Small Enterprise Association of Australia and New Zealand

28th Annual SEAANZ Conference Proceedings

1-3 July Melbourne 2015

The financial management practices of small

to medium enterprises
Tim Mazzarol ᵃ, Sophie Reboud b and Delwyn Clark c
a
University of Western Australia, contact – Email: tim.mazzarol@uwa.edu.au
b
Groupe ESC Dijon Bourgogne Dijon, France, contact – Email: sophie.reboud@escdijon.eu
c
University of Waikato - Business School, New Zealand, contact – Email: dnclark@waikato.ac.nz

Abstract:
This paper examines financial management practices in small to medium enterprises (SMEs) from a study of
289 small business owner-managers across 30 industry sectors in Australia and Singapore. The data was
collected using a case study survey by MBA students and analysed via three stages: (1) examination of the
quantitative survey data; (2) NVivo analysis of the interview data; and (3) Leximancer analysis of the selected
coded transcripts. The findings show that SMEs have largely informal and ad hoc financial management
practices. Differences by size and financial literacy levels were found. As the firm grows in size and complexity
the owner-manager is required to adopt more sophisticated and systematic approaches to financial
management. SMEs with higher financial literacy have greater capacity to monitor and control the financial
performance of their businesses. Challenges for SMEs negotiating with more powerful players were also
identified and approaches to address this issue briefly discussed.

Keywords SME, financial management, owner-manager, case studies.

©copyright Mazzarol, Reboud and Clark (2015) all rights reserved.

This article may be used for research, teaching, and private study purposes. Any substantial or
systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or
distribution in any form to anyone is expressly forbidden.

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INTRODUCTION
The success or failure of small to medium enterprises (SMEs) is contingent on their financial viability
and one of the most common problems facing such firms is their ability to secure sufficient cash flow
and working capital to remain profitable. It was noted as one of the top problems facing SMEs as
long ago as the Bolton Report in the early 1970s (Bolton, 1971). This has been a recurring theme in
the small business literature since that time (Carrington and Aurelio, 1976; Carland and White, 1980;
Kennedy, Tennent and Gibson, 2006). This was highlighted in the 2014 Sensis Business Index report
where the most important prime concerns of Australian SME owner-managers were lack of sales and
cash flow, bad debts and profitability (Sensis, 2014).

Financial management in SMEs is often different to that found in large firms due to the more
dynamic nature of their cash flow cycle, general paucity of working capital, and their ability to raise
finance through debt or equity (Welsh and White, 1981). SMEs also lack the financial management
and accounting systems available to large firms, as well as the professional staff who manage such
systems. Typically the owner-manager is required to perform these tasks, often, but not always, with
support from a bookkeeper and an accountant. This is a pattern found throughout the world, both
within the advanced economies that comprise the Organisation for Economic Co-operation and
Development (OECD) group of nations, and the developing economies (OECD, 2010; Abanis et al.,
2013; Amoako, 2013; Uwonda, et al., 2013).

In Australia SMEs are defined as firms with less than 200 employees (ABS, 2002). They comprise
around 99.7 per cent of the 2.1 million firms operating in the country (DIISR, 2011), and most
(approx. 60%) are non-employing micro-firms with only the owner-manager as employee. This paper
examines the financial management practices of SMEs drawing on a case study survey of 289 owner-
managers from 30 industry sectors. It explores three research questions:

(1) How do the owner-managers of SMEs undertake financial management?

(2) Why owner-managers of SMEs manage their firms’ finances in the way they do?

(3) How does this financial management behaviour impact the performance of SMEs?

This paper is organised as follows. First we review the literature relating to the financial
management of SMEs. Then we overview the case study survey methodology used in this study
before outlining the findings. A discussion of the findings is then undertaken before drawing
conclusions, stating limitations and outlining future directions for research as well as implications for
policy and practice. The paper’s overall finding is that despite their relative lack of accounting and
financial management systems and concerns over their profitability, most owner-managers surveyed
for this study were profitable and not dependent on debt.

LITERATURE REVIEW
Whilst all firms can encounter problems of financial management the challenges facing SMEs are
more significant due to their small size and vulnerability to fluctuations in cash flow. As Welsh and
White (1981) wrote in their famous article “A small business is not a little big business”, large firms
tend to operate in relatively benign environments where rates of growth are small and an

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“approximate equilibrium” exists where “cash flow equals net profit plus depreciation and
amortization” (p. 23). By contrast SMEs are seldom in equilibrium, impacted by seasonal sales cycle
fluctuations and at the risk of losing major clients (Colot and Michel, 1996; Lavigne, 2002). Under
such conditions they consume cash and require working capital to help them remain solvent as
income dries up. Even in periods of growth the SME can experience financial problems as growth
typically demands the firm has more working capital to help maintain its liquidity. As Welsh and
White (1981) conclude:

“Owner-management of a small business is a distinct discipline characterized by severe

constraints on financial resources, a lack of trained personnel, and a short-range management
perspective imposed by a volatile competitive environment. Liquidity must be a prime
objective. The analytical models applicable to big business are of limited use in this arena.
(p.32)

This unique nature of financial management in SMEs was acknowledged by the Beddall Report
(1990) that examined the state of small businesses in Australia as well as by the OECD (2000) review
of the role played by SMEs in job creation and economic growth. Both reports identified the
challenges facing owner-managers seeking to raise either debt or equity capital in order to fund their
businesses. As well as the heavy dependence SMEs have on the owner’s collateral as security for
loans, plus the critical importance of cash flow and retained profits.

Sources of financing

There are three primary sources of financing for SMEs: equity, debt and retained profits (OECD,
2004). The first of these is typically provided by the owner-manager who invests their private savings
into the firm in order to launch it and/or leaves any accumulated earnings in the business to help
fund future growth rather than drawing it out as dividends. Equity from third parties can take the
form of informal investors (e.g. family, friends), semi-formal investors such as business angels, or
formal venture capital funds managers (ABS, 2010; OECD, 2006). The second is comprised of
borrowings (both secured and unsecured) that are typically provided by banks or other financial
services firms. This debt can be short (e.g. credit card debt, accounts payable), or long term (e.g.
mortgages) in nature (OECD, 2012). Banks are the most common provider of debt financing for
SMEs, although this usually requires the owner-manager to supply collateral such as the family home
or similar asset (Cowling and Westhead, 1996). Accessing credit is major challenge for SMEs and
their access to short-term debt became more difficult and expensive in the period following the
Global Financial Crisis (GFC) of 2008/2009 when compared to large firms (OECD, 2012).

In a review of the literature relating to the financing of SMEs, Abdulsaleh and Worthington (2013)
note that the size and age of the firm, its ownership type and legal form, location, industry sector
and assets structure all influence its funding decisions. Differences appear to exist between owner-
managers based on their age, gender, education and experience in relation their preferences for
financing. This is consistent with earlier research that suggests that owner-managers from SMEs
prefer to fund their companies from their personal savings and retain profits rather than from bank
loans or third-party equity (whether formal or informal) (Hamilton and Fox, 1998; Adair and
Adaskou, 2011). Many SME owner-managers view debt financing as an “excessive” risk due to the
bank’s requirements for collateral, and therefore something to avoid if it is possible to do so

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(Hankinson, 2000). They have also been found critical of banks that are viewed as offering poor
service and charging too much for these services (Hankinson et al., 1997; Nakamura, 1999).

However, while banks have improved their services to SMEs in the past 25 years a major challenge
facing owner-managers in securing bank financing is their firm’s structure and governance (Baudret
and Allegret, 1996; Brau, 2002). This is typically centred on the owner-manager who is generally
unwilling or unable to develop a long-term relationship with the banker. In general the SME owner-
manager should seek to maintain a close working relationship with their bank, take the advice that is
given, and have fees and charges explained and justified, and then be prepared to shop around if
they cannot find satisfaction (Gammie, 1995).

Cash flow and working capital management

Two of the most important areas of financial management in SMEs are cash flow cycle and working
capital management. Without cash or the liquid assets (working capital) that are necessary to
operate on a daily basis, the company risks becoming insolvent and failing (Grondin and Cieply,
1999). Cash is generated from sales revenues (accounts receivable) and if this cash flow slows due to
falling sales, or slow recovery of the accounts receivable, the business will need a cash injection or
become insolvent. Under these circumstances the owner-manager will need to either inject more
money from borrowing debt, or lower costs through cutting expenses (Carrington and Aurelio,
1976). For this reason the management of the cash flow cycle has been viewed as one of the most
critical aspects of management in SMEs (Rowan, 1994).

Research has shown a positive relationship between the efficient management of cash flow (the
cash conversion cycle) and working capital, and the firm’s profitability (Yazdanfar and Ohman, 2014).
The more efficiently a firm manages its working capital the more it can boost its profitability. This
emphasizes speeding up the recovery of accounts receivable while carefully managing inventory
turnover (Enqvist, Graham and Nikkinen, 2014; Gul, et al., 2013). The owner-manager needs to
ensure that they monitor their accounts payable (money the firm owes to creditors), and accounts
receivable (money owed to the firm from debtors) closely. As many SMEs have fairly limited working
capital the more efficiency they can develop in their management of the cash conversion cycle the
more profitable they will be (Tauringana and Afrifa, 2013). SMEs that can shorten their cash
conversion cycles (i.e. collect accounts receivable faster) are more likely to have high liquidity levels
and greater working capital (Ebben and Johnson, 2011).

The management of working capital within the SME is therefore important to the firm’s success.
There is also some suggestion that SMEs may have an “optimal level of working capital” beyond
which their profitability might decline (Banos-Caballero, Garcia-Teruel and Martinez-Solano, 2012).
However, the amount of liquidity an SME requires may depend on its age, size, industry, availability
of owner-manager’s collateral, and whether it has access to bank overdraught facilities (Drever and
Hutchinson, 2007). Access to finance by SMEs differs from large and public companies as the SME
owner and his/her social networks are an integral part of their financial behaviour decision
(including applications for loans) (Vos, Yeh, Carter and Tagg, 2007; Wincent, 2005).

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Accounting systems and management practices

It is unsurprising to find a strong relationship between efficient cash flow and working capital
management and profitability in SMEs. However, the main reasons many owner-managers get into
difficulty are the poor financial control systems and management practices in their firms (Chapellier,
1997). Owner-managers need to be actively engaged in the monitoring of their firm’s cash flow
cycle, break-even and profitability (Vos and Roulston, 2008).

A study by Ekanem (2010) of SME owner-managers in the printing and clothing manufacturing
sectors found that managerial practices differed by sector. For example, the average collection
period for accounts receivable within the clothing industry was 30 to 90 days, while that in the
printing industry was 14 days. Where clothing manufacturers employed “closed loop” learning with
a resort to standard industry conventions, the printers were more likely to apply “open loop”
learning, relying on advice from accountants and their own experience when setting their practices
in debtor collection and credit management.

Many owner-managers do monitor their cash flow and financial positions closely with a keen eye on
debtors and creditors (Kubickova and Soucek, 2013). In fact there is often a high focus by owner-
managers on financial performance measures at the expense of non-financial ones, although such
financial management is frequently ad-hoc and less systematic or formal than it should be (Perera
and Baker, 2007). However, in many developing economies the use of formal accounting systems,
credit management and cash flow monitoring is largely ad hoc and informal in nature (Orobia et al.,
2013; Mungal and Garbharran, 2014).

This type of poor practice in financial management is typically due to owner-managers having
insufficient skills and knowledge of financial accounting controls to know what to do (Uwonda et al.,
2013). This typically results in these SMEs experiencing cash flow and liquidity problems with high
levels of bad and doubtful debts (Abanis et al., 2013). In many developing economies it is not
mandatory for SMEs to keep financial records and as a result the owner-managers fail to do so, often
avoiding the need to pay taxes at the same time (Amoako, 2013).

In most advanced economies the requirement for SMEs to keep good financial records, and the
obligation to do so for taxation compliance establishes their relationship with professional
accountants and bookkeepers (Sian and Roberts, 2009). As the size and complexity of the business
grows so too does the level of formality and sophistication in the financial management practices
(Stafanitisis, Fafaliou and Hassid, 2013). Where owner-managers have greater skills and knowledge
of the accounting and financial management processes they are more likely to generate financial
reports and use them to make informed decisions (Van Auken and Carraher, 2013).

Given the significance of financial management decision making in SMEs, this study examines the
financial management practices in SMEs, the perceptions of their owner-managers on this particular
area of their role, and the impacts of their behaviour on the performance of SMEs.

METHODOLOGY
This research draws on a case study survey undertaken in Australia and Singapore over an 11 year
period from 2003 to 2014. It was conducted as part of an MBA program focusing on small business
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management run within an Australian university. Student investigators worked in teams to
undertake in-depth interviews with owner-managers representative of selected industries. Yin
(2014) suggests that case study design is a preferred method when the main research questions deal
with ‘how’ or ‘why’ issues, where the researcher cannot control the events they are studying, and
where the phenomena they are investigating is contemporary. For this reason the case study survey
methodology was chosen (Yin, 1982). A mixed-method approach involving the collection of both
quantitative and qualitative data from owner-managers of SMEs was used as it offered greater
opportunities for triangulation and complementarity (Molina-Azorin, 2007). It also allowed the study
to be used as a teaching tool for the MBA program, while providing multiple cases that offer a
deeper understanding of the phenomena and better “picture of locally grounded causation” (Miles,
Huberman and Salandra, 2014)

Case study selection

The selection of cases was driven by the ability of the student investigators to identify, recruit and
interview the owner-managers of the SMEs. Selection took a theoretical rather than a random
sampling approach (Eisenhardt, 1989), with cases chosen for their ability to offer a good illustration
of the key units of analysis (Garson, 2013). All firms had to meet the definition of being SMEs as
provided by the Australian Bureau of Statistics (ABS, 2002), and within one of a selected industry
sector. The program ran on an annual basis and so the data was collected each year. This provided a
total of 289 interviews with the owner-managers of SMEs representing 30 industry sectors.

The majority (59%) of the firms had been in operation for more than 10 years with 41 per cent aged
less than 5 years. This compares to the true population of SMEs in Australia were 44 per cent are less
than 5 years old (ABS, 2008; 2013). All the firms had fewer than 200 employees with 49 per cent
having less than 5 employees (micro-firms), 44 per cent between 5 and 20 employees (small firms),
and 7 per cent over 20 staff (medium firms). This compares to micro-firms (84.2%), small firms
(11.4%) and medium firms (4.1%) in the true population of Australian businesses (DIISR, 2011).

Crafting the instruments and protocols

The case study protocol was built on the conceptual framework proposed by D’Amboise and
Muldowney (1988) that examines the SMEs’ task environment, organisational configuration,
managerial characteristics, success/failure and stage of evolution/growth. This was combined with a
framework developed by Hankinson et al. (1997) and Hankinson (2000) that examines the owner-
managers’ lifestyle, skills and capabilities, management methods, motivation and sense of “identity”
as a business owner, plus their relationships with banks and strategic vision for their firm. This
protocol was used in conjunction with a diagnostic assessment tool developed by the authors. This
comprised 124 questions grouped into 12 categories that examined a wide range of units of analysis
at the level of the firm.

In this paper we explore the financial management and performance of these SMEs and the skills
and capabilities of the owner-managers who operate them. The SME diagnostic assessment tool
comprised questions on the firm’s actual financial performance. This included total sales, variable
and fixed costs, gross profit, break even sales and net profit. It also contained 16 questions relating
to the owner-managers’ views on sales trends, pricing, break-even and profitability management,
cash flow forecasting and monitoring, sources of financing and financial management skills.
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Data collection

Data collection involved having MBA students use the case study protocol and diagnostic survey tool
to interview two small business owner-managers from selected industry sectors. The diagnostic tool
was set up within an EXCEL spreadsheet with macros to produce a questionnaire that could generate
a diagnostic report for the small business owner. The questionnaire used to collect the diagnostic
information used a simple three-point scale for the various items coded ‘Yes’, ‘Partially’ or ‘No’ to
each item, which asked specific questions about the owner-manager’s operation of the business. It
also collected data on owner-manager’s past use of and attitudes towards outside assistance (e.g.
sources of advice, use of consultants, mentors, business round tables and networking). The
diagnostic tool was aimed at helping an SME owner-manager develop a well-constructed
management operating system (Fassoula and Rogerson, 2003). Student investigators conducted in-
depth interviews typically lasting over an hour with the owner-managers. They then provided the
owner-manager with a copy of their diagnostic report as a reward for the interview. The students
were then placed into groups and prepared an industry benchmarking report focusing on the
industry sector from which the cases were drawn, and aggregating the findings from the individual
cases.

DATA ANALYSIS AND FINDINGS

The total amount of data collected for this project was substantial. It included interview reports with
the owner-managers, diagnostic reports and industry benchmarking reports numbering in the
hundreds of which each were between 20 and 50 pages in length. This included both quantitative
data from the diagnostic survey and qualitative data from the interviews with the owner-managers.
It was analysed via three stages: (1) examination of the quantitative survey data; (2) NVivo analysis
of the interview data; and (3) Leximancer analysis of the selected coded transcripts.

Quantitative analysis of the diagnostic assessment tool

The quantitative analysis of the data from the diagnostic assessment tool was undertaken using the
SPSS statistical software package. This examined the financial performance data provided within the
diagnostic survey as well as the 16 items relating to the owner-manager’s financial management
within the firm. A total of 187 firms (64.7%) of the total cases survey provided financial data. This
revealed that total sales ranged from a mere $5,000 to $27 million with a median of $1 million.
Gross profit margins (the amount of money left over once the variable costs are deducted from the
firm’s total sales revenue – the ‘margin’ is calculated as gross profit as a % of sales) varied by firm
size with micro-firms showing an average of 47.4 per cent, small firms 51.6 per cent and medium
firms 65.4 per cent. The gross profit of the firms also ranged from a loss of $500,000 to a profit of
$27 million, with a median of $420,000. The median gross profit margin across these firms was 43.4
per cent. Net profit margins were an average of 25.5 per cent (median 20.6%), which was quite high
considering that the net profit margin of Australian firms is around 11 per cent (ABS, 2014).

The break-even margin (the break-even sales figure calculated as a % of sales) for these firms was an
average of 49 per cent. However, it varied by size of firm. For example, the average break-even
margins were: micro-firms (47.4%); small firms (51.6%) and medium firms (54.2%), which suggest
that the break-even increases with firm size as might be expected.

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Overall the observations from this analysis of the firms’ actual financial performance data suggests
that these firms had similar performance data to that found in the broader business community
(ABS, 2014). In relation to the 16 items relating to the owner-managers’ financial management the
findings are illustrated in figure 1.

Figure 1: Financial Management and Performance – Diagnostic Report Findings

It can be seen that most owner-managers reported they were generally on top of most of these
issues. Only 16 per cent were negative about sales trends. However, only 45 per cent of these
owner-managers indicated that they were totally happy with their firm’s gross and net profit
margins. Yet it was encouraging to see that 73 per cent of the owner-managers indicated that they
systematically monitored their cash flow. Despite this less than half (47%) were positive that they
had well-prepared cash flow forecasts in place, while a similar number (46%) said that they regularly
monitored their firm’s break-even position. Also of concern was the low number (41%) who
expressed total confidence that they had a well-structured set of financial key performance
indicators (KPIs) in place. Although more than half (56%) indicated that they regularly monitored
their firm’s gross profit across product line or market segment.

An analysis of those owner-managers who indicated they were comfortable reading and analysing
financial statements, compared with those who were not, was undertaken using a chi-square test.
Just over half (54%) of the owner-managers indicated that they were what we might describe as
“financially literate” in relation to their understanding of the financial statements. When compared
to their counterparts who did not claim such financial literacy some significant findings emerged
(significant at the 0.05 level). The majority (60%) of the financially illiterate business owners did not
maintain financial KPIs, compared to 51.5 per cent of the financially literature owners. The majority
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(88.5%) of the financially literature owner-managers also reported monitoring their cash flow,
compared to only 45 per cent of their financially illiterate counterparts. We found similar patterns
with respect to cash flow forecasts (i.e. 62% of financially literature owners had them compared to
19% of financially illiterate owners), and regular monitoring of gross profit margins (71% versus
31%). It is also worth noting that the majority (68%) of owner-managers were not dependent on
mortgages for the operation of their firms, but relatively few (30%) had had their business
independently valued.

A principal component analysis (PCA) was also undertaken with the 16 items to help reduce the data
and examine any underlying constructs. The Kaiser-Meyer-Olkin (KMO) measure of sampling
adequacy (MSO) was 0.717 and the Bartlett’s Test of Sphericity was significant at the 0.000 level
suggesting that the data was suitable for factor analysis (Kaiser, 1974). The PCA was undertaken with
a varimax rotation with Kaiser Normalization to provide a simplified structure. It generated an initial
factor structure after eight iterations with six components accounting for 65.8 per cent of variance.
Factor loadings for the items ranged between 0.506 and 0.911 suggesting that the items comprising
these components were strongly associated (Stewart, 1981). However, subsequent examination of
the scale reliability using Cronbach’s alpha (Cronbach, 1951). This found strong alpha scores for only
four of the initial six factors, one factor was a single item, resulting in a final structure of 5
components or ‘factors’ that were labelled: ‘cash flow’, ‘profitability’, ‘sales turnover’, ‘monitoring’
and ‘mortgage financing’. The remaining items were left as independents. Table 1 lists these results.

An examination of these factors and the independent variables was undertaken. One-way Analysis of
Variance (ANOVA) tests were used to examine differences between the firms of different sizes in
relation to these variables. Scheffe’s tests were used in the SPSS statistical package. Not surprisingly
this found significant differences (at the 0.05 level) between micro, small and medium sized firms in
relation to ‘cash flow’, with larger firms more likely to be positive in relation to the items that
comprise that factor. This suggests that the larger firms are more likely to have owner-managers
who use cash flow forecasts and KPIs to monitor their firm’s performance, and who feel comfortable
reading and using financial statements.

In relation to ‘profitability’ significant differences were found. Perhaps unsurprisingly the micros
were found less likely to feel that their gross and net profitability were higher than the industry
average than did their larger counterparts. This pattern was found for ‘monitoring’ and in relation to
the reinvestment of profits, having the business independently valued the setting of premium prices
and working capital. In general it suggests a divide between the micro firms and the large ones, with
the owner-managers of these micro-businesses being less able to control and monitor their finances
or set premium prices. They also appear to have less working capital available for growth.

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Table 1: Principal Component (Factor) Analysis of Financial Management Measures

Component

1 2 3 4 5

Factor 1: Cash-flow
Do you have well prepared cash flow forecasts for your business? .833
Do you systematically monitor your firm’s cash flow? .775
Do you have a well-structured set of key performance indicators (KPI) measuring such
.682
things as stock turnover, debtors and creditors, creditor strain and breakeven sales?
Are you totally comfortable reading and analysing financial statements (e.g. balance
.506
sheet, profit and loss, cash flow forecasts) to allow you to feel in control of your business?
Factor 2: Profitability
Is the gross profitability of your business higher than the average in your industry? .911
Is the net profitability of your business higher than the average in your industry? .899
Factor 2: Sales Turnover
Are you happy with this sales trend? .852
Are you satisfied with these levels of profitability in your business? .667
Factor 4: Monitoring
Do you regularly monitor your firm’s breakeven position and know how many sales must
.876
be made each day to achieve breakeven?
Do you regularly monitor your firm’s gross profit margins and the contribution that each
.523
product or market segment makes to the overall profitability of your business?
Factor 5: Mortgage financing
Is your business dependent on mortgaged property (e.g. your personal home) to secure
.849
its financial solvency?
Independents
Do you systematically reinvest your profits to build up the equity in your firm’s balance
sheet?
Have you had your business independently valued particularly the amount of goodwill
that might lie in the balance sheet?
Has the annual sales turnover of your business been increasing steadily over the past
three years?
Is your business able to secure premium prices due to its unique products and services?
Do you consider that your business has sufficient working capital to support robust
business growth?

Eigenvalues 3.772 1.899 1.573 1.060 1.015

Percentage of variance explained (total for 5 factors 59.4%) 23.57 11.87 9.83 6.62 6.35

Cronbach’s alpha .729 .886 .758 .619

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Case identification and coding

The conceptual frameworks used to shape the case study protocol provided the initial ‘parent’ nodes
in the NVivo analysis, with ‘child’ nodes emerging to form sub-sets of the original framework. The
coding continued with a process of removing any redundant nodes or nesting nodes within tree
nodes to reduce the total number of overall themes to a reasonable level (Bazeley and Jackson,
2013). It is suggested that the coding continue until there are around 5-7 main themes
interconnected via layering (Rovai, Baker and Ponton, 2013). This process was followed until seven
themes emerged around: (1) financing (e.g. equity/debt); (2) break-even analysis; (3) cost control;
(4) accounting systems; (5) the management of working capital; (6) the management of cash flow;
and (7) pricing and profit. The coding process was also guided by the three research questions
(Miles, Huberman and Salandra, 2014). Data was of two kinds, ‘emic’ or that derived from the
owner-managers as direct comments during the interviews and from the diagnostic survey tool, and
‘etic’, which comprised the analysis from the MBA students who had undertaken the interviews and
produced the industry benchmark reports. Both types of data are important in order to provide a
comprehensive view of the phenomena being examined (Rovai, Baker and Ponton, 2013).

Table 2: Units of Analysis

Units of Analysis Examples of transcript

“In terms of financing the business, the most common, and yet the majority opted for personal
savings, borrowings from friends and trust money as their means of capital funding. Bank loans
were cited by two of the respondents and both admitted that approving bank loans was not a
problem.” (field note, cafe restaurant sector)
“Those who borrowed money would have preferred not to and those who didn’t borrow wished
Financing
that they had had more funds to do things better.” (field note, hosted accommodation sector)
(debt/equity)
“Owner ‘L’ had strong ties with an investment banker who was part owner in the business, so
financing seemed to be a lot easier. Owner ‘JM’’ had a loan from the bank to buy the business and
said it was difficult to get, and he had to use his father as guarantor. His father was a part owner of
the business and ‘JM’ was slowly buying him out as the business made profit.” (field note,
independent liquor store sector)

“The owner-manager has not worked out the break-even point but thinks it is around $30,000 a
week.” (field note, newsagencies sector)
“All pharmacies reported regularly monitoring either the break-even position or gross profit margin
Break-even analysis and product contribution. However, notably ‘I3’, ‘I5’, ‘F3’ and ‘F1’ all reported regularly monitoring
both parameters.” (field note, pharmacy sector)
“I am not sure how to calculate this; I usually just focus on weekly sales amounts.” (owner-manager,
newsagency)

“The major credit suppliers of companies in General Aviation are banks, insurance companies,
airports and air gas. The owners’ ability to negotiate on administration fees, parking fees, fuel costs
and insurance is limited.” (field note, general aviation sector)
Cost control “Both businesses interviewed were consistent with the above fixed costs most strongly impacted by
staff wages. In ‘JM’ staff wages were actually over 60% of expenses which the owner is aware is
higher than the industry norm. ‘CC’ and ‘TR’ have fewer building costs as the premises are owned
outright with no current mortgage costs outstanding.” (field note, travel agencies sector)

“The majority of owner-managers interviewed showed a weakness with respect to financial

management skills. Despite the fact that they generally were making a profit, few recognised that by
having systems or better systems in place could potentially increase their profits substantially.”
Accounting systems
(field note, graphic design industry)
“Next, the implementation of the MYOB program for the businesses is an example of good practice,
as it allows the owner-manager to closely monitor and control the business condition.” (field note,
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 florist industry sector)
“Very few firms demonstrated evidence of management accounting systems. One firm did not
appear to be aware of their break-even and a number of firms only reviewed their financial position
on a yearly basis with their accountant.” (field note, general aviation sector)

“Sufficient working capital to facilitate growth is available to 90% of the survey respondents, with a
number of small business owners constrained by the general state of the economy. Seven of the ten
respondents systematically reinvest profits to build up equity in the business, reducing the need for
external funding.” (field note, real estate industry)
“The owner believes that his firm doesn’t really need more financing in future, as they have a cash
Working capital buffer.” (field note, travel agencies sector)
management
“Both of them are closely monitoring their financial performance. They claimed that their business is
able to secure premium prices due to their unique services, and has sufficient working capital to
support the robust business growth.” (field note, independent consultants)
“All owners reported a high capital investment requirement and three reported they had
underestimated this requirement by some half.” (field note, florist industry sector)

“Budgeting and cash flow forecasts are a waste of time in my business because it is project based
work and project duration alters constantly...Cash flow forecasts are difficult as month-to-month
sales can vary enormously...” (owner-managers, graphic design industry)
“Payments from customers in the B&B business are generally at time of sale; therefore cash flow is
not generally a problem, though one owner reported that corporate customers were slow in paying
Cash flow
bills. Occupancy rate and realisation of forward bookings was of much greater concern.” (field note,
management
hosted accommodation sector)
“All interviewees kept daily, weekly, and monthly figures on both department and total store
turnover, which was compared to previous years and months data. Of the KPIs in a volume driven
industry, this was the most readily monitored. Turnover by area is also used as a guide for analysing
the health of a store.” (field note, independent supermarkets sector)

“Designers can be guilty of under-pricing themselves to keep clients. Stick to core business and keep
up with the times. Position yourself accordingly by trying to keep out of areas that will disappear or
where you have to lower your prices e.g. print with respect to annual reports and prospectus...”
(owner-manager, graphic design)
Pricing and profit “Most B&B’s stated that their pricing was based on ‘what others were charging’. Using this strategy,
several owners found they were undercharging and not making a profit and have gradually pushed
prices up. One reported that it had found a point above which occupancy decreases and another
pushed prices up, in line with the established market leaders in their region.” (field note, hosted
accommodation sector)

Table 2 lists the main units of analysis identified from the NVivo analysis and provides some
examples of the ‘emic’ and ‘etic’ data taken from the transcripts. The general pattern that emerged
from this was the absence of excessive bank borrowing or even equity financing, other than from
family or friends. Most owner-managers preferred to finance their firms from initial owner savings
and then retained profits. In terms of break-even analysis most firms had not formally calculated
this, although they did possess a crude benchmark based on sales volume. For cost control the
owner-managers were generally able to quickly identify their main costs of operations. However,
they typically lacked much power to negotiate these costs which were usually imposed by more
powerful suppliers, landlords or regulators.

Most owner-managers were relatively weak in their financial management skills and their firms’
lacked sophisticated systems to monitor finances. While the majority had accounting software
packages, these were used for financial accounting for tax purposes rather than for the more critical
management accounting tasks. This translated into informal ad hoc methods of tracking working

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capital, cash flow, pricing and profit. As most firms were not seeking to grow, or to only undertake
modest growth, the requirement for working capital was modest and could generally be funded
from cash flow. However, in some cases where there was a need for more capital intensity, the
working capital requirement rose.

Although most owner-managers kept a close eye on their cash flow few had prepared cash flow
forecasts. Many complained that it was not possible to generate reliable cash flow forecasts due to
volatility in their sales, this was particularly the case for those firms that had seasonal or project
based work. Finally, the pattern of setting prices was largely based on following the trend within the
industry. However, this often resulted in the business under pricing and this squeezed profitability.

Leximancer analysis

Once the NVivo analysis had been completed we undertook further analysis of the relevant data
relating to financial management using the text analytic software tool “Leximancer”. This provides a
both conceptual (thematic) analysis and relational (semantic) analysis, identifying concepts in the
corpus and how they interrelate. Leximancer uses word frequency and co-occurrence counts as its
basic data (Smith and Humphreys, 2006). It identifies how frequently words occur, and also tags
them as containing a ‘concept’ if sufficient accumulated evidence is found to suggest that they
represent a distinct concept (Leximancer, 2011). Terms found in the text are weighted so that the
presence of each word in a sentence contributes to the body of evidence to support the existence of
a concept. The Leximancer analysis generated a concept map (see Figure 2) that provides a visual
representation of the data and the relationships between key concepts and themes located therein.
A ‘concept’ is a collection of words that are associated within the text with each other. The bubbles
are themes that contain concepts, with themes overlapping and clustering around concepts that are
associated with each other in the same sequences of text.

As shown in Figure 2 the Leximancer analysis generated eight major themes: (1) business; (2)
financial; (3) sales; (4) prices; (5) price; (6) costs; (7) information; (8) staff. The size of each theme
“bubble” reflects their relative importance as they contain a greater number of related ‘concepts’.
Table 3 lists these themes and their related concepts as well as examples from the interview
transcripts and field notes reflecting the nature of this data.

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 Figure 2: Financial Management and Performance – Leximancer Concept Map

As shown in Figure 2 and described in Table 3 the first theme business reflects the owner-managers’
focus on the key tasks associated with financial management and a recognition of the importance of
cash flow and working capital (particularly in the early years or during periods of growth). The
business theme relates closely to the second theme financial, which is overlapped around the
owner-managers’ abilities to understand and use their financial management reporting systems for
control. As reported in the quantitative analysis many owner-managers lacked financial
management skills and those who did were generally happy with their financial accounting but not
their management accounting capability. This issue became more prominent as the firms grew
requiring more sophisticated systems.

Table 3: Leximancer Themes and ‘Concepts’

Themes Concepts Examples

‘business’ ‘cash
“The present moment it is the cash flow of the business and securing capital to ensure that we
flow’ ‘profit’
have the right cash flow to increase sales to target. New business opportunities are arising and
‘due’
ensuring that we have the cash flow to finance these with ever tightening margins is the challenge,
‘working’
Business current restructuring of debt is the key to this.” (owner-manager SME)
‘monitoring’
‘margins’ “I found premises that would allow me to start the business on a small scale with little initial
‘capital’ outlay, and on a very part-time basis. I have a lot of experience in music and teaching music,
‘owner’ therefore good product knowledge and good knowledge of my customers’ requirements, but no
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 ‘able’ experience of financial planning, monitoring business performance and business cash flow”.
(owner-manager SME)
“Some of the procedures such as cash flow forecasts were informally monitored. Due to the
accounting and family background of the owner, it was clearly stated that the importance of
monitoring financial performance of the business was of utmost importance, but the need for
formal and/or documented procedures regarding these felt redundant.” (field note)

‘owner’ “I am not very good at handling financial matters in a systematic way, so I need help with people
‘financial’ such as accountants and bookkeepers.” (owner-manager SME)
‘performance’
‘difficult’ “Financial reporting mechanisms are good. However, we need more advice on how to manage the
‘problem’ financial resources effectively. This needs to be done in the form of monthly KPIs that reflect the
Financial ‘control’ performance of the business, and is in addition to the quarterly covenant reporting provided by our
‘system’ financier.” (owner-manager SME)
‘systems’
‘better’ “As the company grows I need to move to more sophisticated financial management systems and
‘management’ have somebody else take on the day to day financial operations – I will find this difficult to
‘time’ delegate!” (owner-manager SME)

“You can pay someone to value it properly, but it costs $8,000 to $10,000 and after you pay that
bill, that figure you are looking at will be even lower!” (owner-manager SME)
Costs ‘costs’
“No real issues in particular. However, we could engage in more formal ways of tracking wastage
rates and costs more systematically.”

‘increase’ “The monthly sales turnover does not meet the target every month”. (owner-manager SME)
‘sales’
‘cost’ “There are not enough sales to break-even the daily costs.” (owner-manager SME)
Sales ‘customers’
‘stock’ “The mark up on beer and spirits is minimal and profit margins on these products are low. To stay
‘pharmacy’ viable the owner-manager is always in the field, visiting suppliers to become the main distributor
‘products’ so that he can stock them in the store and ask a premium.” (field note)

“Originally we looked at what other people were charging but then realised we weren’t making a
profit – so we gradually put up our prices.” (owner-manager SME)
“Both of them are closely monitoring their financial performance. They claimed that their business
‘prices’
has sufficient working capital to support the robust business growth”. (field note)
Prices ‘services’
‘problems’ “We don’t experience any substantial problems with this currently, but we had massive problems
with GST when it was first introduced. There are very few deductions in hairdressing, so it was
essentially just adding 10% to our prices for the government without being able to claim this back
anywhere.” (owner-manager SME)

“I feel that I haven’t managed information effectively. But I haven’t really thought about how to
improve it.” (owner-manager SME)
‘information’
“One of my main problems is a lack of timely information, and lack of tracking and reporting of
Information ‘lack’
information.” (owner-manager SME)
‘reports’
“I use my reports (both KPIs and financial) by the 20th of the following month and generally these
are late. Unacceptable!” (owner-manager, SME)

“My problem is a lack of communication between some of the senior staff members with the junior
‘staff’ staff. It doesn’t occur often but when it does occur it can be bothersome.” (owner-manager SME)
Staff
‘trends’ “We need to better utilise our sales figures so that we can analyse trends and respond quickly and
efficiently.” (owner-manager SME)

“Most of the respondents mentioned that they could not compete on price with larger firms.
However, a majority of the interviewees stated that they had developed a model where they could
charge a premium price for the goods they provided.” (field note)
‘price’ “In terms of pricing their offerings, the majority of the owner-managers opted for an average
Price ‘pricing’ pricing attitude.” (field note)
‘industry’
“Market insecurity is a concern, we (firm and industry) are very busy at the moment but some
business units are not reflecting the return from demand that should be expected. There are some
delegation and decision making issues relating to additional resources that we do not have a clear
decision making process for.” (owner-manager SME)

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Associated with business are the themes costs, sales and prices. The first of these is linked to ‘cash
flow’ and is concerned with the costs of operating the business including ways of tracking such
hidden costs as wastage. The theme sales encompasses concepts relating to the owner-managers’
recognition that insufficient sales will reduce cash flow, make it harder to break-even and place
pressure on the working capital requirement of the business. The theme prices reflect the problems
that poor pricing strategy can create for the business. This seems to be a particular issue for services
firms and many owner-managers reported initially under-pricing or attempting to follow the market
average or industry leader rather than setting their own price benchmark.

Other minor themes were information, staff, and price. The first of these reflects the owners’
abilities in extracting information on their firms’ finances. As reflected in the comments listed in
Table 3, many owner-managers felt that they were not getting financial information in a timely
manner. The second theme staff relates to the ability of the owner-manager to link the activities of
their employees to the firm’s activities and financial performance. Most SMEs have limited working
capital and must keep a close eye on sales trends, cash flow, stock turnover and operating costs. This
requires a range of monitoring systems and staff must understand the consequences, although most
SMEs don’t have such systems in place. Finally, the theme price was associated with how the owner-
manager viewed their pricing within their wider industry context. A common pattern emerging from
the data was the sense by the owner-managers that they could not compete on price with larger
firms and what they should do strategically to address this threat.

DISCUSSION AND CONCLUSIONS

Our study collected data from a large sample of SME owner-managers across a wide range of
industries over a period of more than a decade. It provides a picture of a small business community
in which most firms are making do with largely informal and ad hoc financial management practices.
Whilst some minor differences existed between firms and across industries, the overall pattern
emerging from this analysis is that there is a division between the micro-business and their small and
mid-sized counterparts. As the firm grows in size and complexity the owner-manager is required to
adopt more sophisticated and systematic approaches to financial management.

Different patterns of monitoring financial data were found between those SMEs with financial
literacy and those with limited financial knowledge or skills. Monitoring of financial data and
performance appeared to be more systematic and comprehensive for financially literate SMEs.
Hence, SME policy makers, advisors and educators/trainers have a major challenge to increase
financial literacy across the SME sector and in particular within the micro firms which are the
dominant business form. Providing access to financial education programs to develop financial skills
and literacy will help SMEs to monitor and control their finances and increase their chances of
survival. Gaining expertise with accounting systems, software and other financial tools will improve
their ability to monitor the performance of their business, and move beyond routine tax reporting.

Our data confirms prior research on the funding preferences of SME owner-managers in general, as
we found most owner-managers preferred to finance their firms from personal sources and to avoid
excessive bank borrowing or even equity financing, other than from family or friends. The study
shows that the key issues for SME owner-managers regarding financial management include
controlling cash flow, monitoring costs and working capital requirements, and seeking to find the
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most appropriate pricing strategy to retain sales while also ensuring profitability. Most of the owner-
managers from micro-firms were not confident in their ability to read and use financial statements.
Further, most firms found that their accounting and reporting systems were adequate for financial
accounting and tax compliance purposes, but inadequate for the more important task of monitoring
their firm’s financial performance on a daily, weekly basis.

While small size can increase agility, the difficulty of negotiating costs or contracts with more
powerful suppliers, landlords or regulators was noted. This highlights another challenge for SMEs
competing in a dynamic environment controlled by others. There are approaches SMEs can take to
improve their bargaining power and to avoid direct competition such as focusing in a niche with a
specialised product or service. However, it is also important to have a national system which
includes some advocates for SMEs - such as the Australian Small Business Commissioners who assist
SMEs with information, advocacy services, lobbying for regulatory changes, and dispute resolution.

Future research should be undertaken using in-depth case studies of different SME owner-managers
across more industries. While this is time consuming it offers the opportunity to explore in-depth
the actual task environment of the owner-manager. For the majority of SME owner-managers the
effectiveness of their financial management is a make or break issue. Yet far too little attention is
given to it. In a review of research into the financial management of SMEs Jindrichovska (2013) made
the following observations:

“There is a school of thought that believes that ‘a well-run business enterprise should be as
conscious of its finances as healthy a fit person is of his or her breathing’. It must be possible to
undertake production, marketing, distribution and the like, without repeatedly causing
financial pressures and strains. It does not mean, however, that financial management can be
ignored by a small enterprise owner-manager; or as is often done, given to an accountant to
take care of. Whether it is obvious or not to the casual observer, in prosperous small
enterprises the owner-managers themselves have a firm grasp of the principles of financial
management and are actively involved in applying them to their own situation.” (p. 93)

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