Signature: Kieu Minh Nguyen ______________________

Date: ___________________________________________
University of Economics, HCM City Statistical Office, HCM City Department of
Investment and Planning, HCM City Department of Taxation. Specially, I would like to
extend my sincere gratitude to the Government of Switzerland and Dr. Hans Stoessel,
Director of SAV for granting the scholarship which enabled me to participate in a
doctoral degree at Southern Cross University, New South Wales, Australia.

iii
I would particularly like to thank the following friends for their support related to
data collection: Mr. Doan Thanh Tuan, Ms. To Ngoc Huong, and Mr. Bui Hai Binh from
Truong Doan Company Limited, Mr. Hoang Trong from Ho Chi Minh City University of
Economics, Mr. Vo Sy Nhan from Ho Chi Minh City Department of Investment and
Planning, and all my students who worked as fieldworkers for data collection.
Finally, to my parents and my wife, I wish to extend my loving thanks for their
encouragement. My greatest debt of gratitude is to my wife, Mrs. Que Thi Tran, who was
patiently waiting me during my study in Australia. This thesis could not have been
written without her daily encouragement.
business environment. As a result, SMEs often faced obstacles during their operations.
This thesis examines the relationship between financial management and profitability of
SMEs to determine whether financial management practices and financial characteristics
impact on SME profitability.
Objectives of the thesis are (1) to investigate and describe features of financial
management practices and financial characteristics of SMEs in Vietnam, (2) to develop
and test a model of SME profitability, and (3) to contribute knowledge of the
relationships between financial management and characteristics to improve SME
profitability by using tools of efficient financial management.
In terms of structure, the thesis has six chapters. The thesis begins by defining the
research problem and questions, and providing a justification for the research study.
Chapter one also reviews the research background, and presents definitions of terms,
significance and scope of the study. Chapter two examines the economic background,
business structure and the development of SMEs in Vietnam. This chapter also reviews
previous research related to financial management for SMEs in Vietnam to identify gaps
between financial management for SMEs in Vietnam and financial management for
SMEs worldwide.
Chapter three reviews financial management including financial management
practices, financial characteristics and profitability of SMEs around the world, especially
in the developed economies such as the United States of America (USA), the United
Kingdom (UK), Australia and Canada. This review emphasizes profitability and the
impact of financial management practices and financial characteristics on SME
profitability. Objectives of this chapter are to review previous research related to the
areas of financial management practices, financial characteristics, and profitability of

v
SMEs and to build a model of the impact of financial management practices and financial
characteristics on SME profitability.
Chapter four discusses aspects of the research methodology including research
design, data collection and data analysis methods, and hypothesis testing to support the
AFTA ASEAN Free Trade Agreement
ANOVA Analysis of variance
APEC Asia Pacific Economic Cooperation
ASEAN Association of South East Asian Nations
CED Committee of Economic Development
CF Cash flows
CUR Current ratio
DER Debt ratio
E.q Equation
EBT Earning before tax
EBIT Earning before interest and taxes
EFF Efficiency of financial management practices
EOQ Economic order quantity
FAIS Financial and accounting information system
FALP Fixed asset management and long-term planning practices
FDI Foreign direct investment
FSSB Financial Studies of the Small Business
GDP Gross domestic products
GSO General Statistical Office
IFC International Financial Corporation
IRR Internal rate of return
MIRR Modified internal rate of return
MPDF Mekong Project Development Facilities
NOI Net-operating-income
NPV Net present value
PRO Profitability
RE Retained earnings
ROA Return on assets

viii
Table of Contents CERTIFICATE ii
ACKNOWLEDGEMENTS iii
ABSTRACT v
GLOSSARY OF TERMS AND ABBREVIATIONS vii
TABLE OF CONTENTS ix
LIST OF TABLES xiii
LIST OF FIGURES xvii

CHAPTER ONE: INTRODUCTION TO THE STUDY

1.1 INTRODUCTION 1
1.2 RESEARCH BACKGROUND 3
1.3 RESEARCH PROBLEM 4
1.3.1 Research questions 6
1.3.2 Research objectives 6
1.4 METHODOLOGY 7
1.5 JUSTIFICATION FOR THE STUDY 8
1.6 DEFINITIONS OF TERMS USED IN THE STUDY 10
1.7 SIGNIFICANCE AND SCOPE OF THE STUDY 13
1.8 ANALYTICAL MODEL FOR THE STUDY 13
1.9 STRUCTURE OF THE STUDY 15
1.10 CONCLUSIONS 16


3.3 FINANCIAL MANAGEMENT FOR SMEs 67
3.3.1 Defining financial management 68
3.3.2 Objectives of financial management 69
3.3.3 Major decisions of financial management 71
3.3.4 The specific areas of financial management 72
3.4 FINANCIAL MANAGEMENT PRACTICES 76
3.4.1 The context of financial management practices 76
3.4.2 Accounting information systems 77
3.4.3 Financial reporting and analysis 83
3.4.4 Working capital management 89
3.4.5 Fixed asset management 95
3.4.6 Capital structure management 100
3.5 FINANCIAL CHARACTERISTICS OF SMEs 104
3.5.1 Identifying financial characteristics 104
3.5.2 Measuring financial characteristics 107
3.5.3 Previous findings related to financial characteristics 111
3.6 SME PROFITABILITY 119
3.6.1 Importance of profitability 119
3.6.2 Defining and measuring profitability 120
3.6.3 Factors influencing profitability 123
3.7 RELATIONSHIPS BETWEEN FINANCIAL MANAGEMENT AND SME PROFITABILITY 126
3.8 MODEL OF THE IMPACT OF FINANCIAL MANAGEMENT ON SME PROFITABBILITY 128

x
3.9 CONCLUSIONS 131

CHAPTER FOUR: RESEARCH METHODOLOGY

4.1 INTRODUCTION 132
4.2 APPRAISAL OF PRIOR RESEARCH METHODOLOGIES 134

5.4.2 Bivariate analysis and findings 221
5.4.3 Multiple regression analysis and findings 225

xi
5.4.4 Test for the difference of average profits between efficient and inefficient financial
management groups of SMEs 234
5.5 CONCLUSIONS 236

CHAPTER SIX: CONCLUSIONS AND IMPLICATIONS

6.1 INTRODUCTION 237
6.2 CONCLUSIONS RELATED TO RESEARCH QUESTIONS AND TESTING THE MODEL 239
6.2.1 Conclusions related to financial management practices 239
6.2.2 Conclusions related to financial characteristics 247
6.2.3 Conclusions of SME profitability 249
6.2.4 Summary of research question answers 255
6.3 IMPLICATIONS OF THE RESEARCH STUDY 258
6.3.1 Implications for financial management practices of SMEs 258
6.3.2 Contributions to knowledge of this research into financial management for SMEs 262
6.4 LIMITATIONS OF THE RESEARCH STUDY 263
6.5 IMPLICATIONS FOR THE FURTHER RESEARCH 264

Bibliography 266
Appendix 1
Appendix 2
Appendix 3
Appendix 4

2.15 Unemployment rate of labour force in 1998 40
2.16 Number of businesses by economic sector and average capital 43
2.17 Number of businesses and employees on July 1, 1995 44
2.18 Definitions of SMEs in Asian countries 46
2.19 Number of enterprises in manufacturing industry by scale of employees and total
capital 49
2.20 Business operation problems of SMEs in Vietnam 50
2.21 The kind of SME support programs 51
2.22 Some financial characteristics of SMEs in Vietnam 54
2.23 Business structure of SMEs in Ho Chi Minh City 57
2.24 Size of businesses in Ho Chi Minh City 57
3.1 Summary of the quantitative definitions of small business 65
3.2 Forms of SME ownership in the USA 65
3.3 Legal status of small firms in the UK 66

xiii
3.4 Summary of advantages and disadvantages of each form of ownership 67
3.5 Responsibility for the bookkeeping and accounting task 78
3.6 Responsibility for preparation and use of financial information 78
3.7 The results of survey of computer software application 79
3.8 The most important applications of computer software 79
3.9 The most important applications of computers 80
3.10 Percentage of awareness and utilization of costing systems 81
3.11 Evaluate the adequacy of accounting records 82
3.12 Accounting information prepared externally or internally 82
3.13 Summary of research areas related to the accounting system practices of SMEs 83
3.14 Use of financial statement techniques by small manufacturers in Quebec 84
3.15 Responsibility for financial statement interpretation 85
3.16 Proportion of respondents indicating use of selected financial ratios 86
3.17 Percentage of use of financial ratios 87

5.2 Sample distribution by form of ownership within industry 189
5.3 Business characteristics of SMEs in the sample 189
5.4 Characteristics of accounting system organization 190
5.5 Responsibility – accounting information system 191
5.6 Using computer in accounting information system 192
5.7 Kinds of financial statements prepared 193
5.8 Frequency of preparing and analyzing financial statements 193
5.9 Responsibility – preparing and analyzing financial statements 194
5.10 Kinds of financial analysis and ratios used 194
5.11 Preparing cash budgets 196
5.12 Cash balance determination 196
5.13 Cash surplus or shortage 197
5.14 Sales on credit and credit polices 198
5.15 Frequency of reviewing receivable levels and bad debts 199
5.16 Percentage of bad debts compared to sales 199
5.17 Frequency of reviewing inventory levels and preparing inventory budgets 200
5.18 Basis of determining inventory levels and using EOQ Model 201
5.19 Frequency of evaluating investment projects and reviewing efficiency of using
fixed assets after investing 202
5.20 Methods used to evaluate investment projects 203

xv
5.21 Frequency of preparing and reviewing financial budgets 204
5.22 Kinds of financial budgets prepared 204
5.23 Responsibility – preparing financial budgets 205
5.24 Frequency of comparing between budgeted and actual results 205
5.25 Descriptive statistics of financial ratios 207
5.26 Test for difference of means of financial ratios between two groups 208
5.27 Comparison of current ratios 208
5.28 Descriptive findings of SME current ratios 209

1.3 Analytical model for the research 14
1.4 Structure of the study 15
2.1 Structure of chapter 2 18
2.2 Political structure of Vietnam 23
2.3 Business structure in Vietnam 41
2.4 Breakdown of business by size 42
2.5 SME financial management practices and the gap 56
3.1 Structure of chapter 3 60
3.2 The central position and role of financial management 68
3.3 The relations among objectives of financial management 70
3.4 A model of financial management 74
3.5 Interaction between theories and practices of financial management 75
3.6 Financial ratios linked to return on equity 125
3.7 Model of the impact of financial management on SME profitability 130
4.1 Structure of chapter 4 133
4.2 Survey instrument for measuring accounting information system 148
4.3 Survey instrument for measuring financial reporting and analysis 150
4.4 Survey instrument for measuring cash management practices 152
4.5 Survey instrument for measuring receivable management practices 154
4.6 Survey instrument for measuring inventory management practices 156
4.7 Survey instrument for measuring fixed asset management 157
4.8 Survey instrument for measuring financial planning 159
4.9 Analytical model for the research study 165
4.10 Structure of SMEs in Vietnam and the target population 171
4.11 A classification of multivariate methods 179

xvii
5.1 Structure of chapter 5 185
5.2 Distribution of sample by industry 188
5.3 Distribution of sample by ownership 188

Chapter One:
Introduction to the Study

1.1 INTRODUCTION

This chapter provides a general introduction to the research study. The purpose is to
establish foundations for following chapters and the study as a whole, by providing a
general picture of the study. This chapter is structured into ten sections as presented
by figure 1.1 (page 2).
Section 1.1 provides a general introduction to the chapter and section 1.2
examines the research background where the research problem is identified. Section
1.3 defines the research problem, presents a statement of the problem and expands the
research problem in two subsections 1.3.1 and 1.3.2. Subsection 1.3.1 addresses the
research questions that will be respectively answered in chapters of the study.
Subsection 1.3.2 presents research objectives that the study covers in the process of
solving the research problem defined.
Section 1.4 briefly discusses the general aspects of research methodology such
as selecting from alternative types of research and research design, whereas the details
1.3 Research problem
1.3.1 Research questions 1.3.2 Research objectives
1.4 Methodolog
y

production, and goods production for exports. In terms of international economic
relations, the government has encouraged all economic sectors to diversify exporting
products and markets instead of focussing on the traditional ones such as the former
Soviet Union and Eastern European countries (Le, 1992).
It is apparent that since the government introduced the series of economic
reforms known as doi moi (renovation), the private sector has rapidly grown in terms
of the number of businesses, capital and employees. From the base of zero in 1991,
the number of private businesses and limited companies had quickly risen to 28,811 in
1998 (Tran, 1998, p. 54) and almost all are small and medium enterprises (SMEs).
SMEs have contributed considerably to growing GDP and creating jobs for labour-
age people. Vu (1998, p. 18) summarizes SME contributions as follows:

• providing a large number of diversified products, occupying 26 percent of
GDP and 30 percent of industrial outputs,
• creating jobs for 4.5 million people,
• mobilizing temporarily unused resources such as land, capital, labour and
management skills to develop production, and
• increasing export volume and lessening trade deficits.

3
Chapter One: Introduction to the Study
In addition to achievements and contributions as mentioned above, SMEs in Vietnam
are currently being faced with many serious difficulties such as shortage of capital for
expanding and renovating equipment and technology, low productivity and
competitiveness, lack of experience in terms of marketing, production management,
and financial management. Of these difficulties, lack of financing resources and
experience of financial management is currently one of the most serious issues
(Ebashi, Sakai and Takada, 1997). Inefficient financial management may damage
SME profitability and, as a result, the difficulties of SMEs will become greater.
Conversely, efficient financial management will help SMEs to strengthen their

especially financial management. Moreover, the concepts of financial management
have also only been recognized in Vietnam since the beginning of the 1990s when the
economy was converted into a market economy. Currently, financial management is
one of the challenges of SMEs.
Lack of knowledge of financial management combined with the uncertainty of
the business environment often lead SMEs to serious problems regarding financial
performances. Regardless of whether owner-manager or hired-manager, if the
financial decisions are wrong, profitability of the company will be adversely affected.
Consequently, SME profitability could be damaged because of inefficient financial
management. SMEs have often failed due to lack of knowledge of efficient financial
management. Moreover, undercapitalization and uncertainty of the business
environment cause SMEs to rely excessively on equity and maintain high liquidity
and these financial characteristics probably affect SME profitability (Vuong, 1998).
In summary, the problem that SMEs in Vietnam face appears to be that
inefficient financial management practices have adversely affected their profitability.
Therefore, the problem to be addressed in this research is to investigate the
simultaneous effects of financial management practices and financial characteristics
on SME profitability, and then, to determine the best measures for improving SME
profitability in Vietnam by using efficient financial management tools. Figure 1.2
represents the fields of research problem in this study.

Figure 1.2: Fields of the research problem

Financial management practices


A research objective is the researcher’s version of a business problem. Objectives
explain the purpose of the research in measurable terms and define standards of what
the research should accomplish (Zikmund 1997, p. 89). In solving the research
problem and answering the research questions mentioned previously, this study has
the following objectives:

to collect descriptive evidence on financial management practices, financial
characteristics and profitability of SMEs in Vietnam
•
•
•
to develop a model of the impacts of financial management practices and
financial characteristics on SME profitability
to contribute to knowledge of the relationships of financial management
practices, financial characteristics and SME profitability.

6
Chapter One: Introduction to the Study
1.4 METHODOLOGY

In choosing a research design, Zikmund (1997, p. 37) discusses three types of
business research: exploratory, descriptive and causal research.

• Exploratory research is usually conducted to clarify and define the nature of a
problem.
• Descriptive research is designed to describe characteristics of a population or
phenomenon.
• Causal research is conducted to identify cause-and-effect relationships among
variables where the research problem has already been narrowly defined.