IMPACT OF FINANCIAL MANAGEMENT ON THE PROFITABILITY
OF SMALL AND MEDIUM TRADE AND SERVICE ENTERPRISES
IN THAI NGUYEN PROVINCE
A Dissertation
Presented to
The Faculty
Graduate School
Southern Luzon State University
Lucban, Quezon In Partial Fulfillment
of the Requirements for the Degree
Doctor of Business Administration

by
PHAM ANH NGOC (RANDY)
2013
ii

1.4. Attendance to financial management-related trainings
2. To Identify the financial management practices of the company in terms of the
following areas:
2.1. Accounting information system
2.2. Working capital management
2.3. Fixed asset management
3. To assess the company in terms of the following financial aspects:
3.1. Liquidity
3.2. Financial leverage
3.3. Activity
4. To know the relationship of financial management practices and financial aspects
to the company’s profitability in terms of the following:
4.1. Return on sales
4.2. Return of assets
4.3. Return on equity
5. To develop a model for the SME’s profitability
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6. To propose solutions to improve the company’s and SME’s profitability
In this research, both survey and secondary data methods are used in combination.
Survey was chosen to investigate financial management practices. The secondary data
method was used to examine the financial aspects.
Respondents in this study can be: Owner, Manager, Chief-accountant of SMEs located
in Thai Nguyen City.
The disertation provides descriptive findings of financial management practices and
financial aspects and demonstrates the simultaneous impact of financial management
practices and financial aspects on SME profitability. In addition, the research study provides
a model of SME profitability, in which profitability was found to be related to financial
management practices and financial aspects. With the exception of debt ratios, all other
variables including cash ratio, total asset turnover, accounting information systems, working

METHODOLOGY 24
3.1. RESEARCH DESIGN 24
vi

3.2. LOCALE OF THE STUDY 25
3.3 BUSINESS STRUCTURE AND SMES IN THAI NGUYEN PROVINCE 25
3.4 SAMPLING DESIGN AND TECHNIQUES 25
3.5 DETERMINATION OF SAMPLE SIZE 26
3.6 SUBJECT OF THE STUDY 26
3.7. RESEARCH INSTRUMENT 27
3.8. DATA GATHERING PROCEDURE 36
3.9. DATA PROCESSING METHOD 37
3.10. STATISTICAL TREATMENT 37
Chapter 4 39
PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA 39
4.1. DESCRIPTIVE OF THE RESEARCH STUDY 39
4.2 ASSOCIATIVE ANALYSIS OF THE RESEARCH STUDY 62
Chapter 5 71
SUMMARY, FINDINGS, CONCLUSIONS AND RECOMMENDATIONS 71
5.1 SUMMARY 71
5.2 FINDINGS 73
5.3 CONCLUSIONS 76
5.4 RECOMMENDATIONS 77
BIBLIOGRAPHY 79
APPENDIX 1 82
APPENDIX 2: SURVEY INSTRUMENT 83
SURVEY OF FINANCIAL MANAGEMENT PRACTICES 83
OF SMEs IN THAI NGUYEN CITY 83
APPENDIX 3: REGRESSION 95
APPENDIX 4: CORRELATIONS 97

Table 4.22: Overview of SME profitability 61
Table 4.23: Correlation matrix of PRO and independent variables 63
Table 4.24: SME profitability regression model using profitability as dependent variable 65
Table 4.25: Descriptive finding of relationship between profitability and cash ratio 67
Table 4.26: Relationship between SME profitability and the efficiency of financial
management practices 68
T able 4.27: Regression model of SME profitability after removing debt ratio 70
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Chapter 1
INTRODUCTION

This chapter provides a general introduction to the research study. The purpose is to
establish foundations for following chapters and the study as a whole, by providing a general
picture of the study. This chapter is structured into ten sections
Section 1.1 examines the research background where the research problem is identified.
Section 1.2 defines the research problem, presents a statement of the problem and expands
the research problem in two subsections 1.2.1 and 1.2.2. Subsection 1.2.1 presents research
objectives that the study covers in the process of solving the research problem defined.
Subsection 1.2.2.addresses the research questions that will be respectively answered in
chapters of the study
Section 1.3 provides hypothesis of this study. Section 1.4 and section 1.5 points out the
significance and scope of the study. Lastly, section 1.6 presents definition of terms
1.1. BACKGROUND OF THE STUDY
Vietnam was a strong command-economy system in the mid-1980s. The difficulties
from years of war and the inefficiency of the command-economy system had led the
Vietnam economy to crisis. Face with stagnant growth, shortage of food, deficit budgets,
increase in inflation and trade imbalances, the Government of Vietnam started an economic
renovation policy in 1986.
According to Vietnam Chamber Of Commerce And Industry (VCCI), since the

3

1.2) Position in the company
1.3) Highest educational attainment
1.4) Attendance to financial management-related trainings
2) To Identify the financial management practices of the company in terms of the
following areas:
2.1) Accounting information system
2.2) Working capital management
2.3) Fixed asset management
3) To assess the company in terms of the following financial aspects:
3.1) Liquidity
3.2) Financial leverage
3.3) Activity
4) To know the relationship of financial management practices and financial aspects
to the company’s profitability in terms of the following:
4.1) Return on sales
4.2) Return of assets
4.3) Return on equity
5) To develop a model for the SME’s profitability
6) To propose solutions to improve the company’s and SME’s profitability
1.2.2. Research questions
The research problem defined above leads to the following research questions:
1) How important are financial management practices and financial aspects to SME
profitability?
2) What are the relationships between financial management practices, financial
aspects and SME profitability?
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3) How do financial management practices and financial aspects affect SME

The implications of this study for the further research could include the following:
Findings on financial aspects of SMEs could be applied to the further comparative
research of differences in financial aspects between SMEs and large enterprises in
Thainguyen province.
This study’s findings of relationships between cash ratio, total asset turnover and SME
profitability could lead to expanded research to the large companies, state and foreign
companies in Thainguyen province.
The model of SME profitability developed in this study could be applied as the basis
for the further research on building competitive strategies for SMEs
1.5. SCOPE AND LIMITATIONS OF THE STUDY
Using data from Thai Nguyen province to test theories of financial management helps
to confirm and expand the scope of theoretical applications.
This research is designed as a causal research in which a sample of 120 SMEs Trade
and Service Enterprises in Thai Nguyen Province are drawn from a list of over 2000 SMEs
for personal interview in 2011.
The context of financial management practices in this study includes the following
areas: Accounting information systems, Working capital management, and fixed asset
management.
Financial aspects in this study includes: Liquidity measured by cash ratio; Financial
leverage measured by Debt-to-equity ratio; Activity measured by Total asset turnover ;
Profitability measured by average of return on sales, return on assets and return on equity.
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1.6. DEFINITION OF TERMS
Small and medium-sized enterprises are business establishments that have registered
their business according to law and are divided into three levels: very small, small and
medium according to the sizes of their total capital (equivalent to the total assets identified in
an enterprise’s accounting balance sheet) or the average annual number of laborers (total
capital is the priority criterion), concretely as follows:
Table 1.1: Classifying enterprise by total capital and number of laborers

and
construction
10 persons or
fewer
VND 20 billion
or less
Between over
10 persons and
200 persons
Between over
VND 20 billion
and VND 100
billion
Between over
200 persons and
300 persons
III. Trade and
service
10 persons or
fewer
VND 10 billion
or less
Between over
10 persons and
50 persons
Between over
VND 10 billion
and VND 50
billion
Between over


Chapter 2
REVIEW OF RELATED LITERATURE AND STUDIES
The objectives of this chapter are to review previous research related to the areas of
financial management practices, financial aspects, and profitability of SMEs and to build a
model of the impact of financial management practices and financial aspects on SME
profitability.
This chapter is structured into nine main sections. Section 2.1, 2.2 reviews definitions
of SMEs, both qualitative and quantitative. Section 2.3, 2.4 and 2.5 respectively review the
previous studies on financial management practices, financial aspects and SME profitability
conducted by previous researchers in the developed economies. Section 2.7 concentrates on
examining the relationships between financial management practices, financial aspects and
SME profitability. Section 2.8 provides the model of impact of financial management on
SME profitability. Lastly, section 2.9 develops a model of the impact of financial
management practices and financial aspects on SME profitability and conceptual framework
2.1. QUALITATIVE DEFINITIONS OF SMES
Qualitative definitions define small and medium enterprises based on their qualitative
aspects. In the USA, based on four key factors identified by the 1947 Committee of
Economic Development (CED), the authorities define a small firm to be one which:
1) Has independent management
2) Has capital supplied and ownership held by an individual or small group
3) Has an area of operation which is localized in one community, and
4) is small in relation to other firms in the industry.
In the UK, the qualitative definitions adopted by the Bolton Committee identified
three major aspects of small business:
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Firstly, in economic terms, a small firm is one that has a relatively small share of the
market, and is unable to influence the price or quantity of goods or servicing.
Secondly, an essential aspects of a small firm is that it is managed by its owner or

and with ensuring that the funds are used effectively and efficiently in achieving the enterprise’s
goal.
According to Eugene F. Brigham, Michael C. Ehrhardt (2008), modern financial
management involves planning, controlling and decision making responsibilities embracing:
- Various types and sources of finance an enterprise may employ, how these may be
accessed, and how to choose among them.
- Alternative ways in which finance raised may be used in an enterprise and how to select
those that are likely to prove most profitable.
- Different means of ensuring that finance entrusted to specific activities realizes the returns
that were anticipated on its allocation to them.
2.3.2. Objectives of financial management
Like many other management sciences, financial management, firstly, establishes its goal
and objectives. Objectives of financial management are foundations or bases for comparing and
evaluating the efficiency and effectiveness of financial management. The final goal of financial
management is to maximize the financial wealth of the business owner (C. Paramasivan,
Paramasivan C., Subramanian T 2009). This general goal can be viewed in terms of two much
more specific objectives: profitability and liquidity.
Profitability management is concerned with maintaining or increasing a business’s
earnings through attention to cost control, pricing policy, sales volume, stock management, and
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capital expenditures. This objective is also consistent with the goal of most businesses (Julie
Meehan, Mike Simonetto, Larry Montan, Chris Goodin (2011).
Liquidity management, on one hand, ensures that the business’s obligations (wages, bills,
loan repayments, tax payments, etc.) are paid. The owner wants to avoid any damage at all to a
business’s credit rating, due to a temporary inability to meet obligation by: anticipating cash
shortages, maintaining the confidence of creditors, bank managers, pre-arranging finance to
cover cash shortages. On the other hand, liquidity management minimizes idle cash balances,
which could be profitable if they are invested Leonard M. Matz (2011).
2.3.3. Major decisions of financial management

management), profitability management (profit analysis, profit planning), and growth
management (capital resource planning and decisions).
Sudhindra Bhat (2008) examines specific areas of financial management including all
areas that relate to items on the balance sheet of the business. The specific areas financial
management covers consist of managing working capital, managing long-lived assets,
managing sources of finance, planning financial structure, and planning and evaluating
profitability.
In summary, financial management is concerned with many specific areas. Probably
the balance sheet of a business may demonstrate how to recognize these areas including:
- Current asset or working capital management,
- Fixed asset or long-lived asset management,
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- Funding management,
- Financial budgeting and planning,
- Leverage and capital structure,
- Financial analysis and evaluating performance of the business, and
- Profit distribution (dividends and retained earnings policy).
2.4. FINANCIAL MANAGEMENT PRACTICES
2.4.2 Accounting information system
Leslie Turner, Andrea Weickgenannt (2008) measured the efficiency of an accounting
information systems with three indicators: (1) extent to which financial information is
prepared, (2) extent of owner/manager involvement in the interpretation and use of financial
information, and (3) suitability of the information and services provided by outside
accountants. This instrument requested participants to state their perception of the usefulness
of each of aspects of information. Perception of usefulness of information represented the
extent to which these aspects of information were available that would have a direct impact
on performance. The extent of efficiency of accounting information systems was measured
by the following indicators:
- Attitude of owner/manager to accounting information systems

- Computerization of cash budget preparation
b) Receivable management practices
Muhammad Waqas Younas (2011) examined the working capital management and
capital budgeting practices of a sample of small firms. In their survey, respondents were
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requested to indicate (on a scale 1= “never use/review”, to 5 = “use/review very often”) the
frequency with which they reviewed their debtors’ credit period, debtors’ discount policy,
bad debts and doubtful debts based on the following items:
- Attitude of owner/manger to receivable management
- Frequency of reviewing debtors’ credit period
- Reasonability of debtors’ credit period
- Frequency of reviewing debtors’ discount policy
- Reasonability of debtors’ discount policy
- Frequency of reviewing bad debts
- Reasonability of bad debts
- Computerization of receivable management
c) Inventory management practices
In examining inventory management practices, R. S. Saxena (2009) focused on
reviewing stock turnover, stock levels, stock re-order levels and using the economic order
quantity model. They used five-point scales to measure the degree of frequency of
reviewing/using these indicators. This research used nine-point scales, which is similar to the
scales developed by Max Müller (2011), to measure the efficiency of inventory management
practices via the following indicators:
- Attitude of owner/manager to inventory management
- Frequency of reviewing inventory turnover
- Frequency of reviewing inventory level
- Reasonableness of inventory turnover
- Reasonableness of inventory level
- Usefulness of inventory budget in providing information for making decisions

2.5 FINANCIAL ASPECTS
2.5.1 Identifying financial aspects
This subsection mainly discusses the concept of financial aspects of SMEs. It reviews
definitions of financial aspects that were mentioned and used by previous researchers. A. B.
Dorsman, Wim Westerman, Mehmet Baha Karan, Özgür Arslan (2011) are viewed as the
key researchers who study financial aspects. In defining financial aspects, states:
“Financial aspects of enterprise, often in the form of accounting ratios, derived from
financial statements provide useful information for numerous purposes. This information can
be used to quantify the position of small business in terms of their profitability, liquidity, and
leverage and to compare them with other or large enterprises”.
Dorsman, Wim Westerman, Mehmet Baha Karan, Özgür Arslan (2011), who studied
financial aspects of acquired firms, conducted factor analysis on several ratios and reduced
the number of ratios into the following six factors: leverage, profitability, activity, liquidity,
dividend policy and earning ratio identifying financial aspects.
2.5.2 Measuring variables of financial aspects
2.5.2.1 Liquidity
Most researchers view liquidity as one of the variables to define financial aspects.
Liquidity refers to the overall level of cash and near cash assets (such as debtors and stock)
held and cash inflows and outflows that add to and subtract from the sum of these assets
(Richard Bull 2008). When used for determining financial aspects, liquidity is often
measured as ratios. There are two kinds of ratios used by most researchers :
1. Cash ratio = Cash/ Current liabilities
2. Quick ratio = (Current assets – Inventory) / Current liabilities