According to Murphy III (1989), multicollinearity indicates a problem in multiple
regression analysis. As the independent variables have a high probability of correlation,
the regression coefficient (the bs) becomes less reliable, and confidence in the accuracy
222
of the equation is questioned. A general rule is that if a correlation between any two
independent variables is greater than or equal 0.70, then a high degree of interrelationship
can be inferred, and the possibility of multicollinearity exists (Murphy III, 1989).
Correlation matrix as shown in Table 5.38 is used to determine whether
relationships between financial characteristics, financial management practices and
profitability and multicollinearity among independent variables exist.
Table 5.38: Correlation matrix of PRO and independent variables

Profit- Current Debt Total WCSP FALP FAIS
ability ratio ratio asset
turnover
Profitability 1.000 -.553** .155 .381** .399** .498** .343**
Current ratio -.553** 1.000 -.349** -.101 -.281** -.299** -.310**
Debt ratio .155 -.349** 1.000 .096 -.102 .024 .209*
Total asset turnover .381** -.101 .096 1.000 .121 .235** .130
Working capital management and
short-term planning practices .399** -.281** -.102 .121 1.000 .000 .000
(WCSP)
Fixed asset management and long-
term planning practices (FALP) .498** -.299** .024 .235** .000 1.000 .000
Financial and accounting
information system (FAIS) .343** -.310** .209* .130 .000 .000 1.000
* Correlation is significant at the 0.05 level (2-tailed).
The first row of Table 5.38 shows the correlation coefficients between PRO and
the independent variables. As expectedly, the relationships between profitability and
working capital management and short-term planning practices, fixed asset management
and long-term planning practices, and financial and accounting information system are
significantly positive with respective correlation coefficients r = 0.399; 0.498; and 0.343.
Table 5.38 also shows the significantly positive correlation between profitability and total
asset turnover with r = 0.381. Conversely, Table 5.38 reveals the relationships between
profitability and current ratio is significantly negative with correlation coefficients r = -
0.553.
In addition, Table 5.38 shows significant inter-correlation among variables in
which current ratio is be found to negatively correlate to debt ratio (r = - 0.349), working
capital management and short-term planning practices (r = - 0.281), fixed asset
management and long-term planning practices (r = - 0.299), and financial and accounting
223
information system practices (r = - 0.310). Similarly, inter-correlation is also found

among other variables. However, correlation coefficients are not strong enough to cause
multicollinearity because, as indicated by Murphy III (1989), if a correlation between
any two independent variables is greater than or equal 0.70, then the possibility of
multicollinearity exists.
The first row of Table 5.39 shows the correlation coefficients between ROS and
the independent variables as well as among independent variables.
Table 5.39: Correlation matrix of ROS and the independent variables

Return Current Debt Total WCSP FALP FAIS
on sales ratio ratio asset
(%) turnover
Return on sales (%) 1.000 -.286** -.025 -.256** .248** .128 .168*
Current ratio -.286** 1.000 -.349** -.101 -.281** -.299** -.310**
Debt ratio -.025 -.349** 1.000 .096 -.102 .024 .209*
Total asset turnover -.256** -.101 .096 1.000 .121 .235** .130
Working capital management and
short-term planning practices .248** -.281** -.102 .121 1.000 .000 .000
(WCSP)
Fixed asset management and long-
term planning practices (FALP) .128 -.299** .024 .235** .000 1.000 .000
Financial and accounting
information system (FAIS) .168* -.310** .209* .130 .000 .000 1.000
As expected, the relationship between return on sales and working capital

management and short-term planning practices is significantly positive with r = 0.248.
Return on sales and financial and accounting information system practices are also
positively but not strongly correlated with r = 0.168 and a significance level of 0.05.
Conversely, Table 5.39 reveals the relationships between return on sales and current
ratio, and between return on sales and total asset turnover are significantly negative with
correlation coefficients r = - 0.286 and – 0.256 respectively. However, Tables 5.39
demonstrates there are no significant relationships between return on sales and debt ratio
as well as between return on sales and fixed asset management and long-term planning
practices.
Bivariate analysis with using Pearson’s correlation coefficients and presenting the
results by correlation matrix only examines association between the dependent variable
and each of independent variables. It is not appropriate and, thus, could not used to
224
examine the simultaneous impact of many independent variables on dependent variable,

whereas multivariate analysis is appropriate for examining the simultaneous impact of
many independent variables on the dependent variable (Zikmund, 1997).
5.4.3 Multiple regression analysis and findings
In this subsection, multiple regression analysis was used to determine whether

independent variables (CUR, DER, TAT, WCSP, FALP and FAIS) simultaneously
impact the dependent variable (ROS or PRO). As a result, the subsection examines
whether the multiple regression equation can be used to explain the causal theory of
impact of financial characteristics and financial management practices on SME
profitability.
5.4.3.1 Simultaneous impact of financial characteristics and financial management

practices on SME profitability (Model 1)
For this model, profitability was used as the dependent variable and independent
variables included current ratio, debt ratio, total asset turnover, working capital and short-
term planning practices, fixed asset management and long-term planning practices, and
financial and accounting information systems. The relationship between dependent
variable and independent variables, and results of testing significance of the model have
been respectively interpreted. In interpreting the results of multiple regression analysis,
three major elements considered were the coefficient of multiple determination, the
standard error of estimate and the regression coefficients (Emory, 1985; Davis, 1996;
Lehmann, Gupta, and Steckel, 1998). These elements and the results of multiple
regression analysis were presented and interpreted in Table 5.40 below.
Firstly, Table 5.40 (page 226) reveals that SME profitability and financial
characteristics (measured by current ratio, debt ratio and total asset turnover) and
financial management practices (measured by working capital management and short-
term planning practices, fixed asset management and long-term planning practices, and
financial and accounting information system) are significantly correlated with the
correlation coefficient R = 0.78. Table 5.40 also reports the model of SME profitability
225
with the coefficient of determination R2 = 0.608 at a significant level of p = 0.0001. The

coefficient of determination indicated that 60.8% of the variation in profitability for the
sample of 150 SMEs can be explained by the changes in 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
system while 39.2% remains unexplained.
In addition, Table 5.40 reports the summary ANOVA (analysis of variance) table
and F statistic, which reveals the value of F (36.994) is significant at the 0.0001 level.
The value of F is large enough to conclude that the set of independent variables (CUR,
TAT, WCSP, FALP, and FAIS) as a whole was contributing to the variance in SME
profitability and therefore the model represents actual performance of SMEs (Keller,
Warrack, and Bartel, 1994; Davis, 1996).
Table 5.40: SME profitability regression model using profitability as dependent variable
Unstandardized Std. Error Standardized t Sig.
Coefficients Coefficients
Model B Beta
1 (Constant) 8.831 .936 9.436 .000
Current ratio -.907 .233 -.256 -3.893 .000
Debt ratio .570 1.693 .020 .337 .737
Total asset turnover .196 .055 .198 3.590 .000
Working capital management and short- 1.614 .303 .305 5.321 .000
term planning practices
Fixed asset management and long-term 1.980 .305 .374 6.488 .000
planning practices
Financial and accounting information 1.240 .299 .234 4.152 .000
system practices
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .780 .608 .592 3.3851
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 2543.548 6 423.925 36.994 .000a
Residual 1638.658 143 11.459
Total 4182.207 149
a Predictors: (Constant), Financial and accounting information system practices, Fixed asset management
and long-term planning practices, Working capital management and short-term planning practices, Debt
ratio, Total asset turnover, Current ratio
b Dependent Variable: Profitability (%)
The remaining step in the evaluation of the regression equation is to estimate the
contribution of each independent variable in the study. Generally, all independent
variables, except debt ratio, significantly contributed in variance of profitability at a
226
significance level of 0.0001. However, the relative importance of association of each

independent variable was different. This was evaluated and interpreted by the
standardized coefficients of correlation (beta).
Current ratio – Profitability was negatively related to current ratio with β = -
0.256 at a significance level of 0.0001 and support was found for hypothesis one, which
stated that current ratio is negatively related to profitability. This finding is also
consistent with Van Horne (1986)’s theory of relationship between profitability and
liquidity.
cash … profitability unfortunately, also will be less… resolution of trade-off
risk preferences of management (Van Horne, 1986).
As such the result of testing indicated hypothesis one, which was based on Van Horne’s
(1986) theory, was strongly supported. This implies that SMEs that have relatively high
current ratios will be less profitable and vice versa. Additionally, it provided empirical
evidence to support the theory of relationship between profitability and liquidity
developed by Van Horne (1986) and explained why the percentage of SMEs that were
not profitable is relatively high in this research study. This finding is also consistent with
the descriptive finding of relationship between profitability and current ratio as shown in
Table 5.41 below.
Table 5.41: Descriptive finding of relationship between profitability and current ratio
Profitability Total
Not profitable Profitable No. %
No. % No. %
Current ratio Below 1 0 0.0% 15 15.2% 15 10.0%
From 1 to 1.5 2 3.9% 38 38.4% 40 26.7%
From 1.51 to 2 4 7.8% 11 11.1% 15 10.0%
More than 2 45 88.2% 35 35.4% 80 53.3%
Total 51 100.0% 99 100.0% 150 100.0%
Table 5.41 shows all SMEs with current ratio below 1 are profitable, and the higher
current ratio, the higher percentage of unprofitable SMEs.
227
Debt ratio – Table 5.40 (page 226) shows the relationship between profitability
and debt ratio is not significant and, as a result, hypothesis two, which stated that debt
ratio is positively related to profitability, was not supported. While unexpected, this could
be explained by two reasons. Firstly, profitability was not found to be significantly
related to the debt ratio and this might have occurred because the current ratio and the
debt ratio are related concepts. The correlation with r = 0.349 could indicate
multicollinearity in the model. However, it is not high enough (r <0.7) to question the
validity of the regression model. Secondly, profitability and debt ratio are not always
linear related as indicated by Edward and Cooley (1979).
favourable, and the higher leverage factor, the higher the rate of return on
common equity.
When the rate of return on assets exceeds the cost of debt, debt ratio is positively related
to profitability. However, when the debt ratio is continually increasing, the cost of debt
will be increased and profitability will decrease. At this point, the debt ratio is negatively
related to the profitability. Figure 5.3 (page 228) shows the relationship between the debt
ratio and profitability by which the relationship may be considered in two phases.
At the first phase, the debt ratio is below 0.6 and the profitability and debt ratio
are positively related. However, at the second phase, as the debt ratio increases over 0.6
the profitability and debt ratio are negatively related. This may be explained as follows.
When the debt ratio exceeds 0.6 the debt-to-equity will exceed 1. At that point, one dollar
of firm assets is corresponding to more than one dollar of debts. Consequently, firms will
increase risk, the cost of debt will be increased and profitability decreases. Therefore, at
this phase, profitability is negatively related to debt ratio. As such, debt ratio is not linear-
related to profitability but cubic-related as shown in figure 5.4. However, financial
leverage is a complicated issue and the detailed explanation of this issue is beyond this
research study. It should be considered and discussed in further research.
228
Figure 5.4: Relationship between profitability and debt ratio
MODEL: MOD_1.
Independent: DER
Dependent Mth Rsq d.f. F Sigf b0 b1 b2 b3
PRO LIN .024 148 3.65 .058 6.1631 4.5102

PRO CUB .096 146 5.15 .002 6.9367 -13.970 72.5457 -63.198
Profitability
30
20
10
-10 Observed
Linear
-20 Cubic
-.0 .2 .4 .6 .8 1.0 1.2
Debt ratio
Total asset turnover – Table 5.40 (page 226) shows the result of t-test with t-
statistic = 3.590 and β = 0.198. Profitability was found to be positively related to total
asset turnover at a 0.0001 significance level. This finding supports hypothesis three,
which stated that profitability is positively related to total asset turnover. It is implied that
the higher total asset turnover SMEs, the more profitable they become. However, total
asset turnover with β = 0.198 is not relatively important compared to the current ratio (β
= 0.256) in contributing to variance of SME profitability.
Efficiency of financial management practices – Table 5.40 (page 226) reveals
that profitability is positively related to working capital management and short-term
planning practices with β = 0.305 and at 0.0001 significant level. Similarly, profitability
was found to be positively related to fixed asset management and long-term planning
practices and financial and accounting information system with β = 0.374 and 0.234
229
respectively and at a significance level of 0.0001. As such, strong support was found for
hypothesis four, which was developed in chapter 4 and stated that profitability is
positively related to the efficiency of financial management practices. This finding is also
consistent with the descriptive finding of the relationship between profitability and the
efficiency of financial management practices of SMEs in the sample as shown in Table
5.42 below.
Table 5.42: Relationship between SME profitability and the efficiency of financial management
practices
Profitability Total
Not profitable Profitable No. %
No. % No. %
Efficiency Inefficient financial 36 70.6% 5 5.1% 41 27.3%
management
Efficient financial management 15 29.4% 94 94.9% 109 72.7%
Total 51 100.0% 99 100.0% 150 100.0%
Table 5.42 above shows that the proportion of profitable SMEs is much higher for
SMEs that are efficient in financial management practices, while the proportion of
unprofitable SMEs is much higher for SMEs that are not efficient in financial
management practice.
Finally, Table 5.40 (page 226) shows that correlation coefficients of variables of
financial management practice are higher than that of financial characteristics. This
suggests that variables of financial management practices are more important than
financial characteristics in contributing to variance of SME profitability.
In summary, the results of multiple regression analysis in Table 5.40 revealed
that SME profitability was influenced by financial characteristics and financial
management practices at the significance level of 0.0001, and 60.8 percent of variation in
SME profitability (R2 = 0.608) can be accounted for variance in financial characteristics
and financial management practices. Specifically, findings of the impact of financial
characteristics and financial management practices on SME profitability are summarized
as follows:
230
• Current ratio is negatively related to SME profitability at a significance level of

0.0001 and with the standardized correlation coefficient of – 0.256. 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 0.198.
• All variables of financial management practices (WCSP, FALP, and FAIS) are
positively related to SME profitability at a significance level of 0.0001 and with
the standardized correlation coefficients of 0.305, 0.374 and 0.234 respectively. In
addition, variables of financial management practices are found to be more
important than that of financial characteristics in contributing to variation of SME
profitability.
As indicated earlier (page 228), because debt ratio was not related to SME profitability it
should be remove from the multiple regression equation to improve the accuracy of the
model (Murphy III, 1989). After removing the debt ratio and rerunning the program, the
results of multiple regression analysis are shown in Table 5.43.
Table 5.43: Regression model of SME profitability after removing debt ratio
Model B Beta
1 (Constant) 9.063 .629 14.401 .000
Current ratio -.936 .216 -.265 -4.343 .000
Total asset turnover .198 .054 .200 3.659 .000
Working capital management and 1.589 .294 .300 5.412 .000
short-term planning practices
Fixed asset management and long-term 1.967 .302 .371 6.518 .000
planning practices
Financial and accounting information 1.247 .297 .235 4.197 .000
system practices
Model Summary
1 .780 .608 .594 3.3747
ANOVAb
1 Regression 2542.250 5 508.450 44.646 .000a
Residual 1639.957 144 11.389
Total 4182.207 149
a Predictors: (Constant), Financial and accounting information system practices, Fixed asset
management and long-term planning practices, Working capital management and short-term planning
practices, Total asset turnover, Current ratio.
b Dependent Variable: Profitability
231
Table 5.43 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.
5.4.3.2 Simultaneous impact of financial characteristics and financial management

practices on return on sales (Model 2)
In the second model, return on sales (ROS) is used as the dependent variable while
independent variables including current ratio, debt ratio, total asset turnover, working
capital management and short-term planning practices, fixed asset management and long-
term management practices, and financial and accounting information system. Table 5.44
reports the results of testing the model and following are the findings and result
interpretation.
Table 5.44: SME profitability regression model using return on sales as dependent variable
Model B Beta
2 (Constant) 7.266 1.126 6.452 .000
Current ratio -.553 .280 -.180 -1.973 .050
Debt ratio -1.755 2.037 -.069 -.861 .391
Total asset turnover -.306 .066 -.355 -4.658 .000
Working capital management and short- 1.078 .365 .234 2.954 .004
term planning practices
Fixed asset management and long-term .733 .367 .159 1.997 .048
planning practices
Financial and accounting information .798 .359 .173 2.220 .028
system practices
Model Summary
2 .501 .251 .220 4.0738
ANOVAb
2 Regression 796.916 6 132.819 8.003 .000a
Residual 2373.220 143 16.596
Total 3170.136 149
a Predictors: (Constant), Financial and accounting information system practices, Fixed asset management
and long-term planning practices, Working capital management and short-term planning practices, Debt
ratio, Total asset turnover, Current ratio
b Dependent Variable: Return on sales(%)
Table 5.44 (page 232) reports the model representing the impact of financial
characteristics and financial management practice on return on sales with the coefficient
232
of determination R2 = 0.251 at a significant level of p = 0.0001. The coefficient of

determination indicated that 25.1% of the variation in return on sales is explained by the
five independent variables used to measure financial characteristics and financial
management practices, while 74.9% remains unexplained. In addition, Table 5.44 reveals
the value of F = 8.003 is significant at the 0.0001 level. The value of F is not high as that
of F in the first model but it is large enough to conclude that the set of independent
variables (CUR, TAT, WCSP, FALP, and FAIS) as a whole was contributing to the
variance in return on sales and the model is useful (Keller, Warrack, and Bartel, 1994;
Davis, 1996). The next step is to evaluate significance of correlation coefficients of
independent variables.
Current ratio – Similar to profitability, return on sales was negatively related to
the current ratio at 0.05 but not at a significance level of 0.001 (Table 5.44, page 232).
This finding is also consistent with Van Horne (1986)’s theory of relationship between
profitability and liquidity. As such, return on sales of SMEs that have relatively higher
current ratios will be lower and vice versa.
Debt ratio – Table 5.44 (page 232) shows the relationship between return on
sales and debt ratio is not significant. This is unexpected and could be explained that the
return on sales was not found to be significantly related to the debt ratio and this might
have occurred because current ratio and debt ratio are related concepts. The correlation
between current ratio and debt ratio with r = 0.349 could indicate multicollinearity in the
model. However, it is not high enough (r <0.7) to question the validity of the regression
model.
Total asset turnover – Unlike profitability, return on sales was found negatively
and strongly related to total asset turnover with β = - 0.355 and at a significance level of
0.0001 (Table 5.44, page 232). This is reasonable and expected because total asset
turnover is defined as sales divided by total assets, while return on sales is defined as net
profit divided by sales. If total asset turnover increases as the result of an increase in sales
then return on sales will decrease because return on sales is calculated by dividing net
profit by sales.
Efficiency of financial management practices – Three principal components of
financial management practices including working capital management and short-term
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planning practices, fixed asset management and long-term planning practices, and
financial and accounting information system are found to positively relate to return on
sales with respective correlation coefficients 2.954; 1.997 and 2.220 at a significance
level of 0.05. This finding also supports the hypothesis of a positive relationship between
profitability and the efficiency of financial management practices.
The results of multiple regression analysis in the case of return on sales used as
the dependent variable conducted earlier shows findings as that of multiple regression
analysis in the case of using SME profitability as the dependent variable, with the
exception of two differences as follows:
• Total asset turnover was found to be negatively related to return on sales while it
was found to be positively related to SME profitability.
• Variables measured the efficiency of financial management practices were
positively related to return on sales at 0.05 significant levels while they were
related to SME profitability at a significance level of 0.0001.
5.4.4 Test for the difference of average profits between efficient and
inefficient financial management groups of SMEs
As indicated in chapters 1 and 4, financial management practices included accounting

information system, financial reporting and analysis, cash management practices,
receivable management practices, inventory management practice, fixed asset
management practices, and financial planning. The extent of efficiency of each financial
management component is measured by the sum of points of eight items on the nine-
point scale (1 = not efficient at all, 9 = very efficient). If the sum of points of a financial
management component of a business is not less than the average point of 40, the
business is said to be “efficient” in applying that aspect of financial management.
Conversely, if the sum of a component is less than the average point of 40, the business is
said to be “not efficient” or “inefficient” in applying that component of financial
management. Lastly, a business is said to be efficient in financial management practices,
234
if all components of financial management practices are efficient. That means all sums of
points of components are greater than the average point of 40.
Based on the criteria mentioned above, the sample of 150 SMEs were divided into
two groups. The first included SMEs that were not efficient in financial management
practices is labeled as “inefficient group of SMEs”, and the second consisting of SMEs
that were efficient in financial management practices is labeled as “efficient group of
SMEs”. This subsection presents the result of testing the hypothesis of difference in mean
profits of two groups of SMEs.
Table 5.45 summarizes descriptive statistics of profitability of the two groups of
SMEs. The inefficient group of SMEs (41 SMEs) had mean profit return of 3.19% while
the efficient group of SMEs (109 SMEs) had mean profit return of 9.10%. This reveals
that the mean profit of the efficient group was nearly three times that of the inefficient
group.
Table 5.45: Descriptive statistics of profitability of two groups of SMEs

N Mean Std. Deviation Std. Error Mean
Inefficient financial management 41 3.1941 4.9262 .7693
Efficient financial management 109 9.1023 4.4840 .4295
Statistical test was conducted to determine whether the mean profit of the efficient
group of SMEs was greater than that of the inefficient group. A hypothesis was
developed in chapter 4 and following is the result of testing the hypothesis of difference
in the mean profits of the two groups of SMEs (Table 5.56).
Table 5.46: Independent group test of mean profit difference
t-test for equality of means
t df Sig. (2- Mean Std. error
tailed) difference difference
Profitability Equal variances assumed -6.999 148 .000 -5.9083 .8442
Equal variances not assumed -6.706 66.428 .000 -5.9083 .8811
The result of testing shown in Table 5.46 reveals that the null hypothesis of
equality of mean profits of two groups is rejected at a significance level of 0.0001.
Consequently, the hypothesis five indicated in chapter 4, which was stated that the mean
235
profit of SMEs that are efficient in financial management practices is different from that
of SMEs that are not efficient in financial management practices, was strongly supported.
It is concluded that the mean profit of SMEs that are efficient in financial management
practices was greater than that of SMEs that are not efficient.
5.5 CONCLUSIONS
In relation to research objectives and questions, the result of data analysis as presented in
chapter 5 provides descriptive findings of financial management practices and financial
characteristics of SMEs in Vietnam. SMEs in the sample were found to maintain a
relatively high liquidity ratio, low debt ratio and moderate total asset turnover.
More sophisticated statistical techniques were applied to analyze the relationships
between financial characteristics, financial management practices and SME profitability.
The results of multiple regression analysis indicated that SME profitability is
simultaneously influenced by financial characteristics (measured by CUR and TAT) and
financial management practices (measured by WCSP, FALP, and FAIS). SME
profitability was found to be positively related to total asset turnover, working capital
management and short-term planning practices, fixed asset management and long-term
planning practices, and financial and accounting information system at the significant
level of 0.0001. In contrast, SME profitability was found to be negatively related to the
current ratio. However, this study could not demonstrate the relationship between SME
profitability and the debt ratio. Consequently, support was found for the hypotheses one,
three and four but not for the hypothesis two.
To emphasize the importance of financial management practices and the impact
of the efficiency of financial management practices on SME profitability, the hypothesis
of difference in mean profit of two groups of SMEs was also tested. The result of testing
indicated that the mean profit of SMEs that are “efficient” in financial management
practices is greater than that of SMEs are “not efficient” in financial management
practices. This result is empirical evidence to demonstrate SMEs that they should pay
more attention to financial management practices if they want to improve their
profitability and survive in the uncertain business environment in Vietnam.
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Chapter Six:
Conclusions And Implications
6.1 INTRODUCTION
Chapter 5 presented data analysis and findings of the research study including descriptive
and associated findings in relation to the research questions and objectives. The thesis
ends with chapter 6 where conclusions drawn from data analysis and implications of the
research study will be respectively summarized and presented. The objectives of chapter
6 are (1) to summarize conclusions of financial management practices, financial
characteristics, and profitability of SMEs in the sample and the results of testing the
model of SME profitability, (2) to indicate how the research study can be implemented
by financial practitioners and the Government to improve profitability of the firm, and (3)
to suggest further research in the future.
This chapter is structured into five sections. Section 6.1 introduces the objectives
and structure of the chapter. Section 6.2 summarizes conclusions related to the research
questions and testing the model including conclusions on financial management
practices, financial characteristics and SME profitability, and conclusions and revision of
the model of SME profitability. Section 6.3 indicates how the research study can be
applied to financial management practices of SMEs and knowledge of financial
management for SMEs in general.
Section 6.4 examines the limitations of the research study, and section 6.5 ends
the chapter by raising implications and suggestions for further research. Figure 6.1
provides a visual picture of the chapter outline and links among sections as indicated
earlier.
Chapter Six: Conclusions and Implications
6.1 Introduction
6.2 Conclusions related to research questions and testing the model
6.2.1 Conclusions related to financial 6.2.2 Conclusions related to financial

management practices characteristics
6.2.3 Conclusions of SME 6.2.4 Summary of research question

profitability answers
6.3 Implications of the research study
6.3.1 Implications for financial 6.3.2 Contributions to knowledge of

this research into financial
management practices of SMEs
management for SMEs
6.4 Limitations of the research study
6.5 Implications for further research
238
6.2 CONCLUSIONS RELATED TO RESEARCH QUESTIONS AND

TESTING THE MODEL
This section summarizes conclusions related to the research questions and testing the
model analyzed and presented in chapter 5. Conclusions of financial management
practices, financial characteristics, and SME profitability are respectively presented in
subsections 6.2.1, 6.2.2, and 6.2.3 while subsection 6.2.4 presents conclusions and the
revised model of SME profitability.
6.2.1 Conclusions related to financial management practices
As indicated in chapter 1, one of the objectives of the research was to collect empirical
evidence of financial management practices to describe behaviours of SMEs in practising
financial management. This subsection summarizes findings of financial management
practices of SMEs in the sample.
6.2.1.1 Accounting information system practices
Descriptive findings of accounting information system practices were investigated and

reported in subsection 5.3.2.1 of chapter 5 (Tables 5.4, 5.5, and 5.6, page 190, 191, and
192). From these tables the following conclusions related to accounting information
system practices of SMEs are listed.
• Firstly, 100 percent of SMEs have systems for accounting information organized
formally (Table 5.4, page 1990). This finding demonstrates that all SMEs legally
organized in the form of private enterprise, limited liability company or joint
stock company have organized and maintained formal accounting information
systems in which two kinds of financial statements, balance sheets and income
statements, are frequently and regularly prepared. This is a prerequisite for
examining practices of financial reporting and analysis.
• Secondly, employed accountants and chief-accountants still play an important role
in carrying out most accounting responsibilities whereas external accountants
have not been engaged by firms effectively (Table 5.5, page 191). This finding
reveals that, to date, the external accountants have not been regularly engaged and
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most SMEs continue to use employed accountants in their businesses. This proved
that the central-planned management mechanism continues to strongly affect
management styles of SMEs after a decade of policy reform and transformation to
a market economy.
• Thirdly, chief-accountants are frequently employed for more sophisticated
accounting responsibilities such as preparing and interpreting accounting reports
while employed accountants are mainly employed for recording business
transactions (Table 5.5, page 191). This finding shows that the chief-accountant
still plays an important role in controlling financial position of SMEs. Most SMEs
appoint a chief-accountant who is responsible for controlling financial matters
whereas the financial manager position is rarely found in businesses. These
indicate continuity of old management styles, which have not been changed after
a decade of reform.
• Finally, most SMEs have frequently applied computers in their accounting
information systems and the most frequent application of computers is to prepare
accounting reports (Table 5.6, page 192). Although most respondents answered
that they usually use computers in accounting information systems, the ability to
apply accounting software is limited. This is an outcome of limitations of
financial and human resources within SMEs, which means SMEs have difficulty
in developing and carrying out projects providing accounting information system
computerization.
6.2.1.2 Financial reporting and analysis practices
As indicated in subsection 5.3.2.2 of chapter 5 (page 192), findings of financial reporting

and analysis practices were analyzed and presented in tables 5.7 to 5.10. Based on these
tables, conclusions and discussions of financial reporting and analysis practices of SMEs
are summarized below.
Almost 100 percent of SMEs produced financial statements including balance
sheets and income or profit and loss statements prepared and analyzed frequently and
regularly (Table 5.7, page 193). This shows that SMEs have a strong regard for financial
reporting practices and preparing financial statements has become frequent for most
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SMEs. However, other financial statements such as statements of cash flows and
statements of funds are rarely prepared when compared with frequency of preparing
balance sheets and income statements. This is consistent with the situations that
statements of cash flows have only been mentioned in accounting information system in
Vietnam in recent years. SMEs seem to be unfamiliar with preparing statements of cash
flows.
Most SMEs (about 70 percent) have prepared and analyzed their financial
statements based on monthly periods. Nevertheless, about 2 percent of SMEs have never
analyzed financial statements (Table 5.8, page 193). Quarterly periods were expected as
the most frequently used for reporting. However the findings of financial reporting and
analysis practices showed that monthly periods are frequently used by most SMEs. This
may be explained in at least two ways. Firstly, SMEs in Vietnam must cope with the
uncertainty of the business environment therefore updating and providing updated
financial information for making decisions are necessary frequently. Secondly, most
SMEs have employed accountants organized into a division of accounting headed by a
chief-accountant thus preparing financial statements based on the monthly periods is
quite feasible.
In terms of kinds of financial analysis used, over half of the SMEs in the sample
had frequently applied both trend analysis and ratio analysis (Table 5.10, page 194).
Ratio financial analysis was relatively popular as a tool for evaluating and controlling
financial position of the firms. Almost all financial ratios were applied. However, ratios
of activity such as receivable turnover, inventory turnover, total asset turnover were most
frequently used, but ratios of liquidity and ratios of profitability were used infrequently.
6.2.1.3 Working capital management practices
Following patterns of many previous researchers, investigations and reports of working

capital management practices in this research include three areas: cash management,
receivable management and inventory management practices. Each were respectively
analyzed and reported in subsections 5.3.2.3, 5.3.2.4 and 5.3.2.5 of chapter 5 (page 195).
241
For cash management, the following conclusions are reported. Firstly, about 80
percent of SMEs always or often prepare cash budgets, and preparing and reviewing cash
budgets are frequently based on monthly periods (Table 5.11, page 196). The opinions of
many researchers were supported by results of the survey (Appendix 2), which
demonstrated that most of the owners or managers of SMEs have rarely been trained in
skills of financial management. However, this research showed that SMEs are familiar
with using cash budgets as a tool to plan and control cash flows of the firm. On the other
hand, about 80 percent of SMEs determined cash balance based on the owner/manager’s
experience (Table 5.12, page 196). This suggests that experience is viewed as more
important than theory in practising cash management.
Only 2.7 percent of responding SMEs always or often face cash shortages for
expenditure, while about 40 percent always or often have a surplus of cash (Table 5.13,
page 197). Nevertheless, only 19 percent of SMEs deposit cash surpluses in bank
accounts while up to 75 percent did not know how to use temporary cash surpluses for
profits (Table 5.13, page 197). This finding reveals that cash surpluses rather than cash
shortages are the major problem for SMEs. Another problem reported was how to invest
the temporary cash surplus for profitable purposes. That SMEs have to keep high cash
balances is acceptable under conditions of business environment uncertainty. However,
this affects SME profitability and a trade-off between liquidity and profitability needs to
be considered.
As stated above, up to 75 percent of SMEs did not know how to invest cash
surpluses for profitable purposes (Table 5.13, page 197). An explanation may be the fact
that the money market has not developed in Vietnam, SMEs do not have access to money
market instruments such as treasury bills, commercial papers, bank acceptances and
similar instruments for short-term investment purposes. SMEs have not had opportunities
to invest rather than not knowing how to invest temporary cash surpluses for profits. This
conclusion suggests the need to develop money markets, which should be developed
simultaneously with capital or stock markets instead of being separately developed as has
happened in recent years. In addition to developing money markets, a recommendation
for policy makers is that links between components of financial market including money
market, capital market and foreign exchange market need to be developed and fostered.
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Regarding receivable management, results of data analysis and findings were

presented in subsection 5.3.2.4 (page 198). Following are conclusions and discussion
related to receivable management practices. Eighty percent of SMEs always or often sell
their products or services on credit and 63 percent always or often set up their credit
polices for the customers, whereas 7 percent of SMEs tend to sell on credit to anyone
who wishes to buy (Table 5.14, page 198). This finding suggests that selling products or
services on credit is a common trend for SMEs in Vietnam, especially under conditions
of a strong competitive market. In consequence, receivable management practices have
become extremely important and reviewing levels of receivables and bad debts need to be
conducted frequently by SMEs.
Therefore it was not surprising that most SMEs reported reviews of their levels of
receivables and bad debts monthly. As a result, the percentage of bad debts was still
controllable and maintained at an appropriate level (Table 5.16, page 199). The majority
of SMEs reported the percentage of bad debt was less than 10 percent of sales.
In inventory management practices, results of data analysis and findings were
reported in subsection 5.3.2.5 of chapter 5 (Table 5.17 and 5.18 page 200). Based on the
results of data analysis, conclusions suggest that inventory management practices of
SMEs have not been understood by management. Although they review inventory levels
and prepare inventory budgets frequently, the ability to apply theories of inventory
management in inventory budgeting is very limited. Over 90 percent of SMEs determine
inventory levels based on owner/manager’s experience and about 90 percent did not
know of the “Economic Order Quantity Model” (Table 5.18, page 201). Like cash
management, the owner’s or manager’s experience was again found to be more important
than application of theories of inventory management.
In summary, the survey found that SMEs strongly supported all areas of working
capital management practices. Cash and inventory budgets are frequently prepared.
Levels of receivables and inventory are reviewed frequently. However, SME owners
have a low level of management knowledge, and owner/manager’s experience has been
seen to be more important than application of theories of financial management.
Therefore training skills of financial management for the owners and managers is
essential.
243
6.2.1.4 Fixed asset management practices
Results of data analysis and findings of fixed asset management practices were
examined and reported in subsection 5.3.2.6 (page 201) of chapter 5. Following are
conclusions on fixed asset management practices of the sample of 99 trading and 51
manufacturing SMEs.
Firstly, near 80 percent of SMEs always or often evaluate capital projects before
making decisions of investment, and review the efficiency of utilizing fixed assets after
acquisitions. Some 87 percent of SMEs stated that they use payback period techniques in
capital budgeting, only 27.3 percent use the more sophisticated discounted cash flows;
that is, the net present value (NPV), internal rate of return (IRR) and modified internal
rate of return (MIRR).
These findings revealed that SMEs highly regard fixed asset management
although their knowledge of management techniques is not outstanding. The majority of
SMEs always or often evaluate capital investment projects before making decisions on
investment. In addition, efficient utilization of fixed assets after investing is reviewed
frequently. However, like the findings of previous researchers, this research indicated
that payback-period methods are most popularly used in evaluating capital investment
projects while the more sophisticated methods such as NPV, IRR or MIRR are rarely
used.
The predominance of the payback-period method can be attributed to its
simplicity, emphasis on liquidity, and response to external financing pressures. Under
the conditions of lack of long-term capital sources, uncertainty of business environment,
and financial pressures, the payback capital period seems to be more important than
profit return from a project as indicated by Block (1997):
The firms (small firms) continue to be dependent on the payback method as the
primary method of analysis. This is not necessarily evidence of a lack of
sophistication, as much as it is a reflection of the financial pressures put on the
small business owner by financial institutions. The question to be answered is not
always how profitable the project is, but how quickly a loan can be paid back.
244
6.2.1.5 Financial planning practices
Financial planning practices were analyzed based on tables 5.21, 5.22, 5.23, and 5.24 and
findings were reported in subsection 5.3.2.7 of chapter 5 (page 203). The following is
summary of conclusions on financial planning practices of SMEs in the sample.
Firstly, a majority of SMEs in the sample (76.6%) always or often prepares
financial budgets in the process of business operations. This finding suggests that SMEs
have relatively high regard for financial planning practices and they are relatively
familiar with using financial budgets as tools of planning and controlling financial
situation.
Secondly, types of budgets such as sales, selling and administration expenses,
labor and cash budgets are prepared by a majority of SMEs whereas fewer SMEs prepare
the budgeted balance sheets and income statements. This finding suggests that SMEs in
Vietnam rarely prepare the budgeted balance sheets and budgeted income statements,
although they frequently prepare the actual balance sheets and income statements (Table
5.7, page 192). This is consistent with the current status that concepts of budgeted
balance sheet and budgeted income statement are relatively new in Vietnam, they have
only been introduced in recent years.
Thirdly, the majority of SMEs have employed accountants and chief-accountants
to prepare budgets whereas the percentage of SMEs engaging accountants to prepare
financial budgets was not significant. That SMEs were found to be dependent upon the
organizing and using employed or internal accountants while the external accountant are
rarely used suggests that the “old management styles”, which existed with the central-
planned economy period, and remain have a relatively strong impact on management
styles of SMEs in the 1990s. Finally, up to 83 percent of SMEs in the sample frequently
compare budgeted and actual results and monthly periods are most popularly used in
carrying out the comparisons.
Subsections 6.2.1.1 to 6.2.1.5 above presented conclusions and discussion related
to financial management practices of SMEs from the survey. These conclusions are
summarized and reported in Table 6.1 (page 246).
245
Table 6.1: Summary of conclusions related to financial management practices

Items Tables Conclusions
Accounting 5.4; 5.5 1. One hundred percent of SMEs have systems of accounting information
information & 5.6 organized formally.
system 2. Employed accountants and chief-accountants play an important role in
carrying out most accounting responsibilities whereas external accountants have
been extensively engaged.
3. Most SMEs have applied computers in their accounting information systems
and the most frequent application of computers is preparing accounting reports.
Financial 5.7; 1. Nearly 100 percent of SMEs have financial statements including balance
reporting and 5.8; 5.9 sheets and income (profit and loss) statements prepared and analyzed frequently.
analysis & 5.10 2. Most SMEs (about 70 percent) prepare and analyze their financial statements
based on the monthly periods. Nevertheless, about 2 percent of SMEs have
never analyzed financial statements.
3. In financial analysis, about half of SMEs in the sample have frequently applied
both trend and ratio analyses.
4. Ratios of activity such as receivable turnover, inventory turnover, total asset
turnover are most frequently used, followed by ratios of liquidity and finally
ratios of profitability.
Working 5.11; 1. In general, about 80 percent of SMEs always or often prepare and review cash
capital 5.12 & budgets based on monthly periods.
management 5.13; 2. Only 2.7 percent of responding SMEs always or often face cash shortages for
5.14; spending while about 40 percent always or often have a surplus of cash.
5.15 & Nevertheless, only 19 percent of SMEs deposit cash surpluses into bank
5.16; accounts while up to 75 percent did not know how or where to invest the
5.17; & temporary cash surplus for profit.
5.18 3. Eighty percent of SMEs always or often sell their products or services on
credit and 63 percent always or often set up their credit polices for the
customers. In addition, 7 percent of SMEs tend to sell on credit to anyone who
wishes to buy, without reviews.
4. Most SMEs review their levels of receivables and bad debts monthly. As a
result, the percentage of bad debts is controllable and maintained at a relatively
appropriate level.
5. SMEs lack management knowledge. For example, although they often review
inventory levels and prepare inventory budgets, the ability to apply theories of
inventory management to inventory budgeting is limited.
Fixed asset 5.19 & 1. Near 80 percent of SMEs always or often evaluate capital projects before
management 5.20 making decisions on investment and review the efficiency of utilizing fixed
assets after acquisitions.
2. Eighty-seven percent of SMEs stated that they used payback period
techniques in capital budgeting, only 27.3 percent use the more sophisticated
discounted cash flows; that is, the net present value (NPV), internal rate of
return (IRR) and modified internal rate of return (MIRR).
3. These findings reveal SMEs relatively strongly regard to fixed asset
management although their knowledge of sophistication management is not so
high.
Financial 5.21; 1. A majority of SMEs in the sample (76.6%) always or often prepares financial
planning 5.22; budgets in the process of business operation.
5.23 & 2. Budgets such as sales, selling and administration expenses, labor and cash
5.24 budgets are prepared by a majority of SMEs whereas few SMEs prepare the
budgeted balance sheets and income statements.
3. A majority of SMEs let employed accountants and chief-accountants prepare
whereas few SMEs engage external accountants to prepare financial budgets.
4. Up to 83 percent of SMEs in the sample frequently compare budgeted and
actual results monthly.
246
6.2.2 Conclusions related to financial characteristics
This section summarizes conclusions on SME financial characteristics, which were

analyzed and presented in section 5.3.3 of chapter 5 (page 206). These conclusions relate
to descriptive findings of liquidity, financial leverage, and business activity of SMEs in
the sample.
6.2.2.1 Liquidity
In this research, level of liquidity of SMEs was measured by current ratios. As analyzed
and presented in subsection 5.3.3.1, SMEs were found to be in a strong liquidity position.
A relatively high proportion of SMEs (90%) was found to have current ratios greater than
one (Table 5.28, page 209). In addition, most SMEs were found to maintain relatively
high current ratios. On average, the current ratio of trading SMEs was 2.50 while
manufacturing SMEs was 2.47 (Table 5.25b and 5.25c, page 207). However, no
significant difference in the current ratios between the two sectors was found (Table 5.26,
page 208).
This finding reveals that, on average, current assets of SMEs are two and half
times higher than current liabilities. In other words, each dollar of current liabilities is
offset by 2.5 dollars of current assets. In general, this is consistent with Vietnam’s
uncertain business environment and difficulties of SMEs in obtaining the external
financing sources. However, maintaining a relatively high current ratio has adversely
impacted on profitability of SMEs since cash surplus were generally not invested for
profits.
6.2.2.2 Financial leverage
Financial leverage was measured by business debt ratios. Analysis and findings of
financial leverage were presented in subsection 5.3.3.2 of chapter 5 (page 210). SMEs in
the sample were found generally not to use financial leverage. Seventy-two percent of
SMEs had debt ratios less than 30% while only about 10 percent had debt ratios more
than 50% (Table 5.29, page 210). Debt has not been used to boost profitability.
247
As reported in Table 5.25a (page 207) the average debt ratio of SMEs in the
sample was about 30%. In addition, the average debt ratios of trading and manufacturing
SMEs were reported to be of 30% and 27% respectively. The t-test did not demonstrate
any significant difference in debt ratios between the two groups of SMEs. With the debt
ratio of 30%, SMEs presumably do not use significant debt finance. This is not surprising
because SMEs in Vietnam have found difficulty in finding external financing sources.
This may be explained. Firstly, financial markets, especially capital markets, in Vietnam
have not been developed, SMEs are forced to rely on financing sources from commercial
banks rather than actively mobilizing sources of funds from capital market. Secondly,
commercial banks discriminate between SMEs and large companies in granting loans,
especially long-term loans. State-owned commercial banks give priority to state owned
companies rather than SMEs. Private and foreign commercial banks assume that SMEs
are higher risk than large companies. Loans are difficult for SMEs to obtain.
6.2.2.3 Business activity
Business activity in this study was measured by total asset turnover and descriptive
findings of this ratio were analyzed and presented in subsection 5.3.3.3 of chapter 5 (page
211).
SMEs in the sample were found to have moderate total asset turnovers with an
average ratio of 3.84 times (Table 5.25a, page 207). Over 80 percent of SMEs were found
to have total asset turnovers exceeding one. These findings conclude that the efficiency in
utilizing total assets by SMEs was relatively high. On average, SMEs produced 3.84
dollars of sales from each dollar of total assets and about 80 percent of SMEs produced
more than one dollar of sales from one dollar of total assets.
Table 6.2 (page 249) summarizes the main findings and conclusions of financial
characteristics in which current ratio, debt ratio (or debt-to-equity ratio) and total asset
turnovers were respectively used as the measures of liquidity, financial leverage and
activity.
248
Table 6.2: Summary of conclusions related to financial characteristics of SMES

Financial Main findings
Characteristics Mean Range % Conclusions
Current ratio 2.49 Below 1 10.0 SMEs were found to have
From 1 to 2 36.7 relatively high current ratios
More than 2 53.3
Debt ratio 29% Below 30% 72.0 SMEs were found to have
From 30 to 50% 18.7 Low financial leverage
More than 50% 9.3
Total asset turnover 3.84 Below 1 18.7 SMEs were found to be
From 1 to 3 51.3 moderate in total asset
More than 3 30.0 turnover
Return on sales 4.20%
Return on assets 7.51%
Return on equity 10.75%
Source: Summarized from Table 5.25a; 5.28; 5.29 and 5.30
6.2.3 Conclusions of SME profitability
This section summarizes conclusions of SME profitability, which was analyzed and
reported in section 5.4 of chapter 5 (page 215). Firstly, the general conclusions of SME
profitability are summarized, then, the conclusions related to the relationship between
SME profitability and financial management practices, and financial characteristics are
respectively summarized and discussed.
6.2.3.1 General conclusions of SME profitability
Descriptive findings of SME profitability were analyzed and reported in subsection 5.3.4
of chapter 5 (page 211). These findings generally revealed that 99 of 150 SMEs surveyed
(66%) were profitable and the remainder (34%) were not profitable, that is, they could
not produce an annual average profit return that was higher than the free-risk rate of
interest (Table 5.31, page 213). The size of annual profits of SMEs was not high. Level of
annual profit of SMEs in Vietnam is low compared to SMEs in other countries because of
small firm size in terms of total assets and labor.
In relation to the types of industry and forms of ownership, the following findings
were found:
• The percentage of profitable SMEs in manufacturing industry was higher than
that of the trading industry.
249
• In terms of form of ownership, the percentage of profitable SMEs was found

higher for private enterprises than for limited and joint stock companies.
• In terms of business size, the percentage of profitable SMEs was found higher for
smaller businesses than for larger SMEs.
In addition to descriptive findings and conclusions, this study is concerned with

associative findings related to SME profitability. Subsection 6.2.3.2 and 6.2.3.3
respectively present conclusions of the relationships between SME profitability and
financial management practices and relationships between SME profitability and
financial characteristics.
6.2.3.2 Financial management practices and SME profitability
By using factor analysis, fifty-seven items used to measure efficiency of financial

management practices of SMEs were reduced to three principal components including (1)
working capital management and short-term planning practices (WCSP), (2) fixed asset
management and long-term planning practices (FALP), and (3) financial and accounting
information system (FAIS) as presented in Table 5.36 (page 218).
As analyzed and reported in Table 5.38 (page 223), these principal components
were found to be significantly related to SME profitability with Pearson’s correlation
coefficients of 0.399; 0.498 and 0.343 respectively at a 0.01 significance level. This
finding was expected and leads to the following conclusions:
• SME profitability is positively related to the efficiency of three principal

components of financial management practices
• The more efficient financial management practices, the higher profitability
• By raising the efficiency of financial management practices, SMEs can improve
their profitability.
These conclusions bring about important implications in applying financial management

and improving SME profitability, which are summarized in section 6.3 (page 258).
250
6.2.3.3 Financial characteristics and SME profitability
As indicated in chapter 4 and reported in chapter 5, the financial characteristics of SMEs

in this research are measured by three ratios: current ratio, debt ratio and total asset
turnover. Associative findings of the relationship between SME profitability and these
ratios were analyzed and reported in Table 5.36 (page 223). SME profitability was found
to be negatively related to current ratio with the correlation coefficient of minus 0.553 at
a 0.01 significance level. This finding leads to the following conclusions:
• SMEs with higher current ratios are less profitable than SMEs with the lower
current ratios
• Maintaining higher liquidity requires SME trading-off between the two
objectives: liquidity or profitability and a wise policy of financial management
should be to maintain an appropriate liquidity ratio in order to earn a reasonable
profit.
Secondly, SME profitability was found to be positively related to total asset turnover with
a correlation coefficient of 0.381 at a significance level of 0.01 (Table 5.38, page 223).
This finding concludes that SMEs with high total asset turnover are expected to produce
more profit than that with the lower total asset turnover. On the other hand, increasing
total asset turnover by raising the efficiency of utilizing the total assets can help SMEs to
improve profitability.
Finally, SME profitability was not found to be significantly related to debt ratio.
Bivariate analysis did not demonstrate any significant correlation between debt ratio and
SME profitability. This finding was unexpected because SME profitability was assumed
to be positively related to debt ratio. This may be explained since the relationship
between debt ratio and SME profitability is not a simple linear relationship, therefore,
bivariate analysis could not investigate this relation. A more detail study of financial
leverage would be required to investigate this; however, it is beyond the objective of this
research.
251
6.2.3.4 Simultaneous impacts of financial management practices and financial

characteristics on SME profitability
By using multiple regression analysis, this study investigated simultaneous impacts of

financial management practices and financial characteristics on SME profitability. This
analysis and its findings were presented in section 5.4.3 of chapter 5 (page 225).
Financial management practices (measured by the efficiency of three principal
components including working capital management and short-term planning practices,
fixed asset SME profitability and long-term planning practices, and financial and
accounting information system) and financial characteristics (measure by current ratio,
debt ratio and total asset turnover) are significantly correlated with a correlation
coefficient of R = 0.78 at a 0.0001 significance level (Table 5.40, page 226). With the
correlation coefficient of 0.78, financial management practices and financial
characteristics were found to be strongly and simultaneously related to SME profitability.
In other words, financial management practices and financial characteristics
simultaneously impact on SME profitability.
Additionally, t-test statistics were used to evaluate the impacts of each variable on
SME profitability. Results revealed that, with the exception of debt ratio, all 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 significantly related to SME
profitability. Specifically, current ratio was found to be negatively related to SME
profitability with the standardized coefficient β = - 0.256 at a 0.0001 significance level.
In contrast, total asset turnover was found to be positively related to SME profitability
with β = 0.198 at a 0.0001 significance level. Similarly, 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 positively related to
SME profitability with β = 0.305, 0.374 and 0.234 respectively. These findings conclude
that support was demonstrated for the hypotheses one, three and four but not for the
hypothesis two.
252
Since the debt ratio was not related to SME profitability, it was removed from the
multiple regression equation to improve the accuracy of the model (Murphy III, 1989).
The analysis program was rerun to obtain a revised model of SME profitability, which is
presented in section 6.2.3.6 and Figure 6.2 (page 254).
6.2.3.5 Difference in mean profits between efficient and inefficient financial

management groups of SMEs
This research study was also designed to test the hypothesis of differences in average or
mean profitability between “efficient” and “inefficient” financial management groups of
SMEs. Definitions and measurement of “efficient” and “inefficient” financial
management were presented in sections 1.6 (page 10) of chapter 1 and 5.4.4 (page 234)
of chapter 5. A business is said to be “efficient” in financial management practices if all
components of financial management practices are efficient. A component of financial
management practices is said to be “efficient” if its sum of points, which is measured by
8 items on nine-point scales (1 = not efficient at al, 9 = Very efficient), is greater than the
average point of 40 (8 x 5 point average). Testing the hypothesis of differences in mean
profits of the two groups of SMEs was conducted and presented in section 5.4.4 of
chapter 5 (page 234). The result of the test rejected the null hypothesis of equality of
mean profits of the two groups of SMEs (Table 5.46, page 235). Result of the test
supports the hypothesis, which states that the mean profit of SMEs that are efficient in
financial management practices is greater than that of SMEs, which are inefficient in
financial management practices.
This finding leads to the conclusion that the efficiency of financial management
practices can bring about a higher profitability for SMEs. Therefore SMEs can improve
their profitability by raising the efficiency of financial management practices.
6.2.3.6 The revised model of SME profitability
This section presents the revised model of SME profitability, which was obtained after
removing the debt ratio from the group of independent variables and rerunning the
program. After removing the debt ratio and rerunning the program, the model of SME
profitability was revised and presented in Figure 6.2 (page 254). This figure is derived
253
from Table 5.43 (page 231) based on the results of rerunning the multiple regression
programs. Removing debt ratio improved the accuracy of the model while the coefficient
of correlation (R) and the coefficient of determination (R2) remain unchanged. This is
shown by the following changes: (1) standard error of the estimate decreased from 3.39
to 3.37, (2) F value increased from 36.994 to 44.646 (table 5.40 and 5.43), and (3) all t-
test statistics increased significantly.
Figure 6.2: The revised model of SEM profitability
Current ratio (CUR)
Working capital management and short-

term planning practices (WCSP) + SME profitability:
• Return on sales
(PRO)
• Return on assets
Fixed asset management and long-term +
• Return on equity
planning practices (FALP)
Financial and accounting information +

system practices (FAIS)
Source: Table 5.43, chapter 5 (page 231)
Table 5.43 (page 231) provided the coefficient of determination R2 = 0.608 at a 0.0001
significance level. This coefficient reveals that 60.8% of the variation in SME
profitability can be explained by changes in the following attributes: (1) current ratio with
β = - 0.265, (2) total asset turnover with β = 0.200, (3) working capital management and
short-term planning practices with β = 0.300, (4) fixed asset management and long-term
planning practices with β = 0.371, and (5) financial and accounting information system
with β = 0.235 while 39.2% remains unexplained. The revised model of SME
254
profitability as presented in Figure 6.2 illustrates findings presented in Table 5.43 (page
231) and provides a visual insight into the impacts of financial management practices and
financial characteristics on SME profitability.
6.2.4 SUMMARY OF RESEARCH QUESTION ANSWERS
This subsection summarizes the answers corresponding to each research question as

presented in chapter 1. The first research question related to the importance of SMEs in
Vietnam and their profitability. This question was answered in chapters 2 and 5. In
reviewing the economic structure and SMEs in Vietnam, chapter 2 found that SMEs in
Vietnam play an important role in creating employment, and increasing GDP and
exporting volume. Chapter 5, based on empirical data, found that sixty-six percent of
SMEs are profitable, however, the level of profits was not as large as that of profits of
SMEs in the industrialized countries.
Research question two was concerned with how researchers in the literature
review have identified the context of financial management practices and financial
characteristics, and how they proposed to measure SME profitability. This research
question was answered in chapter 3 where literature on financial management was
reviewed. Answers to this question are summarized below:
• Financial management practices include accounting information systems,

financial reporting and analysis, working capital management practices, fixed
asset management practices and financial planning (McMahon, 1998).
• Financial characteristics include liquidity, financial leverage, activity and
profitability (Burns, 1985, Hutchinson, Meric and Meric, 1988, Jaggi and
Considine, 1990, Laitine, 1992, and Meric et al., 1997).
• Profitability is generally measured by the following ratios: return on sales, return
on assets, and return on equity (Burns, 1985; Hutchinson, Meric and Meric,1988;
Laitinen, 1992, Meric et al., 1997)
Research question three related to links between financial management practices and
financial characteristics to SME profitability. This question was answered in chapter 3
255
where previous researchers indicated that financial management practices and financial
characteristics significantly affect SME profitability (Edwards and Cooley, 1979; Van
Horne, 1986; Burns and Walker, 1991).
Research question four concerned in this study called for an examination of
relationships between financial management practices, financial characteristics and SME
profitability in Vietnam. This question was answered in chapters 4 and 5. Chapter 4
designed the measurement scales for efficiency of financial management practices and
defined variables to measure financial characteristics and profitability. Chapter 5
analysed data and indicated a positive relationship between financial management
practices, financial characteristics and SME profitability, except debt ratios (Table 5.38,
page 223).
Research question five focussed on the extent to which financial management
practices and financial characteristics affect SME profitability. This question was
answered in chapter 5 where financial management practices and financial characteristics
were found to simultaneously affect SME profitability. Specifically, the current ratio
negatively affects SME profitability, while 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 positively affect
SME profitability.
The final research question related to what action could improve financial
management and profitability of SMEs in Vietnam. This question was answered in
chapters 5 and 6. After testing the model of SME profitability, chapter 5 indicated SME
profitability was influenced by financial management practices and financial
characteristics. This was the basis for recommending action that could improve
profitability of SMEs. Details of these actions are examined in section 6.3 (page 258)
where the implications of the research study are considered.
Table 6.3 (page 257) summarizes answers corresponding to each research
question defined in chapter 1. These research questions were developed for the research
problem; therefore, answering these questions contributes to solve the research problem.
Table 6.3 is completed based on reviewing all chapters in linking to each research
question, summaries of answers, which were contributed to research problem solution.
256
Table 6.3: Summary of research questions and answers

Research questions Research question answers
• SMEs play an important role in creating employment

defined Chapter Answer summary
1. How important 2&5
are SMEs in Vietnam
• Sixty-six percent of SMEs are profitable, while 34
and growing GDP.
and are they
profitable?
• Financial management practices include accounting
percent are not profitable (Table 5.31, page 213).
2. How have 3
researchers in the information system, financial reporting and analysis,
literature review working capital management practices, fixed asset
identified the context management practices and financial planning
of financial
• Financial characteristics include liquidity, financial
(McMahon, 1998).
management practices
and financial leverage, activity and profitability (Meric et al, 1988;
characteristics, and
• Profitability is generally measured by the following
Laitinen, 1992).
how have they
proposed to measure ratios: return on sales, return on assets, and return on
SME profitability?
• Financial management practices and financial
equity (Burns, 1985; Meric et al, 1988; Laitinen, 1992)
3. How important 3
are financial characteristics significantly affect SME profitability
management practices (Edwards and Cooley, 1979; Van Horne, 1986;
and financial Burns and Walker, 1991)
characteristics to
• Variables measuring financial management practices

SME profitability?
4. What are the 4&5
relationships between and financial characteristics, except debt ratio, were
financial management found to be related to SME profitability (Table 5.38,
practices, financial page 223).
characteristics and
SME profitability in
• Financial management practices and financial

Vietnam?
5. How do financial 5
management practices characteristics simultaneously affect SME
and financial
• Current ratio negatively affects SME profitability,
profitability.
characteristics affect
SME profitability? while total asset turnover, working capital
management and short-term planning practices,
fixed asset management and long-term planning
practices, and financial and accounting information
system positively affect SME profitability (Table
• Maintain the appropriate current ratio and paying

5.40, page 226).
6. What action can 6
improve financial attention to the trade-off between liquidity and
management and
• Raising the efficiency of utilizing total assets to
profitability.
profitability of SMEs
in Vietnam?
• Raising the efficiency of financial management
increase total asset turnover.
practices, particularly the efficiency of working

capital management, fixed asset management, and
financial and accounting systems.
257
6.3 IMPLICATIONS OF THE RESEARCH STUDY
This section presents implications of the research study outcomes including the
implications for financial management practitioners, government, and training
organizations and comments on the contribution to knowledge of this research into
financial management practices of SMEs.
6.3.1 Implications for financial management practices of SMEs
This research model indicated that variation in SME profitability could be explained by
the changes in:
1. current ratio,
2. total asset turnover,
3. efficiency of working capital management and short-term planning practices,
4. efficiency of fixed asset management and long-term planning practices, and
5. efficiency of financial and accounting information system.
Furthermore, the hypothesis that differences expected in mean profits between the
efficient and inefficient financial management SMEs was supported by empirical data
analysis. The model of SME profitability tested by the empirical data in earlier chapters
provides important implications for SME financial management practitioners,
government, and training organizations. For financial management practitioners, several
implications are based on the model of SME profitability and conclusions on differences
in average profits between efficient and inefficient financial management SMEs.
Implication 1: Viewpoint of financial management role
Owners and managers of SMEs in Vietnam believe that marketing plays the most
important role in producing profits, while financial management only plays a role in
protecting financial position of a business. This research study indicates that efficiency of
258
financial management could lead to high profits and, as such, financial management not
only controls the financial position but also significantly contributes to improving and
increasing profitability of small business. These conclusions suggest that SMEs should
highly regard financial management and view financial management practices as one of
the tools to improve and increase profitability. Moreover, based on the findings of this
research study, the central role of financial management to the success of any SMEs as
indicated by Meredith (1986) has been demonstrated by the empirical data from SMEs in
an emerging economy.
Implication 2: Actions to improve SME profitability
The research model of SME profitability indicates that SME profitability depends upon
efficiency of financial management practices and financial characteristics of SMEs.
Therefore any action that influences financial management practices and financial
characteristics should be carefully considered to determine whether they positively or
negatively impact on SME profitability.
• The current ratio, which is often used as a tool defining and measuring liquidity,
is negatively related to SME profitability, the objectives and policies of liquidity
should be linked to those of profitability. High current ratios tend to high liquidity
and low profitability. However, this does not mean the current ratio should be
continuously lowered to raising profitability because such actions will adversely
affect liquidity. The trade-off between liquidity and profitability as indicated by
Van Horne (1986) and demonstrated in this study should be flexibly applied
depending on particular circumstances. Wise policies on financial management
achieve both liquidity and profitability objectives. Unless both these objectives
are achieved, what financial managers should do is to maintain an “appropriate”
current ratio so that the profitability of SMEs will not be adversely affected.
When an enterprise is forced to maintain a relatively high current ratio because of
liquidity problems, the adverse effects of this current ratio on profitability should
be identified and reduced. Short-time investment of the temporary cash surplus
259
for profitable purpose is often considered actions to reduce the adverse effects of
maintaining relatively high liquidity ratios.
• In contrast to the current ratio, total asset turnover is positively related to SME
profitability. High total asset turnover leads to higher profitability for SMEs. In
general, actions increasing total asset turnover will positively impact on
profitability. 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 that are not necessary for business
operations is a typical example of efforts to increase the efficiency of utilizing
total assets and increase total asset turnover. In addition, efforts of marketing,
sales management, and new product development and the likes will increase net
sales and, as a result, increase total asset turnover and profitability.
Implication 3: Raising the efficiency of financial management practices to improve SME

profitability.
The model of SME profitability indicates that SME profitability is positively related to
the efficiency of financial management practices. Therefore raising the efficiency of
financial management is considered an effective tool for improving and increasing
profitability of SMEs. Specifically, the model indicates the efficiency of the following
financial management components are positively correlated to SME profitability:
• working capital management and short-term planning practices including cash

management, receivable management, inventory management and short-term
financial planning regarding working capital
• fixed asset management and long-term financial planning practices consisting of
managing fixed assets, evaluating capital investment projects, and long-term
financial planning regarding capital investments
• financial and accounting information systems practices including systems for
accounting reports and financial reporting and analysis.
260
In financial management practices, the financial manager or owner should have regard to
the effects of these components on profitability and decisions should be reviewed to
determine whether they affect the efficiency of financial management and thus affect
SME profitability.
Implication 4: Implications for the government policy-makers
The main objective of this study is to identify implications for financial management
practices of SMEs. However, in this research study, SMEs were found to have difficulties
involving the government policies, which make financial management practices
ineffective and ineffective. As reviewed in chapter 2, SMEs continue to play important
roles in developing the multi-sector economy and the government has polices to promote
and support development of SMEs. Government policies will be more effective if the
policy-makers understand current practices of financial management of SMEs. Based on
the descriptive findings of financial management practices of SMEs in the survey, this
study recommends the following issues to be considered by government policy-makers.
• Remove discrimination between SMEs and large companies and between state
and non-state SMEs in granting loans.
• Develop the financial market including both capital and money markets.
• Provide training programs in financial management skills for the owners and
managers of SMEs.
Implication 5: Implications for training and teaching organizations
Findings on financial management practices and financial characteristics of SMEs help

teaching and training organization personnel to understand the bahaviour of SMEs in the
field of financial management. This will be basis for developing more appropriately
training programs for owners and managers of SMEs.
261
6.3.2 Contributions to knowledge of this research into financial

management for SMEs
This research study has made a number of contributions to knowledge in the fields of
SME financial management.
• The model of SME profitability is considered a most significant and important

contribution of this study to knowledge of financial management for SMEs. This
model, in one hand, evaluates the financial management theories provided by
previous researchers by using empirical evidence from an emerging country. On
the other hand, it provides knowledge of simultaneous impacts of financial
management practices and financial characteristics on SME profitability, which
has not investigated previously.
• This model also indicates relationships between variables used to measure
financial characteristics. Specifically, it indicates the negative relationship
between profitability and liquidity and the positive relationship between
profitability and activity.
• A contribution is the use of statistical techniques to identify some relationships
not previously emphasized by researchers – linkages between current ratios and
profitability, linkages between financial leverage and profitability, and linkages
between total asset turnover and profitability.
• This study provides details of the relationships between financial management
practices, financial characteristics and profitability of SMEs in developing
nations. Previous research provided a large number of descriptive findings of
financial management and financial characteristics whereas the associative
findings have rarely been investigated. This study supplements the gap by
investigating the association between profitability and financial management
practices, and financial characteristics of SMEs.
• Through the study’s model, testing of the model and revision of the model, the
research demonstrates how field data from an emerging nation (Vietnam) can be
applied to modify theoretical model to reflect the business environment of SMEs.
262
• This study contributes to the knowledge of financial management practices and

financial characteristics of SMEs in Vietnam which can be considered
representative of emerging economies. As indicated in chapter 3, the descriptive
findings of financial management practices and financial characteristics of SMEs
around the world are numerous, however most findings involve SMEs in the
developed or market economy countries while findings involving SMEs in the
developing or emerging countries are few, and findings involving SMEs in
Vietnam are rare. Therefore descriptive findings of financial management
practices and financial characteristics of SMEs in this study expand the literature
of financial management in general and especially financial management of SMEs
in Vietnam.
6.4 LIMITATIONS OF THE RESEARCH STUDY
Regardless of its high ambitions, doctoral research is constrained by resource limitations,

both financial and non-financial resources. Limitations of time, funding and scope of the
study required the research study to focus on a limited number of objectives. Moreover
the research problem and questions often directly or indirectly involve multiple areas of
financial management while limits of time and funds would not make all areas can be
investigated.
Because of limited access to scare resources, this study could not research SMEs
in all regions of Vietnam but only selected SMEs located in Ho Chi Minh City as the
target population and considered the target SMEs representative for all SMEs in Vietnam.
Although Ho Chi Minh City is the biggest city with the largest number of SMEs located,
differences in knowledge and style of management between SMEs located in Ho Chi
Minh City and SMEs located in other regions may lead to differences in financial
management practices and financial characteristics. As a result, an overestimation may
exist due to the higher level of management knowledge of SMEs in Ho Chi Minh City.
Similarly, due to limited resources this study uses the stratified sampling
technique with one SME in lieu of 90 for personal interview. Given more time and funds,
the fraction would be reduced to 30 and the sample has been broadened.
263
Given difficulties in data collection, data related to financial characteristics in this

study were only derived from current financial statements. In consequence, data
collection only provided cross-sectional data related to financial characteristics while the
longitudinal data was not available for this research study. Also, for the purpose of
encouraging and support for the local and private SME development, this study only
focuses on the domestic private sector but does not capture the foreign-owned and state
sectors.
In terms of scope of the study, more specific limitations imposed by the approach
adopted in the investigation include:
• 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 internal business functions of the greatest concern in
this study were financial management while other functions such as production
management, marketing management, and personnel management were omitted.
• This study indicates current ratios are negatively related to profitability and
positively related to liquidity and maintaining the appropriate current ratio will
improve SME profitability while the liquidity was not affected. However, this
study could not specify what the appropriate current ratio should be because the
appropriate current ratio is dependent on characteristics of each industry. This
requires further research with surveys to indicate appropriate current ratios
corresponding to each industry. Unfortunately, such extended research was
beyond scope of this thesis.
6.5 IMPLICATIONS FOR THE FURTHER RESEARCH
This study was designed to examine relationships between financial management

practices, financial characteristics and SME profitability. Its limitations were examined in
section 6.4. These limitations suggest further research to expand and supplement what
could not be captured in this research. Descriptive findings of financial management
practices, financial characteristics, and SME profitability and conclusions related to the
264
relationships between financial management practices, financial characteristics and SME

profitability could be used as the foundations for the further research. Additional
implications of this study for the further research could include the following:
• Findings on financial characteristics of SMEs could be applied to the further

comparative research of differences in financial characteristics between SMEs
and large enterprises in Vietnam.
• Findings on financial management practices could be used as the basis for specific
and detailed research into every separate aspect of financial management practices
in Vietnam such as financial reporting and analysis, working capital management,
fixed asset management, capital budgeting, and for financial planning.
• This study’s findings of relationships between current ratio, total asset turnover
and SME profitability could lead to expanded research to the large companies,
state and foreign companies in Vietnam.
• This study could not demonstrate the significant relationships between debt ratios
and SME profitability, and this could be explained that debt ratio are not always
linear-related to profitability but cubic-related. This finding could be used as the
basis for more specific and detailed research on financial leverage and
relationships between financial leverage and profitability.
• This study’s research methodological approached and findings on current ratios,
debt ratios, debt-to-equity ratios, total asset turnovers, returns on sales, returns on
assets, and returns on equity could lead to further research on investigating and
building industry averages of financial ratios in Vietnam. Such research is
necessary and important for financial management practices in this country.
• 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.
265
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Appendix 1: Survey instrument
SURVEY OF
FINANCIAL MANAGEMENT PRACTICES
OF SMEs IN HO CHI MINH CITY
Purpose of the survey: The purpose of this survey is to obtain in-depth

information on financial management practices of SMEs located in Ho
Chi Minh City. This information is linked to a project of improving financial
management practices and profitability of SMEs.
Businesses to be surveyed: All small and medium enterprises (SMEs) including stock
companies, limited liabilities companies and private enterprises which have less than 500
employees and total capital of less than VND 10 billion will be interviewed in this
survey. Large companies, foreign-invested companies, joint-venture companies and state-
owned enterprises are not included in this survey.
Respondents: We ask that this questionnaire should be answered by the owner or key
manager (e.g., financial manager or chief-accountant) who is responsible for financial
function in your business. We would like you to answer each question from the
perspective of the business unit that you manage rather than from the general ideas or
views and please add any additional comments that you believe are appropriate.
Non commercialization and confidentiality: Data collected from the survey will be
used to test the model relating to a theory developed as a part of a doctoral thesis. It does
not involve any commercial activities and all information will be treated in strictest
confidence.
How to answer the questions: To answer the questions you simply circle the most
appropriate numbers, which are listed, excepting of some cases you are requested to fill
the appropriate number into the blanks. For example, to answer the following question, if
your position is “owner” you will circle number 1 as follows:
1.1 What is your position in your business (Please circle one that applies)?
Owner................................................................... 11
Manager................................................................ 2
Chief-accountant .................................................. 3
Other, please specify ........................................... 4, please specify……………………………….
Your cooperation by answering questions raised by the interviewer is viewed as the most
important contribution to support for the development of SMEs.
Thank you for spending time to answer the questionnaire.

A. COMPANY PROFILE
(Please circle the appropriate number that best answers to each question)
1. Owner/manager details
1.1 What is your position in your business (Please circle one that applies)?
Owner................................................................... 1
Manager................................................................ 2
Chief-accountant .................................................. 3
Other, please specify ........................................... 4, please specify……………………………….
1.2 What is your HIGHEST educational qualification or nearest equivalent (Please circle one that applies)?
High school ......................................................... 1
Bachelor degree.................................................... 2
Master degree ....................................................... 3
Higher degree ....................................................... 4
Others .................................................................. 5, please specify ……………………………….
1.3 Do you ever attend management training programs related to financial management (Please circle one
that applies)?
Never ................................................................... 1
Rarely (from 1 to 2 attentions) ............................. 2
Sometimes (3 to 4 attentions) ............................... 3
Often (more than 4 attentions).............................. 4
Always ................................................................. 5
1.4 What best describes your background (Please circles one that applies)?
Management general ............................................ 1
Technical field...................................................... 2
Business general................................................... 3
Financial management.......................................... 4
Others .................................................................. 5, please specify ………………………………
2. Business details
2.1 What best describes the type of industry of your business (Please circles one that applies)?
Manufacturing ..................................................... 1
Trading ................................................................ 2
Service ................................................................. 3
2.2 What best describes the form of ownership of your business (Please circles one that applies)?
Private enterprise.................................................. 1
Limited company.................................................. 2
Joint stock company ............................................. 3
State company ...................................................... 4
2.3 How long has your business been established (Please circle one that applies)?
Less than 2 years .................................................. 1
2 – 5 years ............................................................ 2
6 – 10 years .......................................................... 3
More than 10 years............................................... 4
2
2.4 How many employees does your business currently have (Please fill the number that applies)?
Full-time:.............................................................. employees
Part-time:.............................................................. employees
2.5 Which of the following ranges is the best indication of your business total assets (Please circle one that
applies)?
Less than 5 billion dong ....................................... 1
5 to 10 billion dong .............................................. 2
More than 10 billion dong .................................... 3
2.6 Which of the following ranges is the best indication of your business annual sales (Please circle one
that applies)?
Less than 5 billion dong ....................................... 1
5 – 30 billion dong ............................................... 2
31 – 50 billion dong ............................................. 3
More than 50 billion dong ................................... 4
2.7 What best describes your business’ profitability (Please circles one that applies)?
Profitable .............................................................. 0
Not profitable ....................................................... 1
2.8 Which of the following ranges is the best indication of your business annual net profits?
Less than 50 million dong .................................... 1
50 to 300 million dong ......................................... 2
301 to 500 million dong ....................................... 3
More than 500 million dong................................. 4
B. FINANCIAL MANAGEMENT
1. Accounting information system
1.1 Who is responsible for the following duties in your business (Please circle the number that applies for
each duty)?
Duties Owner Manager Chief- Employed External

accountant accountan accountant
t
Recording business transactions 1 2 3 4 5
Preparing accounting reports 1 2 3 4 5
Interpreting and using accounting information 1 2 3 4 5
1.2 What best describes characteristics of the organization of your business accounting system (Please
circle number that applies)?
Formal ................................................................. 1
Informal ............................................................... 2
1.3 Does your business ever utilize computers in accounting (Please circle number that applies)?
Never ................................................................... 1
Rarely .................................................................. 2
Sometimes ........................................................... 3
Often .................................................................... 4
Always ................................................................. 5
3
1.4 If yes, which of the following is the most popular application (Please circle number that applies)?
Recording business transactions .......................... 1
Preparing accounting reports ............................... 2
Managing assets .................................................. 3
Controlling payroll .............................................. 4
Controlling cash flows ......................................... 5
Others, please specify .......................................... 6, please specify …………………………..
1.5 Efficiency of accounting information system (Please circle number that applies on each scale)
Here are some statements, which describe how owner/manager may feel about the efficiency of accounting
information system. Please indicate the most appropriate number that describes your business position on
the scale.
1 – Extremely negative
5 – Neither negative nor positive
9 – Extremely positive
There are no right or wrong answers to these questions. Just give your opinion about your business.

1. How does your business regard its accounting information 1 2 3 4 5 6 7 8 9
system?
2. How frequent does your business prepare its accounting 1 2 3 4 5 6 7 8 9
reports?
Not updated at all Very updated
3. How does accounting information system in your business 1 2 3 4 5 6 7 8 9
update the business transactions?
4. What is owner/manager involvement in preparing accounting 1 2 3 4 5 6 7 8 9
information?
5. What is owner/manager involvement in interpreting and using 1 2 3 4 5 6 7 8 9
accounting information?
6. How acceptable is your business’s accounting information 1 2 3 4 5 6 7 8 9
system?
7. How useful is your business’s accounting information useful 1 2 3 4 5 6 7 8 9
in making decisions?
Low High
8. How computerized is your business’s accounting information 1 2 3 4 5 6 7 8 9
system?
2. Financial reporting and analysis
2.1 What kinds of financial statements are regularly prepared in your business (May circle more than one
number)?
Balance sheet ....................................................... 1
Income statement (Profit and loss statement)....... 2
Statement of cash flows ....................................... 3
Statement of funds ............................................... 4
Other .................................................................... 5, please specify ……………………………………
4
2.2 Who is responsible for the following duties in your business (Please circle number that applies for each
duty)?
Owner Manager Chief- Employed External Never do

accountant accountant accountant it
Preparing financial statements 1 2 3 4 5 6

Analyzing financial statements 1 2 3 4 5 6
2.3 How often are the financial statements of your business prepared and analyzed (Please circle number
that applies for each duties)?
Monthly Quarterly Semiannually Annually Never

Preparing financial statements 1 2 3 4 5
Analyzing financial statements 1 2 3 4 5
2.4 What kinds of financial analysis are currently used in your business (May circle more than one
number)?
Ratio analysis ...................................................... 1
Trend analysis ..................................................... 2
Both ..................................................................... 3
Other .................................................................... 4, please specify ……………………………………..
2.5 What kinds of financial ratios are currently used for financial analysis in your business (May circle
more than one number)?
Current ratio ........................................................ 1
Quick ratio ........................................................... 2
Debt ratio ............................................................. 3
Debt-to-equity ratio ............................................. 4
Short-term debt ratio ........................................... 5
Long-term debt ratio ............................................ 6
Receivable turnover ............................................. 7
Inventory turnover ............................................... 8
Fixed asset turnover ............................................ 9
Total asset turnover ............................................. 10
Return on sales .................................................... 11
Return on assets ................................................... 12
Return on equity .................................................. 13
Never use any ratio .............................................. 14
2.6 Does your business ever apply computers in financial reporting and analysis (Please circle number that
applies)?
Never ................................................................... 1
Rarely .................................................................. 2
Sometimes ........................................................... 3
Often .................................................................... 4
Always ................................................................ 5
2.7 If yes, what area is your computer applied (Please circle number that applies)?
Financial reporting .............................................. 1
Financial analysis ................................................ 2
Both ..................................................................... 3
Other .................................................................... 4, please specify ……………………………………
5
2.8 Efficiency of financial reporting and analysis (Circle one number that applies on each scale)
Here are some statements which describe how owner/manager might feel about the efficiency of financial
reporting and analysis practices. Please indicate the most appropriate number that describes your business
position on the scale.

1. How does your business regard financial reporting and 1 2 3 4 5 6 7 8 9
analysis?
2. How frequent does your business prepare financial statements 1 2 3 4 5 6 7 8 9
(balance sheet, income statements, statements of cash flows)?
statements?
4. How involved is the owner/manager involve in interpreting 1 2 3 4 5 6 7 8 9
and using financial statements?
5. How useful are the financial statements of your business in 1 2 3 4 5 6 7 8 9
6. How frequent does your business analyze financial statements 1 2 3 4 5 6 7 8 9
(balance sheet, income statements, statements of cash flows)?
7. How useful are financial ratios applied in financial analysis of 1 2 3 4 5 6 7 8 9
your business?
Low High
3. Cash management practices
3.1 Does your business ever conduct or occur the following ones (Circle one number that applies for each
described below)?
Never Rarely Sometimes Often Always

Preparing cash budget 1 2 3 4 5
Determining the target cash balance 1 2 3 4 5
Occurring cash shortage 1 2 3 4 5
Occurring cash surplus 1 2 3 4 5
Utilizing computers in cash management 1 2 3 4 5
3.2 How often is the cash budget prepared and reviewed in your business (Circle one that applies for
each)?
Never Weekly Monthly Quarterly Semiannually Annually

Preparing cash budget 0 1 2 3 4 5
Reviewing cash budget 0 1 2 3 4 5
6
3.3 On what basis does your business determine target cash balances (Circle one that applies)?
Based on theories of cash management ............... 1
Based on historical data ....................................... 2
Based on owner/manager’s experience ............... 3
Other .................................................................... 4, please specify ………………………………..
3.4 Where does your business often invest the temporary cash surplus (Circle one that applies)?
Bank deposit ........................................................ 1
Treasury bills ....................................................... 2
Both above .......................................................... 3
Other .................................................................... 4, please specify ………………………………..
No where ............................................................. 5
3.5 In cash management, what area is the computer applied (Circle one that applies)?
Preparing cash budget ......................................... 1
Recording cash transactions ................................ 2
Both above .......................................................... 3
Other .................................................................... 4, please specify ……………………………..
3.6 Efficiency of cash management (Circle one number that applies for each scale)
Here are some statements which describe how owner/manager might feel about the efficiency of cash
management practices. Please indicate the most appropriate number that describes your business position
on the scale.

1. How does your business regard cash management practices? 1 2 3 4 5 6 7 8 9
2. How regularly does your business prepare cash budgets? 1 2 3 4 5 6 7 8 9
3. How involved is the owner/manager in preparing cash 1 2 3 4 5 6 7 8 9
budgets?
4. How involved is the owner/manager in interpreting and using 1 2 3 4 5 6 7 8 9
cash budgets?
5. How useful are cash budgets of your business in providing 1 2 3 4 5 6 7 8 9
information for making decisions?
6. How does your business apply theories of cash management in 1 2 3 4 5 6 7 8 9
determining the target cash balance?
7. How acceptable is the target cash balance determined in your 1 2 3 4 5 6 7 8 9
business?
Low High
8. How computerized are cash management practices in your 1 2 3 4 5 6 7 8 9
business?
7
4. Receivable management practices
4.1 Does your business ever carry out the things listed below (Circle one that applies for each)?
Never Rarely Often Sometimes Always

Sell products or services in credit 1 2 3 4 5
Set up its credit policy to the customers 1 2 3 4 5
Use computers in receivable management 1 2 3 4 5
4.2 How often does your business review its levels of receivables and bad debts (Circle one that applies for
each row)?
Never Weekly Monthly Quarterly Semiannually Annually

Review its levels of receivables 0 1 2 3 4 5
Review its bad debts 0 1 2 3 4 5
4.3 Which of the following ranges is the best indication your business’s percentage of bad debts (Circle
one that applies)?
Less than 5% of sales .......................................... 1
5 – 10% of sales .................................................. 2
10 –20 % of sales ................................................ 3
More than 20% .................................................... 4
Don’t know .......................................................... 5
4.4 In managing receivables, which areas are computers applied (Circle one that applies)?
Managing receivables .......................................... 1
Managing bad debts ............................................ 2
Both ..................................................................... 3
Others .................................................................. 3, please specify ………………………………….
4.5 Efficiency of receivable management (Circle one number applies for each scale)
Here are some statements which describe how owner/manager might feel about the efficiency of receivable
on the scale.

1. How does your business regard to receivables management 1 2 3 4 5 6 7 8 9
practices?
2. How regularly does your business review debtors’ credit 1 2 3 4 5 6 7 8 9
period?
3. How reasonable is debtors’ credit period in your business? 1 2 3 4 5 6 7 8 9
4. How regular does your business review debtors’ discount 1 2 3 4 5 6 7 8 9
policy?
5. How reasonable is debtors’ discount policy in your business 1 2 3 4 5 6 7 8 9
6. How regular does your business review percentage of bad 1 2 3 4 5 6 7 8 9
8
debts?
7. How reasonable is the percentage of bad debts in your 1 2 3 4 5 6 7 8 9
business
8. How frequent does your business implement theories of 1 2 3 4 5 6 7 8 9
receivables management?
Low High
9. How computerized are receivable management practices in 1 2 3 4 5 6 7 8 9
your business?
5. Inventory management practices
5.1 Does your business ever do the following ones (Circle one that applies for each row)?

Review its inventory levels 1 2 3 4 5
Prepare inventory budget 1 2 3 4 5
Utilize computer in managing inventory 1 2 3 4 5
5.2 On what basis is the inventory level determined (Circle one that applies)?
Based on theories of inventory management ....... 1
Based on historical data........................................ 2
Based on owner/manager’s experience ................ 3
Other .................................................................... 4, please
specify……………………………………….
5.3 Does your business ever use “economic order quantity model” in inventory management?
Do not know this model ...................................... 1
Know but never use ............................................. 2
Sometimes use ..................................................... 3
Often use ............................................................. 4
Always use .......................................................... 5
5.4 Efficiency of inventory management (Circle one that applies for each scale)
Here are some statements which describe how owner/manager might feel about the efficiency of inventory
on the scale.

1. How does your business regard inventory management 1 2 3 4 5 6 7 8 9
practices?
2. How regularly does your business review inventory turnover? 1 2 3 4 5 6 7 8 9
3. How regularly does your business review inventory level? 1 2 3 4 5 6 7 8 9
Very slow Very fast
4. How fast is inventory turnover of your business? 1 2 3 4 5 6 7 8 9
9
5. How acceptable is inventory level of your business? 1 2 3 4 5 6 7 8 9
Very useful at all Very useful
6. How are inventory budgets of your business useful in 1 2 3 4 5 6 7 8 9
Very poor Very good
7. How does your business apply theories of inventory 1 2 3 4 5 6 7 8 9
management in determining the inventory level?
Low High
Computerization computerization
8. How computerized are inventory management practices in 1 2 3 4 5 6 7 8 9
your business?
6. Fixed asset management practices
6.1 Related to fixed asset management, does your business ever do the following ones (Circle one that
applies for each row)?

Evaluate its projects before making capital investment 1 2 3 4 5
decisions
Review efficiency of using fixed assets after investing 1 2 3 4 5
Use computer in managing fixed assets 1 2 3 4 5
6.2 Which methods does your business use for assessing capital projects (May circle more than one
number)?
Payback period .................................................... 1
Discounted payback period ................................. 2
Net present value ................................................. 3
Internal rate of return ........................................... 4
Modified internal rate of return ........................... 5
6.3 Which area is computer used in managing fixed assets (Circle one that applies)?
Assessing capital investment projects ................. 1
Managing fixed assets ......................................... 2
Both ..................................................................... 3
Others .................................................................. 4, please specify…………………………………….
6.4 Efficiency of fixed asset management (Circle one that applies for each scale)
Here are some statements which describe how owner/manager might feel about the efficiency of fixed asset
on the scale.

1. How does your business regard fixed asset management 1 2 3 4 5 6 7 8 9
practices?
2. How does your business regard assessing capital project 1 2 3 4 5 6 7 8 9
before making investment decisions?
10
3. How regularly does your business review capital projects? 1 2 3 4 5 6 7 8 9
4. How acceptable is capital budgeting utilized in your business? 1 2 3 4 5 6 7 8 9
Not advanced at all Very advanced
5. How advanced does your business apply techniques of capital 1 2 3 4 5 6 7 8 9
budgeting in determining capital investment projects?
6. How reasonable are fixed assets of your business utilized? 1 2 3 4 5 6 7 8 9
7. How useful are fixed assets acquired in your business? 1 2 3 4 5 6 7 8 9
Low High
8. How computerized are fixed asset management practices in 1 2 3 4 5 6 7 8 9
your business?
7. Financial planning practices
7.1 Related to financial planning, does your business ever conduct the ones listed below (Circle one that
applies for each row)?

Preparing financial budgets 1 2 3 4 5
Comparing between budgeted and actual results 1 2 3 4 5
Using computer in financial planning 1 2 3 4 5
7.2 What are objectives of financial planning? (May circle more than one)
Sales maximization ............................................. 1
Cost minimization ............................................... 2
Profit maximization ............................................. 3
Quality product or service ................................... 4
Growth ................................................................. 5
Survival ............................................................... 6
No goal or policy ................................................. 7
7.3 What type of budget does your business regularly prepared? (May circle more than one).
Sales budget ........................................................ 1
Manufacturing budget ......................................... 2
Purchase budget ................................................... 3
Labor budget ....................................................... 4
Overhead cost budget .......................................... 5
Selling and administration expenses budget ........ 6
Cash budget ......................................................... 7
Budgeted profit and loss account ........................ 8
Budgeted balance sheet ....................................... 9
7.4 Who is responsible for preparing budgets (Circle one that applies)?
Owner .................................................................. 1
Financial manager ............................................... 2
Chief-accountant ................................................. 3
Employed accountant .......................................... 4
External accountant ............................................. 5
7.5 How often is comparison of between budgeted and actual results conducted (Circle one that applies)?
Daily .................................................................... 1
Weekly ................................................................ 2
11
Monthly ............................................................... 3
Quarterly ............................................................. 4
Semiannually ....................................................... 5
Annually .............................................................. 6
7.6 Efficiency of financial planning
Here are some statements which describe how owner/manager might feel about the efficiency of financial
planning practices. Please indicate the most appropriate number that describes your business position on
the scale.

1. How does your business regard financial planning? 1 2 3 4 5 6 7 8 9
2. How regularly does your business prepare its financial 1 2 3 4 5 6 7 8 9
budgets?
budgets?
4. How involved is the owner/manager in interpreting and using 1 2 3 4 5 6 7 8 9
financial budgets?
5. How useful are the financial budgets of your business useful in 1 2 3 4 5 6 7 8 9
6. How regularly does your business compare between actual and 1 2 3 4 5 6 7 8 9
budgeted results?
7. How reasonable are financial planning techniques applied in 1 2 3 4 5 6 7 8 9
financial analysis of your business?
Low High
C. FINANCIAL CHARACTERISTICS
(Based on the current financial statements of your business, please complete the table as described below?)
Financial ratio Description Results

Current ratio Current assets divided by current liabilities ?
Debt-to-equity ratio Total debt/Equity ?
Total asset turnover Sales/Total assets ?
Return on sales (%) Net income/Sales ?
Return on assets (%) Net income/Total assets ?
Return on equity (%) Net income/Equity ?
Business name:
Address: Phone number:
Respondent name: Position:
Once again thank you very much for your co-operation.
12
Appendix 2: Vietnam Background information
General Information
The Socialist Republic of Vietnam is a one-party communist state, extending 1 600 km
from latitude 23 degrees north to 9 degrees north along the western rim of the South
China Sea. Occupying 331 114 sq. km. and
bordering China to the north, Laos to the
west and Cambodia to the south-west,
Vietnam is marked by two delta regions at
either end of the country (the Songkoi - or
Red River - in the north, the Mekong in the
Figure removed due to south), which are separated by the narrow
copyright restrictions region of the Central Highlands. The
extensive Annamite Mountains dominate
the north-west. Around 16% of Vietnam's
land mass is under cultivation, with the
remaining areas either mountainous or
forested. Vietnam has substantial territorial
claims in the South China Sea and
occupies a number of reefs and islands. Its
capital, Hanoi, lies on the Red River.
Eighty percent of Vietnam's
population of 78 million (1998 official estimate) are ethnic Vietnamese. Significant
ethnic minorities include the Tai and Hmong in the north and west, the Cham in the
centre, and the Chinese and Khmer in the south. Vietnam has a Buddhist majority, its
religious minorities including the Cao Dai, the Hoa Hao, and most notably the Roman
Catholic, Protestant and Muslim religions.
Vietnam is a member of the UN, ASEAN, ARF, ASEM, APEC and the Non-
Aligned Movement. It is currently seeking accession to the WTO.
Historical Overview
After a millennium as a Chinese province, the northern region of Vietnam gained
independence in 938, following the dissolution of the Tang empire. Under succeeding
local dynasties ruling from Hanoi over the next five centuries, Vietnam fought off several
attempts to reintegrate it into China and also expanded its reach southward, gradually
annexing the central kingdom of Champa.
Dynastic struggles led to civil wars during the sixteenth, seventeenth, eighteenth
centuries. During this period, Vietnam gained control over the Mekong delta and the first
Christian missions arrived. It was not until 1802 that the present Vietnam was united
under a single ruler, Nguyen Anh, whose court was located at the central coastal city of
Hue.
Despite the continuation of the Nguyen dynasty, Vietnam saw increasing French
intervention from the 1850s. Spurred by Hue's persecution of French Christian
missionaries and their Vietnamese converts and by a desire not to lose eastern markets to
the British, France annexed the southern Cochin-China region, their possession of which
1
was recognised by Hue in a 1874 treaty. A treaty of protection over Vietnam followed in
1883. By 1901, Vietnam, Cambodia and Laos had fallen collectively under a central
French administration, forming the Union Indochinoise.
In the decades before the Second World War, a number of groups opposed to
colonial rule emerged. Following the suppression in the 1900s of early nationalist
movements led by Phan Chau Trinh and Phan Boi Chau and the restriction of
constitutionalist movements in the 1910s to the Cochin-China region, Vietnamese
nationalism adopted a revolutionary flavour during the 1920s. The Communist Party of
Indochina (CPI) was established in 1930. Although suppressed by the French military in
1931, the CPI took advantage of an amnesty for political prisoners in 1936 and enjoyed
increasing support from Moscow during the late 1930s. The outbreak of war in 1939 led
to a ban on left-wing activity and the development of secret CPI networks which were
maintained throughout the war. In 1941, the Revolutionary League for the Independence
of Vietnam (Viet Minh) was formed under the leadership of Ho Chi Minh.
Despite the Japanese advance into Vietnam in 1941, a Vichy French
administration maintained authority until early 1945, when it was deposed by the
Japanese and a pro-Japanese government was appointed by Emperor Bao Dai. Following
the Japanese surrender, the Viet Minh took effective control of a number of provinces,
mostly in the north. After the abdication of Bao Dai, Ho Chi Minh declared independence
and the founding of the Democratic Republic of Vietnam on 2 September 1945. But with
the division of Vietnam at the 16th parallel between British forces in the south and
Chinese forces in the north agreed at the Potsdam Conference, France was able to regain
control over the south by the end of 1945 and negotiated the withdrawal of Chinese
troops from the north by March 1946.
Relations between the French and Viet Minh completely broke down by late
1946, leading to a protracted guerrilla war which ended with the French defeat at Dien
Bien Phu in May 1954, the Viet Minh being aided to a large extent by Chinese
communists. A cease-fire agreement at Geneva in the same month provided for a single
Vietnam divided at the 17th parallel. Vietnam was to be administered in the north from
Hanoi by the government of the Democratic Republic of Vietnam and in the south from
Saigon by the government of the State of Vietnam, which had been founded by the
French under Bao Dai in 1949. The agreement also provided for the possibility in 1956 of
national elections which never eventuated. The following decade saw economic and
social restructuring in the north under the Vietnam Workers' Party (formerly the CPI) and
the dominance of Ngo Dinh Diem in the south.
A Roman Catholic, Diem overthrew Bao Dai to become President in 1955. Until
his assassination in the 1963 military coup, due in part to increasing Buddhist
dissatisfaction with his Catholic-dominated government, Diem took South Vietnam
increasingly into the US sphere, his conflict with communists in South Vietnam
developing a cold-war dynamic. Accordingly, the Kennedy and Johnson Administrations
committed themselves to defending South Vietnam, first with military advisers and then
following the Gulf of Tonkin incident in August 1964 with US military force. Australia,
New Zealand, Thailand, South Korea and the Philippines also contributed forces. After a
series of coups in South Vietnam, the constitutional reforms in 1967 led to the
government of General Nguyen Van Thieu, which survived until 1975.
2
Although enjoying military superiority and seriously disrupting economic life in
North Vietnam through aerial bombardment from 1965 to 1968, the domestically
beleaguered United States entered into informal negotiations with North Vietnam in
1968. With the advent of the Nixon Administration in 1969, the same year as Ho Chi
Minh's death, formal negotiations commenced in Paris. Despite Nixon's intention to
reduce US involvement and "Vietnamise" the conflict, a campaign to disrupt communist
supply lines led to the expansion of the conflict into Cambodia and Laos. The Paris
Agreement was concluded in March 1973, which provided for the withdrawal of US but
not North Vietnamese troops. Although the agreement notionally provided for South
Vietnam's security, this security was not enforced effectively. Following a final swift
campaign in early 1975, North Vietnamese forces entered Saigon on 30 April and
renamed it Ho Chi Minh City. Formal reunification took place on 2 July 1976 with the
foundation of the Socialist Republic of Vietnam and in December with the foundation of
the Communist Party of Vietnam.
In the late 1970s, relations with China soured over border disputes, the plight of
southern Vietnam's Chinese, China's support for the hostile Pol Pot regime in Cambodia,
and Vietnam's orientation towards the USSR. Following the Vietnamese-Cambodia
conflict in late 1978 and the imposition of a pro-Vietnamese government, tension with
China increased leading to full-scale conflict in February and March 1979. Sporadic
clashes continued throughout the 1980s. Although the USSR-China rapprochement in the
late 1980s and the withdrawal of Vietnamese troops from Cambodia in 1989 helped ease
conflict, tensions between Vietnam and China over competing claims in the South China
Sea continue to the present.
Changing global circumstances and desperate economic conditions within the
country during the late 1980s forced Vietnam to make its first tentative steps towards
political and economic doi moi (renovation). (See political and economic overviews.) In
1994, the United States lifted its economic embargo against Vietnam, imposed after
Vietnam and Cambodia war. In 1995, Vietnam became the seventh member of ASEAN.
In the same year, the United States and Vietnam established full diplomatic relations, the
two countries signing an agreement to normalise trading relations in July 2000.
Political Overview
Vietnam is one of the world's five remaining one-party communist states. Decision
making in Vietnam is shared by national and provincial government and agencies,
slowing the political process and encouraging a cautious approach to major policy issues.
Political power lies with the Communist Party of Vietnam. Its peak organ, the eighteen
member Politburo, is elected by the Party's Central Committee, of 170 members, and
holds authority over the implementation of social, economic, labour, defence, security
and foreign policy. The Party is led by the General Secretary, currently Le Kha Phieu.
Party Congresses are held every five years to ratify major policy changes. The ninth
Congress will take place in early 2001. Between Congresses, Central Committee Plena
are convened three or four times per year to decide on important policy issues.
Although still conservatively communist, Vietnam has undertaken some reforms
in recent years. In 1986, at a time of economic crisis following years of economic
stagnation resulting from the effects of the war and unsuccessful collectivisation
programs, the Party embarked upon a program of limited market-based economic
3
reforms. These reforms were known as doi moi (renovation) and were aimed at a shift
towards "market economy with socialist orientation". Under doi moi, the private sector
was permitted to exist in a limited capacity. There was also greater decentralised
economic planning and a greater acceptance of market forces as the determinant of prices
and production. Foreign investment was encouraged, and agriculture was deregulated to
allow individual family farms again. Vietnamese living standards rose appreciably,
particularly in urban areas.
However, the potential benefits of past reforms are now close to being exhausted
and further reform is needed to stimulate the Vietnamese economy. While Vietnam's
signing in July 2000 of the Bilateral Trade Agreement with the United States indicates a
commitment to continued economic reform, the Party remains equally committed to an
economy which is led by the public sector, dominated by state owned enterprises (SOEs)
and protected by government regulation. The prospect of inequitable development and
social disintegration, which some elements of the Party attribute to market forces, has
also been a source of considerable debate within the Party. The Party's collective
ambivalence towards reform is reflected in Vietnam's current leadership, representing a
reformist and conservative mix.
The Party is presently faced with a conjunction of difficult issues such as
increasing unemployment, growing income disparities between urban and rural areas,
social problems (including drug abuse, prostitution and increasing levels of HIV),
occasional pockets of provincial unrest, corruption and declining Party membership. Its
overriding concern is to maintain political and economic stability, which will ensure its
continued existence in the face of a more open economic environment.
Since the end of 1997, there have been a number of instances where members of
the Party and the general population have been prepared to express dissent. The Party has
responded by introducing measures to address the concerns of the general population
(such as seeking to channel more of the benefits of economic reform to the rural areas
and pursuing administrative reform within the Party) and by projecting itself as the
protector of Vietnamese culture. The August 1999 Central Committee Plenum reflected
these themes, acknowledging that ineffective organisation and a cumbersome political
structure, particularly in state administrative management, had been "responsible for
reducing the efficiency of the [Party] leadership and management". The Party also
launched a campaign of criticism and self-criticism in May 1999, designed to "purify"
itself and to stem internal corruption and mismanagement. The dismissal of former
Deputy Prime Minister Ngo Xuan Loc by the National Assembly in December 1999
represents the most prominent outcome of this campaign.
Although political reform has never been articulated as an objective, and the
paramount position of the Party has never been under challenge, the National Assembly
took some cautious steps in 1998 away from complete dominance by the Party, with
unexpectedly heated debate over key provisions of legislation relating to land and
citizenship. The release of a number of leading dissidents in successive Presidential
amnesties, including many prisoners on the Australian Government's list of cases of
concern who are believed imprisoned for the peaceful expression of their political or
religious beliefs, was taken as an indication of greater political openness.
4
Head of State and Government
President Tran Duc Luong
Vice-President Nguyen Thi Binh
Prime Minister Phan Van Khai
Deputy Prime Minister Nguyen Tan Dung
Deputy Prime Minister Nguyen Manh Cam
Deputy Prime Minister Nguyen Cong Tan
Deputy Prime Minister Pham Gia Khiem
Minister of Agriculture and Rural Development Le Huy Ngo
Minister of Construction Nguyen Manh Kiem
Minister of Culture and Information Nguyen Khoa Diem
Minister of Defence Pham Van Tra
Minister of Education and Training Nguyen Minh Hien
Minister of Finance Nguyen Sinh Hung
Ministry of Fisheries Ta Quang Ngoc
Minister of Foreign Affairs Nguyen Dy Nien
Minister of Health Do Nguyen Phuong
Minister of Industry Dang Vu Chu
Minister of Justice Nguyen Dinh Loc
Minister of Labour, War Invalids and Social Affairs Nguyen Thi Hang
Minister of Planning and Investment Tran Xuan Gia
Minister of Public Security Le Minh Huong
Minister of Science, Technology and Environment Chu Tuan Nha
Minister of Trade Vu Khoan
Minister of Transport and Communications Le Ngoc Hoan
Governor of the State Bank Le Duc Thuy
Minister, Committee for Ethnic Minorities and Mountainous Areas Hoang Duc Nghi
Minister, Government Committee of Organization and Personnel Do Quang Trung
Minister, State Inspectorate Ta Huu Thanh
Minister, Office of Government Doan Manh Giao
Minister, Committee and Physical Culture and Sport Ha Quang Du
Minister, National Committe for Population and Family Planning Tran Thi Trung Chien
Minister, National Committee for Protection and Care of Children Tran Thi Thanh Thanh
Politburo of the Communist Party of Vietnam

Le Kha Phieu* (General Secretary)
Tran Duc Luong* (President)
Phan Van Khai* (Prime Minister)
Nong Duc Manh* (Chairman of the National Assembly)
Pham The Duyet* (Former Chairman of the Hanoi Party Committee, President of the
Vietnam National Fatherland Front)
Nguyen Phu Trong* (special member assisting Mr Duyet)
Nguyen Manh Cam (Deputy Prime Minister)
Nguyen Duc Binh
Nguyen Van An
5
Pham Van Tra (Minister of Defence)
Nguyen Thi Xuan My
Truong Tan Sang (Head, Economic Commission of the CPV Central Committee)
Le Xuan Tung
Le Minh Huong (Minister of Public Security)
Nguyen Tan Dung (Deputy Prime Minister)
Pham Thanh Ngan
Nguyen Minh Triet (Party Secretary, Ho Chi Minh City)
Phan Dien
Economic Overview
Key Indicators
Population (1998) :78.1 million
Exchange rate (15/3/2000) :7636 dong/A$
GDP per capita (1999) :approx. US$360
GDP growth (1999) :4.8%
Inflation (1999) :0.1%
Total exports (1999) :US$11.523 billion
Total imports (1999) :US$11.636 billion
Current account deficit (1999) :US$113 million
Unemployment (1999 est.) :7.4% (significant variation between urban and rural areas)
Macroeconomic Environment and Reform Prospects
The Vietnamese economy is currently in transition from a centrally planned to a market-
based economy. However, the economy is still largely centrally planned, with state
ownership still the predominant
form of ownership. The
government is committed to state
sector dominance as a key feature
of the Vietnamese economy. This
is effected through measures such
as price controls, production
planning and access to credit.
However, there has been some
development of monetary, fiscal
and trade policy as tools of
economic management within the
context of maintaining a "socialist
economy with a market
orientation". The financial sector
is in poor shape, Moody's ratings agency recently giving Vietnam a B1 rating. Vietnam
has a controlled exchange rate which is allowed to fluctuate within a very narrow band.
While the dong has been gradually depreciating as permitted by this band, it is still
generally regarded to be overvalued.
6
The state owned sector is not only protected from international competition, but
also from the domestic private sector. However, as part of broader efforts to improve the
investment climate for domestic and foreign investors alike, as well as provide
employment opportunities for Vietnamese, the government has recognised the legitimacy
of the private sector and the
inherent disadvantages it faces
vis-a-vis the state owned sector.
The government is undertaking a
privatisation process
(equitisation) to improve the
overall performance of the state
owned sector and allow the
private sector to operate in more
sectors. The Enterprise Law,
passed in 1999, was the first step
in providing a legal platform for
private sector development.
Equitisation has not proceeded as
quickly as the government has expected, in part because many state assets are not
attractive investment options. Key sectors, such as aviation, power supply,
telecommunications and post are among industries which will remain monopolised by
large SOEs, and subject to central planning management mechanisms.
Vietnam has committed to global economic integration through its participation in
AFTA and APEC, its WTO accession negotiations and most recently its signing in July
2000 of the US-Vietnam Bilateral Trade Agreement. However, global integration is a
long-term objective and the Government has recently introduced a number of policies
which appear to contradict the spirit of trade liberalisation. Although actively
encouraging exports, Vietnam is pursuing an import substitution industrialisation policy
which affords disproportionate protection to the predominant state owned sector, and
restricts imports in an ad hoc manner to protect its currency.
Recent Economic Performance
The Vietnamese Government's underlying objective is to achieve stable and high
economic growth and development. Such growth was achieved in the early to mid 1990s,
with real growth averaging 8% annually. However, the combined effects of the stalling
reform process, the regional economic crisis, falling demand, including declining foreign
and domestic investment, have slowed growth. According to official figures, GDP growth
declined from 9.5% and 9.3% in 1995 and 1996 to 4.8% in 1999. The IMF estimated
growth at 3.5% and the World Bank at around 4% in 1999. With an official growth rate
of 6.2% for the first half of 2000 (partly the result of the recently improved value of its
crude oil exports), Vietnam is expected to meet the government's growth target for 2000
of around 6%. The government has attempted to stimulate growth through a combination
of fiscal and monetary policy measures. However, these have yet to prove fruitful. In
1999, unemployment was estimated at 7.4% by the World Bank. This is a major
preoccupation for the Vietnamese government in its efforts to maintain economic and
political stability. The economy does not generate enough jobs to accommodate the
7
annual growth in the labour force. According to the Ministry of Planning and Investment,
total investment in Vietnam grew by 9% in 1999. But investment, as a proportion of GDP
has fallen from 29% in 1997 to 19% in 1999 (World Bank estimate) . Half of this decline
can be attributed to the decline in foreign direct investment (FDI) flows from around
US$2 billion annually between 1995-7 to the IMF's estimate of US$800 million of
realised investment in 1999.
On a sectoral basis, industrial output reached around US$12 billion, an increase of
10.4% over 1998. Overall, the industrial sector remained uncompetitive and was
frustrated by falling demand, reflected by widespread stockpiling. Sub-sectors most
affected were cement, sugar and steel. Of total industrial production, the state sector
accounted for 50% (up from 44.5% in 1998), domestic private sector about 20%,
achieving a growth rate of 8.8%, and the foreign invested sector about 30%, achieving a
growth rate of nearly 20%. The agricultural sector was a bright spot in the economy, with
an official growth rate of 5.3%. However, a simultaneous decline in domestic food prices
by 7.8% led to the actual lowering of farmers' incomes, driving the decline in domestic
demand even further. The consumer price index (CPI) rose by only 0.1% in 1999 and fell
consistently from March to October 1999. Measures to stimulate demand have not been
successful. Statistical data on the services sector is not readily available, but most
commentators agree that economic activity in this sector reflects broader economic
trends. As in most developing countries, the informal service sector masks
underemployment and unemployment to a significant degree.
Vietnam's trade deficit fell to US$113 million from US$2.1345 billion in 1998, a
fall of 95%. Export earnings reached US$11.523 billion, an increase of 23.1%. Notable
export performances included crude oil (mainly due to increased world prices), textiles
and garments, footwear, seafood, electronic appliances and computers, and handicrafts.
The coal, coffee, and tea export sectors contracted. Vietnam's total imports in 1999 were
valued at US$11.636 billion, a slight increase of 0.9% or US$200 million from 1998.
Declining domestic demand and the implementation of import quotas largely limited
import growth. Cotton, textile thread, oil and petroleum, steel, plastic and chemicals were
among the import sectors experiencing slight increases.

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Southern Cross University

Financial management and proitability of small

Signature: Kieu Minh Nguyen ______________________

AFTA ASEAN Free Trade Agreement

ACKNOWLEDGEMENTS ....................................................................................................................... iii

GLOSSARY OF TERMS AND ABBREVIATIONS ................................................................................ vii

TABLE OF CONTENTS .......................................................................................................................... ix

LIST OF TABLES..................................................................................................................................... xiii

LIST OF FIGURES .................................................................................................................................. xvii

CHAPTER ONE: INTRODUCTION TO THE STUDY

CHAPTER TWO: THE ECONOMIC STRUCTURE AND SMEs IN VIETNAM

2.1 INTRODUCTION ....................................................................................................................17

CHAPTER THREE: FINANCIAL MANAGEMENT AND PROFITABILITY OF

3.1 INTRODUCTION ....................................................................................................................59

CHAPTER FOUR: RESEARCH METHODOLOGY

CHAPTER FIVE: DATA ANALYSIS AND FINDINGS

5.1 INTRODUCTION ....................................................................................................................184

CHAPTER SIX: CONCLUSIONS AND IMPLICATIONS

6.1 INTRODUCTION ...................................................................................................................237

Figure 1.1: Structure of chapter 1

1.2 Research background

1.3 Research problem

1.3.1 Research questions 1.3.2 Research objectives

1.5 Justification for the study

1.6 Definitions of terms used in the study

1.7 Significance and scope of the study

1.8 The analytical model for the study

1.9 Structure of the study

Source: Developed for the thesis

1.2 RESEARCH BACKGROUND

In the mid-1980s, Vietnam could be characterized as having a strong command-

• providing a large number of diversified products, occupying 26 percent of

In addition to achievements and contributions as mentioned above, SMEs in Vietnam

1.3 RESEARCH PROBLEM

Problem definition is essential before conducting a research project, especially

Figure 1.2: Fields of the research problem

Financial management practices Financial characteristics

Source: Developed for the thesis

1.3.1 Research questions

1.3.2 Research objectives

A research objective is the researcher’s version of a business problem. Objectives

• to collect descriptive evidence on financial management practices, financial

In choosing a research design, Zikmund (1997, p. 37) discusses three types of

• Exploratory research is usually conducted to clarify and define the nature of a

1.5 JUSTIFICATION FOR THE STUDY

Concerned with financial management practices, most previous researchers have

• Secondly, most previous researchers focus on investigating and describing

• Firstly, it appears that the financial characteristics of SMEs in developing

1.6 DEFINITIONS OF TERMS USED IN THE STUDY

1.7 SIGNIFICANCE AND SCOPE OF THE STUDY

1.8 ANALYTICAL MODEL FOR THE STUDY

Pm = SME profitability ratios, viewed as dependent variables

As = Accounting information system practices, viewed as independent variables

Figure 1.3: Analytical model for the research

Financial management practices:

Source: Developed for the study

Chapter 4 will present, in more detail, definitions and measures of dependent

management, capital structure management, and financial planning. In addition, the

1.9 STRUCTURE OF THE STUDY

Figure 1.4: Structure of the study

Chapter 1: Introduction to the Study

Chapter 2: The Economic Structure Chapter 3: Financial Management

Chapter 4: Research Methodology

Chapter 5: Data Analysis and Findings