Best Practice Financial Management Principles of SMEs in South Africa

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Best Practice Financial Management Principles of SMEs in South Africa

The evolution of market dynamics accentuated the focus of large corporate enterprises towards the emerging world in search of growth and competitive advantage (Miller & Shamsie, 1996). Globalization and Information Communication Technology (ICT) development are at the forefront of economic advancements stimulating interest in emerging economies (EE). In addition, shorter product life-cycles, fast changing consumer preferences and fiercer competition (Tan & Peng, 2003) accentuate the risk of doing business in emerging and developing economies.

Financial management practices form part of the daily routine activities of large enterprises. During the recent financial crisis much attention has been given to the financial management practices of large enterprises as a key source of their survival and continuity (Tan & Peng, 2003). Financial management practices provide large enterprises with the capability and willingness to readily mobilize and manage their financial resources towards unexpected/expected needs and opportunities (Byoun, 2007:4; Nikolai, Bazley & Jefferson, 2009:44). Optimal financial management practices have enabled large enterprises to take cost-efficient responses quickly, in order to counter interruptions in the business environment and to adopt and anticipate economic changes affecting organizational goals (Temtime & Pansiri, 2004). Similarly, optimal financial management practices provide financial flexibility to large enterprises during volatile economic conditions typical of emerging economies (Graham & Harvey 2001; Bancel & Mittoo, 2004).

On the contrary, financial management practices are not valued and seldom adopted amongst small businesses in emerging economies. According to Terpstra and Olson (1993) in McMahon (2001:14), financial management is one of the most prevalent problems experienced by SMEs during start-up phases, especially in emerging economies. Financial management practices in the context of SMEs are defined as the principles exercised in order to manage the financial resources of an organization, these include: accounting and financial reporting, capital budgeting, working capital management, risk management, and insurance for a business. As financial management practices are directly influenced by firm size, firm growth, tangibility, profit margin, GDP growth and financial development (Yarty, 2011:183), it will differ in practicality between different enterprise types and verticals. It is important to note that SMEs may not be seen as scaled-down versions of large organizations (Jarvis et al. 1996) since they differ from large firms in various respects. Primarily, the combination of ownership and management and the limited resources (financial and management skills) vary significantly from large organizations.

According to SME research, the lack of adoption of financial management practices by SMEs may be justified in four main areas:

1. SMEs do not have sufficient financial knowledge to effectively interpret financial management information and financial statements;

2. Current financial management practices are not aligned toward the SMEs’ key business objectives;

3. SMEs have a misperception of the benefits of optimal financial management practices;

4. Current financial management practices are not geared to support the SMEs in their day-to-day activities. Hence, SMEs are forced to become expert managers or dependent on expertise of outside consultants in order to obtain sufficient value from financial management practices.

I am conducting a study to examine the general features, financial objectives and constraints and financial management practices amongst SMEs in South Africa, categorize these SMEs accordingly and identify the best practice financial management principles that can lead to sustainability and growth within SMEs in South Africa.

Please participate in my SME research study by completing this 10 multiple-choice online survey and help me to complete my Mcom: http://www.surveymonkey.com/s/NRFVNSP.

 

 

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