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Copyright © eContent Management Pty Ltd. Small Enterprise Research (2014) 21: 2–13.

Research review: A review of the latest research


in the field of small business and
entrepreneurship

Financial management in SMEs


TIM M AZZAROL
UWA Business School, University of Western Australia, WA, Australia

ABSTRACT
This is the first of a series of reviews for Small Enterprise Research that cover recently published
research in the field of small business management and entrepreneurship. The focus of this review is
on financial management in small to medium enterprises (SMEs), in particular working capital
and cash flow management. A total of 18 papers published in the past 12 months are reviewed
summarising their methodology, findings and implications for research, education, policy and prac-
tice. The papers are grouped into four categories. The first are those that provide an overall exami-
nation of the nature of SME financing. The second are those that focus on the relationship between
working capital management and profitability in SMEs. The third group encompass studies of how
owner-managers undertake the management of working capital, specifically in developing
economies. The fourth group examines the relationship between financial management and growth
within SMEs.

Keywords: financial management, working capital, cash flow, small business, SMEs

INTRODUCTION 18 papers relating to the financial management

F inancial management, in particular the man-


agement of cash flow and working capital is
one of the most important challenges facing small
of SMEs are examined and discussed. Only
papers published within the past 12 months were
reviewed and these were identified using a search
to medium enterprises (SMEs). This was identi- of major online academic bibliographic databases
fied as long ago as the Bolton Committee Report including Google Scholar, plus the extensive col-
of the early 1970s that investigated the challenges lection of journals provided by the University of
facing SMEs in the United Kingdom (Bolton Western Australia Library. In searching for arti-
1971). Despite the passage of time the challenge cles published between January 2013 and July
of management cash flow and working capital 2014 attention was given to works from peer
continues to be a major concern of small firms. reviewed journals that addressed the financial
What then is the academic literature reporting in management of SMEs, specifically cash flow and
relation to this issue? working capital management. Working capital
In this article, the first of a series of reviews refers to the assets and liabilities necessary for the
for Small Enterprise Research, the findings from daily operations of the business and typically

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includes accounts receivable (e.g. debtors and a business and share any profits or losses. Also dis-
pre-payments) stock or inventories, and accounts cussed is ‘Murabahah’, where an Islamic bank
payable (e.g. creditors and provisions). The purchases goods, such as imports, and on-sells
working capital cycle is the flow of cash and them for a negotiated profit to the business owner
other liquid assets that can move through the who pays the bank via instalments. Finally, the
business during its normal trading period; pro- review also examines ‘Mudarabah’, a further type
viding payments for creditors from the collection of Islamic financing involving a contract between
of receivables from debtors. The cash conversion parties in which the profit is distributed via a pre-
cycle is the process of generating cash from agreed ratio, but any financial losses are borne by
invoices issued to customers and using this to the financier and any operating losses by the busi-
pay for the firm’s operations. The efficiency with ness owner. The paper provides a useful overview
which the business manages its working capital of small business financing with the coverage of
and the speed of its cash conversion cycle are key Islamic financing approaches of particular inter-
determinants of how profitable it is. est. Where the paper is perhaps found wanting is
its lack of a detailed discussion to draw together
THE CHALLENGE OF FINANCIAL all the various threads it has encompassed to pro-
MANAGEMENT IN SME S vide an analytical synthesis of the findings. Never-
The initial three papers reviewed here are by theless the paper is a good starting point for
Abdulsaleh and Worthington (2013), Jindri- anyone seeking to understand the nature of
chovska (2013) and Zhong (2014). Each of these financing for SMEs and the academic literature
papers provides a useful general overview of the relating to this.
topic of financial management in SMEs. Jindrichovska’s (2013) paper from European
The first paper by Abdulsaleh and Worthing- Research Studies sets out with the goal of review-
ton (2013), published in the International Journal ing recent studies into the financial management
of Business and Management, is a review of the lit- of SMEs. In particular she aims to examine the
erature into SME financing. The authors note cash flow and liquidity management, asset acqui-
that the financial management of SMEs differs sition and capital structure of such firms to bet-
significantly from large firms due not only to size, ter understand the main causes of financial
but also the way in which small business owner- management for owner-managers. The paper has
managers make decisions. In developing their a literature review that encompasses work from
literature review the authors examine the organi- the 1980s to the present. It is fairly broad and
sational characteristics of SMEs (e.g. size, age, provides a good description of the work in each
ownership and legal form, location, plus industry of the main studies examined. She then moves
sector and assets structure) and the influences that onto to examine working capital and liquidity
these have on financing. They then turn to the management including a discussion of a firm’s
characteristics of the owner-manager and how cash conversion cycle. There is also a section on
gender, age and experience influence the financ- the way in which the financial decision making
ing and financial behaviour of SMEs. The paper of small business owner-managers impacts on the
subsequently explores the key sources of financing firm’s balance sheet, which is well explained with
for SMEs (e.g. equity, venture capital, business diagrams. The paper concludes with a summary
angels, debt such as banks and trade credit, plus table of what lessons have been learned from the
government assistance). Of particular interest in study including recommendations for the
this paper is its discussion of Islamic financing, ‘Healthy Financial Management of SMEs’. This
including ‘Musharakah’, a form of Islamic financ- is a useful and very pragmatic paper with clear
ing where two or more people collaborate to fund recommendations for practice. Key messages

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include having appropriate accounting systems The first of these papers by Yazdanfar and
in place, frequent reporting of cash flow and liq- Ohman (2014) was published in the Interna-
uidity along with other relevant key performance tional Journal of Managerial Finance. It examines
indicators (KPI). Taking advice from profession- panel data from 13,797 Swedish SMEs engaged
als such as accountants and bankers, plus the use in four different industries. The study utilized
of cash flow budgets and cost control procedures regression analysis and drew cross-sectional data
are also recommendations to owner-managers. from the period 2008–2011. Of interest to the
The paper by Zhong (2014) from the Scottish researchers was the relationship between man-
Journal of Arts, Social Sciences and Scientific Studies agement of the cash conversion cycle and firm
uses a single case study that provides a focus for profitability. The study found a significant rela-
discussion over the financial problems confronting tionship between profitability and the cash con-
SMEs. The case is CGM, a company founded in version cycle, although this was influenced by
2009 that is involved in the R&D and commer- the firm’s size, age and industry. A key finding
cialisation of bio-medical technology. The case from the study, albeit an unsurprising one, is that
study tracks the history of CGM through its life- managers of SMEs can enhance their firm’s prof-
cycle and the different challenges it faces in raising itability by improving their management of
capital, managing money and cash flow. It high- working capital. Because working capital is the
lights the importance of cash flow management to liquid assets found within the firm, the ability to
the firm’s survival and points to the need for improve the speed at which cash is generated
CGM to enhance its corporate governance and from invoices will help enhance profitability.
financial management control systems. As a tech- Enqvist, Graham and Nikkinen (2014) pub-
nology-based start-up CGM offers many lessons lishing in Research in International Business and
for how such firms require good budgetary control Finance drew a sample of 1,136 ‘firm year’ obser-
and prudent financial management. The paper is a vations from the Helsinki stock exchange cover-
clearly written although largely descriptive ing the period 1990–2008. The firms’ return on
account of the CGM case. However, the author assets (ROA) was used as a proxy for profitability
provides some well-considered lessons for future along with gross operating income. Regression
management practice that make the case study of analysis was used to examine the data and several
potential value for those seeking to teach princi- control variables were employed (e.g. firm size,
ples of good financial management, or those sim- current ratio, debt ratio). Attention was given to
ply interested in learning these lessons. the economic booms and busts that had impacted
the Finnish economy during the 18 year period
WORKING CAPITAL MANAGEMENT AND spanned by the data. Twelve hypotheses were
PROFITABILITY IN SME S tested. These related to the relationship between
Four papers addressed research undertaken into profitability and several independent variables
working capital and cash flow management (e.g. cash conversion cycle, accounts payables
within SMEs and the influence this has on prof- deferral period, accounts receivables conversion
itability. These are by Yazdanfar and Ohman period, inventory conversion period) in general
(2014), Enqvist, Graham and Nikkinen (2014), and during economic cycles. Evidence was found
Tauringana and Afrifa (2013) and Gul, Khan, to support the view that there is a negative rela-
Rehman, Kahn, Khan and Kahn (2013). They tionship between the cash conversion cycle and
focus on assessing the impact of the cash conver- profitability, suggesting that a firm can boost
sion cycle and working capital management on their profitability by speeding up their cash cycle
firm profitability using quantitative and qualita- and thereby improving their working capital effi-
tive analysis. ciency. A similar finding emerged for the speed of

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the inventory conversion cycle (e.g. stock turn). and loss of discount terms from suppliers. The
Evidence was also found to suggest that the man- study also found that the management of
agement of inventories was more important in accounts receivable and payable was more impor-
economic downturns than during booms. tant to profitability than managing inventory or
According to the authors: the cash conversion cycle. For SMEs facing cash
flow constraints the study highlighted the need
Overall the results indicate that investing in
to carefully manage accounts receivable and
working capital processes and incorporating
payable to maximise profitability. However, con-
working capital efficiency into everyday rou-
flicting findings over the relative importance of
tines is essential for corporate profitability. As
accounts receivable and payable led the authors
a result, firms should include working capital
to suggest that future research should examine
management in their financial planning
which of the two is more important.
processes. (Enqvist et al. 2014, p. 48)
The fourth paper by Gul et al. (2013) from
The study also suggests that falling demand European Journal of Business and Management
during economic downturns impacts negatively examined a seven year study of the relationship
on a firm’s working capital and requires careful between working capital management and prof-
cash flow and inventory management. For policy itability among SMEs in Pakistan. Like the paper
makers seeking to assist SMEs in difficult eco- by Enqvist et al. (2014), the dependent variable
nomic times, policies that can help speed up the and proxy for firm profitability was ROA. The
cash conversion cycle and enhance working capi- independent variables were accounts receivable as
tal will be beneficial. a percentage of sales, accounts payable as a per-
Tauringana and Afrifa (2013), writing in the centage of purchases and inventory as a percent-
Journal of Small Business and Enterprise Develop- age of purchases. Regression analysis was used
ment also investigated the importance of the with a sample of 55 SMEs data from the Karachi
management of the working capital and cash stock exchange and other sources covering the
conversion cycle to the profitability of small period 2006–2012. Control variables were firm
firms. This study sought to test four hypotheses size, growth (e.g. annual % increase in sales), and
relating to the relationship between profitability debt ratio. The results suggested that profitability
as the dependent variable, and the independent was significantly influenced by the speed with
variables of inventory holding period, accounts which the firm collects its receivables, which is
receivable period, accounts payable period and consistent with earlier research. The ability of the
the cash conversion cycle. Control variables were firm to speed up the rate of inventory turnover
used that included ratios of current assets to was also positively associated with profitability.
inventory, current assets to total assets, fixed In essence the paper suggests that firm profitabil-
assets to total assets, leverage and size. A sample ity will be improved if the owner-manager can
of 133 firms from the United Kingdom was sur- collect its customer payments faster, pay its credi-
veyed and a regression analysis used to test the tors more slowly and turn over its inventories
hypotheses. The data covered a five year period more quickly.
from 2005–2009. As with the other studies
described here, this study found a significant WORKING CAPITAL MANAGEMENT
relationship between profitability and the effi- PRACTICES BY OWNER -MANAGERS
cient management of accounts receivable and The next eight papers are from Kubickova and
payable. Of more importance to profitability was Soucek (2013), Orobia, Byabashija, Munene, Sei-
management of accounts payable so as to avoid jaaka and Musinguzi (2013), Mungal and Garbhar-
late payment costs or penalties, interest charges ran (2014), Uwonda, Okello and Okello (2013),

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Abanis, Sunday, Burani, and Eliabu (2013), Orobia et al. (2013) in Qualitative Research in
Amoko (2013), Stefanitis, Fafaliou and Hassid Accounting & Management, focused on the
(2013) and Van Auken and Carraher (2013). All actions of ten small business owner-managers
focused on the behaviour of SME owner-managers from Kampala, Uganda who were engaged in the
in relation to working capital and cash flow man- management of working capital. This was a qual-
agement and drew their data from both economi- itative study in which the firms selected were
cally developed and emerging economies. employing between 5 and 49 people. These firms
Kuickova and Soucek (2013) writing in Euro- were drawn from a range of industries including
pean Research Studies examined the management manufacturers, restaurant and service firms and
of accounts receivable among SMEs in the Czech agribusiness. The pattern that emerged from
Republic. Of particular interest to the authors was these interviews was one of a largely informal
how much attention Czech SMEs gave to this and intuitive approach to the management of
aspect of business financing. The study used a cash flow and accounts receivable. Informal rela-
three-stage methodology commencing with case tionships were forged with customers who had a
studies of selected firms, then a survey and then good track record and credit was often extended
the data analysis. SMEs were defined as those with to them. Most of these agreements were oral in
fewer than 250 employees and annual turnover of nature and did not involve formal record keep-
less than €50 million. Firms were asked to indi- ing. Debt collection was done personally either
cate whether they monitored the status of their by phone or in person. Overall the findings sug-
accounts receivable, whether they checked cus- gest that the majority of owner-managers used
tomers credit scores, offered discounts, applied only informal methods of planning in relation to
supply/credit limits, specified conditions of pay- cash flow forecasting, and entered into oral con-
ment for some debtors, and/or used other tech- tracts with customers who were known to them.
niques as an incentive to collect payment on time. Most financial record keeping was informal and
The majority of firms reported monitoring many kept such information in their memory.
accounts receivable (93%), checking customer For example, inventory or stock control was gen-
credit ratings (68%) and imposing conditions on erally a process of keeping an eye on what was
some customers as a result (77%). Most (76%) held and ordering more when an item began to
did not offer discounts while many (56%) did not run out. As these firms were generally very small,
use supply/credit limits. Further, the majority it was possible for the owner-managers to keep
(65%) were not using any incentives to speed up on top of their firm’s operations, and many did
their debtor collection process. The majority not actively bank their money as they did not
(93%) of firms reported monitoring accounts generate sufficient cash to save. The authors con-
receivable throughout their lifecycle (e.g. from clude that the study suggests not all small busi-
invoice to the receipt of payment). Most (76%) ness owners need to keep formal records. They
sent reminders after a set period and almost as recommend that policy makers avoid treating
many (72%) reported that they had experienced SMEs, in particular micro-enterprises, as if they
having to collect debts. The study suggests that are large firms.
most of the SMEs surveyed had reasonably good Mungal and Garbharran (2014) publishing in
debtor management systems, but that more could the Journal of Economics and Behavioral Studies
be done to speed up collection times. The authors addressed the perceptions of small business
suggest that more should be done via court and owner-managers engaged in the implementation
legal systems to assist SMEs to collect unpaid of cash flow management systems in South
debts, and to outsource debt collection to special- Africa. The paper surveyed 69 small businesses of
ist firms for a proportion of the amount recovered. which 60% had been operating for less than 5

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years. It examined the use of cash flow and other tionnaire was used to examine the firm’s formal
financial management techniques. Although use of cash flow forecasting and budgeting, profit
around 65% of firms reported being profitable management, preparation of financial accounts
over the previous three months and 45% records (e.g. profit and loss, balance sheet, cash
reported managing cash flow easily, they were flow forecast), and use of financial ratios. The
evenly divided over the keeping of formal finan- study found that just over half (56%) of firms
cial records; with 45% not keeping such records reported preparing cash flow projections and
and 46% indicating that they did so. The major- 63% indicated that they prepared cash budgets.
ity (78%) agreed that keeping cash flow manage- However, only 52% reported preparing formal
ment records was important, 49% said they financial accounts and only 49% indicated that
knew what a cash budget was, and 57% sug- they used financial ratios. Despite the lack of for-
gested that they knew how much money was mality around 80% of firms reported systemati-
coming into the business. However, only 49% cally monitoring cash flow and 64% indicated
felt that they knew exactly how much money was that they adopted systematic approaches to the
spent in the business, 58% reported not having control of cash flows. Overall the study found
time to manage cash flow, and only 30% actually that 42% of firms did not formally forecast
drew up cash budgets. Chi square tests were used future cash flows and 20% did not monitor cash
to examine the relationship between knowledge flow. Other findings suggest that many firms
of cash flow management and reported activities were not employing good practices in relation to
in cash flow management. This found a statisti- the management of cash flow or credit. The
cally significant relationship between knowledge authors note that many firms were unincorpo-
of cash flow management and formal record rated entities operating as sole traders or partner-
keeping, suggesting – not surprisingly – that a ships. Many owner-managers lacked the
relationship exists between the owner-manager’s knowledge and skills to undertake the necessary
knowledge and their implementation of proper accounting and financial practices. The paper
cash management techniques. Further, the concludes with a list of recommendations for
owner-managers who reported the formal man- SME owner-managers, government policy mak-
agement of cash flow were more likely to report ers and future researchers. For the owner-man-
enhanced profitability. The authors’ recommen- agers there is the recommendation to seek
dations from the study were to provide short outside expert advice to implement formal finan-
courses on cash flow management, and for cial management systems and take control over
owner-managers to seek outside advice from cash flow, inventory control and budgeting. For
local small business support programs to help government agencies the suggestion is to provide
them set up cash flow management systems. more support to SMEs while also reducing taxa-
Uwonda et al. (2013) writing in the Merit tion, enhancing infrastructure, and increasing
Research Journal of Accounting, Auditing, Econom- small business access to bank financing. The
ics and Finance examined the management of paper concludes with a call for more research
cash flow in SMEs in northern Uganda. The into financial management, corporate gover-
sample drawn for the study comprised 120 firms nance, budgetary and operational controls and
from the services sector, including motor garages SME performance.
and petrol stations, health care, hotels and cater- Abanis et al. (2013) in the Research Journal of
ing firms, schools, communications and bus Finance and Accounting examined the financial
companies. The majority of firms (98%) had management practices of SMEs in western
fewer than 50 employees and most (87%) had Uganda. Drawing on a sample of 335 firms their
been in operation for less than 10 years. A ques- study investigated working capital and cash man-

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agement practices using a survey of owner- industries, although the majority (60.5%) were
mangers. This found that cash flow management involved in retailing. Most (65%) reported not
practice amongst these firms was very low and maintaining formal accounting records, although
that most owner-managers reported cash flow 80% reported keeping some records. For the
problems. However, very few owner-managers business owners who kept accounting records the
sought to take action to alleviate this and there- most important reason was to track accounts
fore placed their business at risk. Cash budgeting receivable and payable, followed by the desire to
was not common and cash flow management was monitor the performance of their business. The
undertaken in a largely ad hoc way. Few firms most important reasons given as to why they did
were regularly reviewing their cash flow against not keep formal accounting records were that
budget and current operations. It was viewed as they had no reason to do so, a fear that it might
the reason so many firms were reporting cash disclose their financial status to others, and that it
flow shortages. Most firms had no clear credit would risk them having to pay more tax. It was
policies and did not screen customers for credit also viewed as time consuming, expensive and
risk. There were high levels of bad and doubtful required them to possess technical knowledge.
debts reported by the firms surveyed. Debtor col- When asked how they might improve their
lection processes were also low and few firms had accounting practices these respondents suggested
well established inventory management systems. that training programs would help. They also felt
Few firms used debt financing as they were often that more should be done to motivate owner-
unable to secure credit. The owner-managers managers to keep records, and that free account-
were responsible for financial record keeping and ancy services should be offered. The author
reporting. However, most firms used only infor- recommended that better information be sup-
mal record keeping systems and few used profes- plied to SMEs on how to keep financial records
sional accountants or computers and associated with templates for owner-managers to use in their
accounting systems. The authors concluded with business. It was proposed that government regula-
the recommendations that the Ugandan govern- tions require all firms to keep financial records in
ment needs to support enhanced financial man- Ghana, but that any reporting follow clear stan-
agement training for SME owner-managers and dards that would be simple to apply. There was
strengthen laws relating to the collection of also a call for the creation of a regulatory agency
debtors. It was also recommended that steps be to monitor this.
taken to help SMEs gain access to bank financing Stefanitsis, Fafaliou and Hassid (2013) writing
and to encourage owner-managers to keep better in the International Journal of Economics and
financial records and make use of financial Business Research examined the financial knowl-
reports for the management of their businesses. edge and behaviour of SMEs in Greece. They
The paper by Amoako (2013) in the Interna- drew a sample of 352 firms whom they surveyed
tional Journal of Business and Management online. The firms were drawn from across the
describes a survey of 210 SME owner-managers country with 74% of respondents being men and
from Kumasi, Ghana. A major focus for this 26% women who ranged in age from 18 to over
study was to examine the accounting practices of 70 years. All firms employed fewer than 250 peo-
these owners. The sample comprised 60% male ple with 72% employing less than 10. Owner-
and 40% female business owners with a broad managers were surveyed about their use of
cross-section of ages. About 45% had post-sec- professional advisors and sources of information
ondary education levels and 74% reported their in relation to financial management. The most
level of accounting skills to be below average. The common source of professional advice was from
owner-managers were engaged in a variety of accountants, although 24% reported seeking

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advice from bank managers, while 29% sought annual turnover of less than $100,000. The analysis
advice from family, friends and colleagues. Just found support for both the hypotheses suggesting
over half (51%) reported using newspapers as a that firms that produce financial statements more
source of information. However, the majority frequently are more likely to use them in decision
(75%) reported using the internet for informa- making, and that frequency of financial statement
tion on financial management. The financial generation is related to the owner-manager’s confi-
knowledge of the owner-managers and their dence in their reliability. The study also found that
financial behaviour in relation to the operation women owner-managers were likely to generate
of their firms was examined using correlation financial statements more frequently than their
analysis. This found no statistically significant male counterparts. It also found that firms located
relationship between these two variables. How- in larger communities (e.g. bigger towns) were
ever, weak relationships were found between more likely to generate financial statements than
investment knowledge and investment behav- those in smaller ones. According to the authors the
iour, and general financial knowledge and loan study’s findings highlight the importance of fre-
financial behaviour. Further, owner-mangers quent generation of financial reports to help small
with larger firms or higher levels of education business owner-managers in their decision making.
were found to have more financial knowledge The quality of the financial statements and how
and associated financial management behaviour. owner-mangers understand the data they receive
Van Auken and Carraher (2013) in the Journal from them is important. Where the owner-manager
of Innovation Management examined the relation- has a better understanding of how to read and use
ship between the frequency with which financial financial statements the more likely they will have
statements are prepared by SMEs, whether such them produced and used in decision making. The
financial reports are used to make decisions, and need for training courses to help owner-managers
the confidence that owner-managers have in such read and understand financial statements was rec-
statements. The study drew on a survey of 312 ommended. Future research was called for that
SME owner-managers from the United States. undertook longitudinal analysis of how small busi-
Regression analysis was used to test two hypotheses. nesses use financial statements during business
The first was that there is a direct association cycles. This research might also focus on influences
between the frequency of financial statement prepa- of region, type of business and owner ethnicity.
ration and whether such statements are used in
decision making by owner-managers. The second FINANCIALMANAGEMENT AND
was that the frequency of financial statement prepa- GROWTH IN SME S
ration is inversely associated with the owner’s belief The final three papers are by Solomon, Bryant,
in the reliability of these statements. The dependent May and Perry (2013), Belghitar and Khan (2013)
variable used in the analysis was the frequency of and Nunes, Gonclaves and Serrasqueiro (2013).
financial statement preparation (e.g. never, These explore the relationship between financial
monthly, quarterly, annually), while independent management within SMEs and their growth.
variables were the owner-managers’ use of the Solomon et al. (2013) publishing in Technova-
financial statements to make decisions and their tion examined the relationship between the level of
perception of the reliability of these statements. technical and managerial support received by
Control variables were gender and size of the com- SMEs in the United States, and these firms’ sur-
munity in which the firm operated. Of the owner- vival and growth. Data was collected from surveys
managers surveyed, 65.4% were male and most of SMEs that had received face-to-face counselling
(80%) operated in retailing or services industries. from small business support agencies over the
These firms were also very small with 61% having period 2008 to 2011. The study examined four

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hypotheses. The first two related to there being a uid assets, cash flow volatility, dividend policy,
positive relationship between the amount of coun- board size, non-executive representation, owner-
selling time received and the probability of business ship structure, corporate governance and invest-
survival, and the financial performance of the firm. ment policy. A sample of 368 SMEs was selected
The second two related to there being a relation- from a database of stock exchange listed firms
ship between the size of the firm’s revenue and its within the United Kingdom. All firms had fewer
financial performance, and the interactional effect than 250 employees and annual turnover of below
of firm size and counselling hours on financial out- £22.8 million. Multiple regression analysis was
comes. A large sample of 30,746 firms across 16 used to test the hypotheses. The analysis found
different industry sectors was collected by following that SMEs with high cash flow volatility and
up small business owners who had received coun- shareholders who are institutional investors tend to
selling. A two-stage analysis was undertaken; the hold more cash. By contrast those firms that have
first examined the firms’ survival following the higher debt leverage, pay dividends and have
counselling sessions, while the second examined shareholders who are not actively engaged in the
the firms’ financial performance. Multiple regres- business tend to hold less cash. For firms with high
sion analysis was used to test the hypotheses. The growth investment opportunities, the study found
results found support for the notion that a positive that cash holdings were influenced by ownership
relationship exists between the amount of time a structure. In the case of firms with low growth
business owner receives counselling and the proba- investment opportunities, the most important
bility for their firm’s survival. However, no support influence on cash holding was debt leverage. The
could be found to demonstrate a relationship authors conclude that these findings highlight the
between the time spent in counselling and the important role that ownership structure plays
financial performance of the firm. In fact a negative within the governance of listed SMEs and the
relationship was found. Larger firms were found to determination of whether cash is held for future
gain more benefits from counselling than smaller investment, the retirement of debt, or the distribu-
ones in relation to market share, sales, cash flow tion of dividends. However, they note that firms
and profit margins. The authors suggested their listed within the UK will be bound by regulatory
study indicates that the type of counselling rather codes on directors and that this will influence their
than the amount of counselling is important, par- approach to corporate governance and financial
ticularly in relation to financial outcomes. This management. The authors suggest that further
may be of greater importance for firms of different research is needed to investigate private companies
sizes. They recommended that government SME and family owned firms. Why SMEs retain large
support agencies be customised to meet the needs amounts of cash and its influence on firm per-
of each individual firm. Further, they also suggested formance remains a frontier for future study.
that identifying which firms have the best potential The final paper by Nunes et al. (2013) was
for survival and growth, and then how to best allo- published in Small Business Economics. This study
cate specific types of assistance was considered a examined the factors influencing the growth of
worthwhile area for future research. SMEs. Eight hypotheses were explored, which
Belghitar and Khan (2013), writing in Small relate to the relationships between firm growth
Business Economics investigated the relationship and age, size, R&D intensity (proportion of rev-
between the amount of cash held by SMEs and enue invested in R&D), labour productivity,
the firm’s governance and investment structure. internal financing and debt. Data was drawn
The study examined 12 hypotheses relating to the from the SABI database of Portuguese firms with
relationships between the amount of cash held by companies selected on the basis of their having
the firm and its: size, debt leverage, non-cash liq- fewer than 250 employees, annual turnover

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© eContent Management Pty Ltd Research review: Financial management in SMEs

below €50 million, and less than €43 million in focusing on the owner-managers and the influ-
assets. The sample comprised 495 ‘young’ and ence of internal and external R&D activities.
1,350 ‘old’ firms with data for the period 1999-
2006. Age was determined by a trading history DISCUSSION
of plus or minus 10 years at the end of the analy- This review of 18 of the most recently published
sis period. Sub-samples of firms with high-tech research papers in the field of small business
characteristics were also drawn. Probit regression financing provides some important insights. The
analysis was used to test the hypotheses. The first three papers provide a useful overview of the
dependent variable was growth in sales, while the academic literature relating to SME financing.
independent variables were firm: age, size, labour Abdulsaleh and Worthington’s (2013) review of
productivity, R&D intensity, cash flow (as a the literature is particularly interesting due to the
measure of internal financing), debt (as a meas- focus is has on Islamic financing. Jindrichovska
ure of external financing), and debt interest. The (2013) and Zhong (2014) offer papers that are of
study found that the survival of young SMEs was value to anyone seeking to get a more applied
determined by growth, age, size, labour produc- focus on the process of cash flow and working
tivity, cash flow and debt leverage, while debt capital management. The first has some worth-
interest burden is likely to impact negatively on while accounting concepts and examples that
firm survival. For older firms, survival seems to might be used in teaching programs. The second
be influenced by firm age, R&D intensity, labour is a potentially valuable teaching case for those
productivity and debt leverage. Firm growth studying the financial management requirements
amongst young SMEs was found to be positively for high-tech SMEs.
associated with R&D intensity, cash flow and The papers by Yazdanfar and Ohman (2014),
debt leverage. For older firms the main factors Enqvist et al. (2014), Tauringana and Afrifa
influencing growth were R&D intensity, labour (2013) and Gul et al. (2013) provide evidence of
productivity and cash flow. All hypotheses were the importance to SME profitability of good
supported. The authors concluded that firm age cash flow and working capital management.
is a relevant factor in determining firm growth Although drawn from a range of different coun-
and that greater age and size contribute to slower tries the pattern of findings that emerges from
growth. In terms of cash flow and debt, the study these studies highlights the need for all SMEs to
suggests that these factors are more important for focus on better control over the collection of
the growth of younger firms and they have more accounts receivable and the ability to speed up
importance for the survival of such firms. The the cash conversion cycle. In addition, SMEs
paper recommended that policy makers direct need to monitor their working capital require-
financial assistance to younger SMEs to help ments and to efficiently manage inventory by
them address short term financing needs during using measures of stock turn, creditor strain (i.e.
rapid growth. Such firms also experience prob- time taken to pay creditors beyond normal lim-
lems in raising debt, but may lack sufficient cash its), plus debtor and creditor days (e.g. time
flow to generate the necessary working capital taken to collect from debtors and pay creditors).
required for growth. For high-tech SMEs the They highlight the importance of good financial
authors suggest government provide ‘advanta- management and the critical role played by
geous lines of credit’ and special tax concessions working capital within a small business.
for R&D expenditure. Assistance to older SMEs The eight papers that addressed the working
should take the form of labour force skills devel- capital practices of SME owner-managers encom-
opment to enhance worker productivity. Further pass a range of countries (e.g. Czech Republic,
research is recommended in the form of studies Uganda, South Africa, Ghana, Greece and the

Volume 21, Issue 1, 2014 SMALL ENTERPRISE RESEARCH 11


Tim Mazzarol © eContent Management Pty Ltd

United States). Despite the many differences SMEs should be focused on targeted areas such as
found in those countries the general pattern that financial management if the financial performance
emerges from these studies is that most SMEs of the business is to be enhanced. While Belghitar
have largely informal approaches to working capi- and Khan (2013) show that prudent management
tal and cash flow management. It is clear that within SMEs facing cash flow volatility will seek
firms in developing economies are more likely to to build up cash reserves, as will firms seeking to
employ informal approaches to financial manage- invest in future growth opportunities.
ment. This is due to the relative paucity of regula-
tions that govern businesses in these countries. CONCLUSION
Many firms in developing economies operate out- The importance of effective financial management
side the mainstream regulated economy and don’t for SMEs, specifically in the areas of cash flow and
need to maintain the same type of financial record working capital, cannot be underestimated. Many
keeping that their more formal counterparts do. young firms suffer from a lack of working capital
The main reasons small business owners maintain and poor cash flow during their start-up phase,
financial records are for tax compliance. In many and growing firms have a high demand for work-
developing economies micro-firms that operate ing capital. The study of financial management
within the informal economy are less likely to and how it impacts upon the survival and growth
comply with tax regulations (World Bank, 2013). of SMEs is a field of research that deserves greater
However, many firms – regardless of their level attention. It is clear from this review of recently
of systems formality – experience problems in col- published research that there is a positive relation-
lecting accounts receivable. Cash flow manage- ship between effective cash flow and working capi-
ment including forecasting and budgeting is tal management and the profitability, survival and
important to the financial health of SMEs, and growth of SMEs. These studies also suggest that
firms that can improve their cash conversion cycle for many small business owner-managers, particu-
and the efficiency of their working capital cycle larly those from developing economies, cash flow
will experience more profitability. The growth of a and working capital management practices could
small firm is related to its profitability and ability be improved. Future research needs to explore how
to manage its working capital requirements. As the financial management of cash flow and work-
Van Auken and Carraher (2013) show, there is a ing capital changes over the lifecycle of the busi-
relationship between enhanced knowledge by ness. Are there specific differences across industries
owner-managers about financial reporting and or for firms with different rates of growth, levels of
their willingness to generate such reports and use complexity, size, and age or ownership structure?
it for decision making. Information and education Longitudinal analysis is likely to be of most
is a key to helping small business owner-managers value in researching this phenomenon, and a
avoid financial crises through the implementation combination of qualitative and quantitative
of good management practice, and this seems to methodologies should be applied. The former is
be a problem in many developing economies. of particular use in the investigation of firm and
The final three papers suggest that good owner-manager level activity. However, there is
financial management is important for SMEs also a need to translate academic research into
seeking growth, which is consistent with prior outcomes that can be applied within educational,
research (Brinckmann, Salomo and Gemuenden, policy and practice fields. It is not sufficient for
2011). For example, Nunes et al. (2013) point to academics to simply sketch out a few brief recom-
the key role played by cash flow and debt leverage mendations for government policy makers or the
in the survival and growth of young companies. practicing small business owner. Stronger linkages
Solomon et al. (2013) suggest that counselling for need to be made between research findings and

12 SMALL ENTERPRISE RESEARCH Volume 21, Issue 1, 2014


© eContent Management Pty Ltd Research review: Financial management in SMEs

the development of educational programs, policy European Research Studies 16(Special Issue on
recommendations and suggestions for manage- SMEs), 97-111.
ment practice. Governments also need to play a Mungal, A., and Garbharran, H.L. (2014) The
perceptions of small businesses in the implement-
more active role in helping SMEs to improve ation of cash management techniques, Journal of
their financial management systems and this can Economics and Behavioral Studies 6(1), 75-83.
be facilitated through changes to the way taxation Nunes, P., Gonçalves, M., and Serrasqueiro, Z.
compliance is undertaken. Professional advisors, (2013) The influence of age on SMEs’ growth
in particular accountants, can also play a key role. determinants: empirical evidence, Small Business
Economics 40(2), 249-272.
Better financial management practices will result
Orobia, L. A., Byabashaija, W., Munene, J.C.,
in strong and more profitable SMEs. Sejjaaka, S.K., and Musinguzi, D. (2013) How
do small business owners manage working
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