Factors affecting financial stability of small and medium enterprises: A...

  • 1 month ago
  • 1 lượt xem
  • 0 bình luận

  • Ít hơn 1 phút để đọc

Giới thiệu

The study was descriptive and quantitative in nature, using questionnaires to collect data from a sample of one hundred and twenty (120) SMEs across the Durban area. The findings show that lack of understanding of financial reporting has a negative impact on the financial stability of the business. Also the lack of insufficient financial experience proved to have a negative impact on the financial stability of SMEs. The study recommends that a short accounting programme should be developed by government incubators to assist and provide owners and accounts staff of SMEs with practical experience in financial reporting in order to increase their level of understanding financial reporting processes.

Thông tin tài liệu

Loại file: PDF , dung lượng : 1.04 M, số trang : 11

Chi tiết

Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
FACTORS AFFECTING FINANCIAL STABILITY OF
SMALL AND MEDIUM ENTERPRISES: A CASE
STUDY OF EMERGING MARKETS
Nonhlanhla Mbatha*, Musawenkosi Ngibe*
* Faculty of Accounting and Informatics, Durban University of Technology, South Africa
Abstract
Small and Medium Enterprises (SMEs) play a significant role in the South African economy as
they provide job opportunities to communities and contribute to the South African gross
domestic product. However, the majority of small businesses lack financial skills, which results
in the falsification of financial information and analysis and inaccurate financial reports leading
to decline of confidence by investors and negative impact on stakeholders. Therefore, this study
examines the critical factors that affect SME’s financial stability which in the long run result in
the liquidation of SMEs.
The study was descriptive and quantitative in nature, using questionnaires to collect data from a
sample of one hundred and twenty (120) SMEs across the Durban area.
The findings show that lack of understanding of financial reporting has a negative impact on the
financial stability of the business. Also the lack of insufficient financial experience proved to
have a negative impact on the financial stability of SMEs.
The study recommends that a short accounting programme should be developed by government
incubators to assist and provide owners and accounts staff of SMEs with practical experience in
financial reporting in order to increase their level of understanding financial reporting
processes.
Keywords: Small Medium Enterprises, Financial Reporting, Financial Credibility, Financial Stability
JEL Classification: M41, G31
DOI: 10.22495/rgcv7i1art1
1. INTRODUCTION
SMEs. This highlights the significance of financial
reporting and is supported by Atrill and McLaney
Small and Medium Enterprises (SMEs) are faced with
many challenges which negatively impact on their
growth and existence. The literature reviews indicate
that the challenges include leadership skills, capital,
management of funds/profits, resources,
government regulations, technology, human capital
and environmental factors. Despite these difficulties,
SMEs are still expected to address the challenges of
job creation, sustainable economic growth, equitable
distribution of income and the overall stimulation of
economic development (Franco and Haase, 2010:
504; Ismaila, 2011; Fatoki, 2014: 922). In other
words, SMEs play a pivotal role in the general
improvement of living standards in South Africa
(Lekhanya, 2016:13; Olawale and Garwe, 2010: 730)
with 91 percent of the formal businesses estimated
to be SMEs (Abor and Quartey, 2010: 218).
The aim of this study was to ascertain the
effect or impact of the financial stability and
credibility of financial reporting of SMEs on their
sustainable growth.
(2009) who state that financial reports assist users
of financial statements with financial information, to
evaluate and make decisions based on the financial
statements and financial performance of the
business. Borio and Tsatsaronis (2005: 1) add that
the implementation and usage of financial
information and financial systems are the key
factors in indicating the direction in which the
business is going in terms of financial position,
performance and stability. Wiese (2014: 68) argues
that financial stability is negatively affected by
unsustainable high profit, lack of experience, bad
services, economic downturn and weak cooperation
among financial officers and can critically affect
both financial reporting and financial stability of
SMEs (Laux, 2012: 239) which is generally measured
by their financial performance (Ismaila, 2011: 4).
Hence, strong leadership, with qualified financial
officers can result in improvement of financial
performance and financial stability of SMEs
(Rajaram, 2008: 1).
The financial statements within the operating
entity play a very significant role in determining the
Problem Statement
financial position and financial performance of the
business. The financial stability of the business is
determined by analyzing financial reports within
that financial year. SMEs have a responsibility to
assess the financial position and performance of an
entity which determines the financial stability of
Lack of in-depth understanding and information of
financial reporting, lack of financial expertise and
skills, finance, poor administration, economic
growth, and human resources to build the required
changes for sustainability within the organisation
7
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
has contributed to the failure of many SMEs (Singh,
rate of creation. They are formed at a rate far higher
Olugu and Musa, 2016: 610). This has been evident
than is needed by the economy.
from the failure rate of SMEs from 63 percent to 75
percent in the first two years of trading (I-Net Bridge,
Challenges faced by South African SMEs
2011; Olawale and Garwe, 2010: 279; Kongolo, 2010:
2288). Moreover, SMEs play an integral role in the
sustainability of the South African economy with
over 90 percent of African business operations; and
contribute to over 50 percent of African
employment and Gross Domestic Product (GDP)
(Ramukumba, 2014: 19). Therefore, if these critical
factors are not addressed with urgency, the South
African economy will be affected immensely.
SMEs are faced with numerous challenges that are
within and outside the business and these
challenges include accounting skills, risk
management, general management, professionalism,
and green business (Idemobi, 2012; Fatoki, 2014).
These critical challenges affect the development,
growth and sustainability of SMEs. Ahmad and Seet
(2009) argue that lack of management skills in
transforming and sustaining the organisation
Primary Objective
critically contributes to the failure rate of SMEs. The
major leadership mistakes which contribute to the
The aim of this study was to identify the critical
factors that affect financial stability of SMEs, with
specific reference to Durban, Kwa-Zulu Natal.
high failure rate are lack of financial responsibility
and financial reporting, lack of capital, going into
business for the wrong reasons and underestimating
business time requirements (Valdiserri and Wilson,
2010).
Additionally, Olawale and Garwe (2010: 730)
Secondary objective
argue that SMEs exhibit higher growth rates in
percentage terms, however, most new small firms do
To identify factors affecting the credibility
reports, and
To ascertain the contribution of financial
reporting to the financial stability of SMEs.
not grow at all as they are established as a last
resort (necessity) rather than first choice
(opportunity). Hence, the high failure rate negatively
impacts on the ability of new SMEs to contribute
meaningfully to job creation, economic growth and
2. LITERATURE REVIEW
more equal income
(Olawale, 2014: 926).
distribution
in
South
Africa
A brief overview of the SMEs sector in Kwa-Zulu
Natal
Factors affecting financial reports
According to the South African National Small
Business Act of 1996 as amended by the National
Small Business Amendments Acts of 2003 and 2004,
SME is a separate and distinct business entity,
including co-operative enterprises and non-
governmental organisations, including its branches
and subsidiaries managed by one owner or more.
This type of business is identified by the number of
employees, sales, gross profits or turnovers
(Mahembe, 2011: 65). SMEs consist of 100 or more
but less than 500 employees (Abor and Quartey,
2010: 220; Modimogale and Kroeze 2011: 2). SMEs
have been a part of the economic growth, providing
employment to middle and low income population
groups and have actually been the engine of
economic development (Beck and Demirgue-Kunt,
2006: 2932). This means that SMEs play a significant
role in South African economic growth of business
sectors and are major contributors to the provision
of job opportunities (Lekhanya, 2010: 1; Peters and
Brijlal, 2011: 266). They provide employment to
about 60 percent of South Africa’s labour force and
are instrumental in the growth of any economy
(Bisseker, 2014; Cant and Wild, 2013:707; Singh,
Olugu and Musa, 2016: 609).
With such impact and steady contribution to
the South African economy, surprisingly, liquidation
rates of SMEs have halted their existence. Bridge
(2011); Olawale and Garwe (2010: 279) indicated that
63 percent to 75 percent SMEs, in the first two years
of trading, are liquidated. A current study by Wiese
(2014:38) further confirmed that, nine out of ten
firms are liquidated in the first year of operation,
while 80 percent of new start-up fail within the first
three years. Pinhold (2008) argues that one of the
primary reasons for SMEs’ failure is their abnormal
In order for any successful business to operate
efficiently, its reporting must be precise and
accurately reflect the transactions made by the
organisation. In any case, the law requires all SMEs
to prepare financial statements and they are often
subject to audit (Maseko and Manyani, 2011: 172).
Dick and Missonier (2010:1) agree and adds that
financial information plays an important role in a
business entity as it performs a significant role in
recording financial information (Service, 2013: 38).
In order to perform that task, a qualified accountant
is necessary for the effective running of the business
(Moloi, 2013:28). Hence, financial reporting is
created to identify the movement of business
resources in order to identify the wealth of the
business through financial statements (Harrison,
Horrigen, Thomas and Suwadry, 2014:2). Weil,
Schipper and Frances (2013: 2) concur that financial
reporting is essential to improve the financial
stability of the organisation in order to make
informed decision about the future of the entity.
But then again, these decisions should be based on
several financial statements from previous months
and years to ensure the overall picture of how the
business is progressing financially (Mary, 2016).
Moreover, financial reports are not only pivotal to
the organization, but they are integral to auditors
and most importantly the stakeholders (Peecher,
Solomon and Trotman, 2013: 578). Therefore,
failing to understand or track financial information
can quickly lead to dangerous business situations,
such as low cash flow or the possibility of
bankruptcy (Vitez, 2016).
In a study conducted by Maseko and Manyani
(2011) the majority of SMEs in Zimbabwe (Bindura)
do not keep complete accounting records because of
lack of accounting knowledge and as a result, there
8
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
is
inefficient
use
of
accounting
information
to
However, they are critical for the effective financial
support
financial
performance
measurement
by
administration of the business and they ensure that
SMEs.
Madurapperuma, Thilakerathne and Manawadu
(2016) also found that most SMEs in Sri Lanka do not
the organization complies with the financial
reporting standards set by the International
Financial Reporting Standards (IFRS).
keep complete accounting records due to lack of
accounting knowledge and the cost of hiring
professional accountants. McMahon (1999) also
3. RESEARCH METHODOLOGY
revealed that some SMEs fail to prepare complete set
of financial statements even though they have well-
maintained books of accounts but because financial
statements and reporting accurately requires proper
preparation. Newhard (2013: 28) recommends that
owners of SMEs use financial reporting framework
as it has extensive accounting, reporting, and
disclosure guidance that will result, over time, in
effective and consistent financial reporting.
Although there are many reliable accounting
information systems for SMEs to support accurate
preparations of financial statement, they are not
prioritized and used to benefit the organisation
(Bruwer and Smit, 2015: 49). As a result, this makes
it difficult for the entrepreneurs to calculate their
business profits efficiently (Madurapperuma,
Thilakerathne and Manawadu, 2016).
A quantitative research method was adopted for this
study to ensure that the research aims and
objectives were achieved. For the purposes of this
research, data was collected from SMEs in the
following sectors in the Durban area, namely:
trading, industry and manufacturing, accounting
firms, independent accountants and or chartered
accountants. Primary data was collected from 120
participants within the above mentioned sectors. A
non-probability sampling technique (convenient
sampling) was used to determine the sample size for
this study. It is worth noting that SMEs outsourced
their accounting to accounting firms and it is, in this
reason that accounting firms and charted accounts
were selected.
Questionnaire design
Factors influencing financial stability
The questionnaire was carefully designed in order to
The literature review on small business shows that
the maturity of SMEs is developed but fails to exist
for a long period of time. Most factors that affect the
continuity of the business is “lacking innovative
capacity” (Franco and Haase, 2010: 505). Franco and
Haase (2010: 505) also state that controlling equity
and debt finances to achieve the balance appear to
be still an issue for SMEs to date. Tracy (2010: 1)
adds that one of the issues affecting the financial
meet the objectives of the study and formulated
through the objectives of the study and literature
reviews. The questionnaire was used to collect data
about the key variables to enable the researchers to
ascertain critical factors affecting credibility reports
and financial reporting in order to achieve financial
stability of SMEs.
Shown in Table 1 below is the structure of the
questionnaire.
reporting is inaccuracy during the preparation stage
of financial statements. This is caused by lack of
Data analysis
understanding financial reporting, business
requirements and lack of control over resources
which result in financial instability (Chuthamas,
Islam, Keawchana and Yusuf, 2011:184). In order to
achieve pertinent and precise financial reporting, a
financial accountant should be deployed by SMEs to
The primary data gathered was coded and cross-
checked for any inconsistencies before analysis. This
ensured that the results were error-free and reliable.
The empirical data was analysed by means of
descriptive analysis using SPSS version (23.0).
manage, develop and prepare financial reports to
avoid any issue of inconsistencies and
Validity and reliability
mismanagement of business finances. However,
according to Schmitt (2010), this is not practiced by
SMEs as majority of people in SMEs working under
accounting sections have no financial or accounting
qualifications. While others may have relevant
qualifications, they lack experience, perspective and
understanding in the practical division. Therefore,
experience is important in the world of work and an
inexperienced employee dealing with financial
reports has a negative effect on the financial
stability of a business entity (Schmitt, 2010).
Although it is important to acquire the services
of experienced accountants, Engel, Hayes and Wang
(2010:136) advise that their services are very costly.
In order to improve validity and reliability of the
data collection instrument, the questionnaire was
sent to research experts to check whether the
instrument covered all the critical variables, and also
if the questions had no ambiguity. Secondly, it was
pilot tested to the 10 % of sample size, which
enabled the researcher to determine whether the
questionnaire was an effective and reliable data
collection instrument for the purpose of achieving
the aims and objectives of this study. The measure
of reliability was obtained in the administering the
same questionnaire to different groups which did
not form part of the main study.
9

Download

capchaimage
Xem thêm
Thông tin phản hồi của bạn
Hủy bỏ