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Financial Performance Measures of Small Medium Enterprises in the 21 st

Century

Article in Journal of Economics · August 2016

DOI: 10.1080/09765239.2016.11907829

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© Kamla-Raj 2016 J Economics, 7(2,3): 144-160 (2016)

Financial Performance Measures of Small Medium Enterprises

in the 21st Century
Mamorena Lucia Matsoso1 and Olumide Henrie Benedict2
1
Department of Management Accounting, 2Department of Financial Accounting and Taxation,
Faculty of Business Cape Peninsula University of Technology, South Africa
E-mail: 1<[email protected]>, 2<[email protected]>
KEYWORDS Financial Measures. Manufacturing. Performance Measures. Profitability. Small Businesses. Supply
Chain Management

ABSTRACT Financial performance measures (FPMs) are the most commonly used measures of productivity and
efficiency in companies, with less consideration for non-financial performance measures. FPMs are regarded as
traditional measures that lead to sustainability of a firm, hence they need to be properly managed and controlled.
This paper reports the extent to which SMEs recognize the significance of FPMs in their supply chain management
(SCM). The study followed a positivist paradigm, with the use of questionnaires to collect data from owners and
managers of SMEs in the manufacturing sector in Cape Town. The major findings indicate that although financial
performance measures are highly regarded by these entities, they lack the skills to properly determine their
financial measures, and do not know with certainty, which financial performance measures are of relevance to their
businesses. Extensive training is one of the recommendations.

INTRODUCTION Initially, performance measurement was used to

identify profit and control cash flow in an orga-
Financial performance measures (FPMs) play nization, prior to the early 1900s, when William
a paramount role in the productivity and effi- Durant, founder of General Motors, realized that
ciency of small and medium enterprises (SMEs). profit was not the ultimate result of an account-
Notwithstanding, financial measures alone can- ing exercise but rather the outcome of a cost
not sustain the business without the aid of non- stream pool throughout the supply chain (Morgan
financial performance measures (Gunday et al. 2004: 529).
2011: 665). However, the focus of this paper is In 1951, the Chief Executive Officer (CEO) of
on financial performance measures. A retrospect General Electric, Ralph Cordiner, organized a
of how SMEs have evolved in managing their task team to identify key corporate measures,
financial performance since the invention of which consisted of financial and non-financial
double entry shows that FPMs have been ap- measures (Neely 1999: 207, citing Meyer and
plied to different kinds of industries and utilized Gupta 1994; Eccles 1991: 132). These develop-
for strategic intents. Performance measures are ments inspired many accounting professionals
ways in which the efficiency and effectiveness and academics, such as Johnson and Kaplan
of actions may be quantified to provide mean- (1987: 3) to argue that traditional financial per-
ing and indication of failure or growth (Neely et formance measures were losing relevance to
al. 2002: 2). They originated with the invention modern organizations and needed to produce
of double entry bookkeeping, founded by Luca an effective evaluation of products that would
Pacioli in 1494 (Morgan 2004: 522; Eccles meet customer demands and contribute to an
1991:131), but the application of ‘modern’ per- efficient production process and distribution
formance measures were only evident from 1850. within an organization.
Their early use in rail operations (Morgan 2004: During the 1980s many companies realized
522) was extended in 1870 to steel and chemical that their financial records were declining due to
production processes, since large-scale prob- unnoticed deterioration in quality and customer
lems within these organizations created a high satisfaction. As a result many managers began
degree of uncertainty and risk (Morgan 2004: to focus on quality (Eccles 1991: 134) as a strate-
522). Such industries required reliable cost data gic weapon and committed their resources to
to determine prices when assessing the results develop measures such as defects rates, re-
of operations, and to evaluate capital-intensive sponse time, and delivery commitment to con-
technological innovations (Morgan 2004: 529). trol, monitor and evaluate performance within
FINANCIAL MEASURES IN THE 21 ST CENTURY 145

their organizations. During the 1990s customer may also hinder the implementation of FPMs in
satisfaction became the focus (Eccles 1991: 134). their businesses. Hence, the objective of the
Using basic methods to manage large corpora- study is to determine the extent to which SMEs
tions dates back to 1910 and Du Pont Cousins in the manufacturing sector perceive and recog-
(Chandler 1977: 417), however, the dilemma re- nize the significance of financial performance
mained that organizations did not have effec- measures in their SCM. The premise of this study
tive performance measurement systems in place. lies on the following research questions:
As Neely (1999: 205-207) indicates, there were 1. How do SMEs in the manufacturing sec-
many critics of traditional financial measures in tor perceive the importance of FPMs?
the mid-1980s, but even in the late 1980s and 2. To what extent do these SMEs recognize
early 1990s the performance measurement sys- the significance of financial performance mea-
tem of many companies was irrelevant to their sures in their SCM?
business targeted goals. These challenges led The remaining sections of the paper consists
some researchers to suggest measurement frame- of literature review with subsections that en-
works that might be suitable for them (Lynch compass theoretical background, importance of
and Cross 1991: 5; Kaplan and Norton 1992: 71), small manufacturing enterprise sector, perfor-
and during the mid-1990s businesses were con- mance measurement of supply chain, financial
cerned as to how balanced performance mea- measures, implementation and use of perfor-
surement systems could be developed and de- mance measures, methodology, results and dis-
ployed (Neely 2005: 1266). However, barriers to cussion, and conclusions.
implementation were also reported (Bourne et
al. 2000: 759). During the early 2000s Balanced Literature Review
Scorecard (BSC) became a popular performance
framework that provided empirical findings of Theoretical Framework
mixed results (Neely et al. 2004: 3; Ittner and
Lacker 2003: 2). Table 1 summarizes the history This paper derives from two seminal frame-
of performance measures. works namely, Transaction Cost Analysis (TCA)
Despite the evolution of performance mea- and Resource-based View (RBV). The TCA was
sures over the years, it is not clear how SMEs originally developed by Coase in 1937 (Coase
have succeeded in their financial performance 1998: 72; Grover and Malhotra 2003: 457). TCA
measures in the 21st century. SMEs are common- stems from the ‘make or buy decision’ concept
ly known for their lack of education, skills and of a firm (Halldorsson et al. 20007: 285), which
resources to successfully manage their busi- refers to the decision that a firm may conclude
nesses (Rahman, et al. 2010: 3997; Burn 2011: on whether it has to manufacture the product or
161; Tumaini and Zheng, 2011: 2613; Betchoo buy a finished product. The decision on wheth-
2015: 16; Rakicevic et al. 2016: 31). This reality er to produce or to outsource is to ensure elimi-

Table 1: Evolution of performance measurement

1494 “Performance measures” originates from invention of double entry by Luca Pacioli (Eccles 1991:131).
1850 Application of modern performance measures to identify profit and control cash flow (Morgan
2004:522).
1900 Wiliam Durrant realised performance from outcomes measures of cost stream pool throughout the SC
(Eccles1991:131).
1951 CEO of General Electric, Ralph Cardinar organised a task team to identify key corporate measures,
consisting of financial and non-financial measures (Meyer and Gupta, 1994, cited in Neely
1999:207).
1980s Companies realised the decline in financial records due to unnoticed deterioration in quality and
customer satisfaction and then began to focus on quality (Eccles 1991:134).

1990s Customer satisfaction became the primary focus for many businesses (Eccles 1991:134). During the
mid-1990s businesses were concerned about how performance measures could be developed and
deployed (Neely 2005:1266)
2000s BSC became the popular performance framework (Neely et at. 2004:2; Ittner and Lacker 2003:2).

Sources: Reflected in the Table

146 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

nation of costs while attaining the desired qual- customers and suppliers, cooperative partner-
ity products needed. TCA, since its inception, ship among SMEs may be regarded as a vital
has as its focus in minimizing the total of prod- tool to enhance the competitive advantage in
ucts incurred by a firm while ensuring the qual- manufacturing businesses, which may subse-
ity aspired to in meeting the demands of the quently improve financial performance measures
consumer. that lead to sustainability of SMEs.
Performance measures are used across the
value chain, ranging from suppliers, to ensure The Significance of the Small Manufacturing
smooth material flow at economical cost, reli- Enterprise Sector
ability and flexibility, to on-time delivery and
quality of products to ensure customer satisfac- The significance of manufacturing business-
tion and retention. When all these measures are es cannot be overemphasized as they contrib-
controlled and properly evaluated and monitored, ute towards the country’s economic growth
unnecessary costs may be reduced, thus help- through job creation, employment and allevia-
ing achieve the quality of goods delivered to tion of poverty (Rogerson 2004: 766). Accord-
the customers. This may also lead to higher re- ing to the business environment specialist, SBP
turns and help SMEs maintain a competitive (2009: 3) an estimate of seventy-three percent of
advantage, thereby increasing their performance. people work for firms with fewer than 50 em-
While researchers advise that TCA be used for ployees and forty-five percent of all employees
‘make or buy decisions’ (Halldorsson et al. 2007: work in firms with fewer than 10 people in South
285; Williamson 2008: 5), Ketchen et al. (2007: Africa. However, one of the major factors im-
575) in turn posit that it should focus not only peding the success of SMEs, especially in the
on transaction cost as a basis for these but also manufacturing environment, is lack of access to
on all total cost engaged in SCM, a view sup- finance (Beck and Demirguc-Kunt 2006: 2932).
ported in this study. All the total costs engaged This prohibits these firms from expanding their
in the SCM of SMEs are taken into account to businesses, which may enable greater employ-
ensure maximum efficiency in the value chain. The ment opportunities, thus alleviating poverty, and
costs, ranging from point of raw material, suppli- as Beck and Demirguc-Kunt (2006: 2932, 2935)
ers, production and distribution until the goods assert, efforts targeted at the SME sector are
reach the final stage of the customers, are deemed usually focused on the basis that SMEs are the
necessary to determine the total cost engaged in ‘engine for growth’, although market imperfec-
the entire value chain, thus help measure finan- tions and institutional weaknesses prohibit them
cial performance of a firm effectively. from growth. SMEs are often faced with a segre-
RBV looks at how best a firm’s assets and gated level of decision-making, which makes it
capabilities may be utilized for competitive ad- difficult for these entities to overcome their chal-
vantage (Barney 1991: 99). SMEs are faced with lenges as a collective. The decision-making lev-
inadequate skills, lack of resources, human cap- el may be effective when every member of the
ital and financial constraints (Nichter and Gold- organizational SCM in the manufacturing busi-
mark 2009: 1454), however, they may utilize SCM ness is involved, thus enabling effective deci-
linkage by maintaining close ties among cus- sions that aim for a higher satisfaction level
tomer-supplier relationships to assist in achiev- (Bhagwat and Sharma 2007: 44).
ing smooth flow of material throughout the val- One may consider manufacturing firms to be
ue chain, and so meet the customers’ demands the heart of innovation, however SMEs are lag-
and help improve performance of SMEs in the ging behind in innovativeness, regarded as key
manufacturing sector (Rungtusanatham et al. for these entities to sustain themselves in a com-
2003: 1084; Halldorsson et al. 2007: 288). For this petitive environment. Innovations may come in
study, the researchers use RBV from the point various forms, such as capability to produce and
of view of SMEs’ capabilities, such as building introduce new products that suit the market and
relationships between customers and suppliers. attain the customer satisfaction level (Margues
Strong relationships may allow them the oppor- and Ferreira 2009: 55). Therefore, much atten-
tunity for bargaining powers, low costs and en- tion is required to ensure that the manufactur-
gagement with suppliers in the design of prod- ing sector is well developed and performance
ucts. Apart from good relationships between measurement systems are in place. Improving
FINANCIAL MEASURES IN THE 21 ST CENTURY 147

the performance of the supply chain in manu- mance persistently by utilizing metrics from the
facturing is inevitable when one considers the following five categories, namely, cost, time,
impact of this sector in the national economy. quality, flexibility and innovativeness, and take
action upon performance measurement results
Performance Measurement of Supply Chain in order to stay competitive (Olugu et al. 2010:
875; Shepherd and Gunter 2006: 244-245). It is
According to Neely et al. (2002: 2) and Neely vital for SMEs to maximize on quality and time
et al. (2005:1229), performance measures play an during the implementation of performance mea-
integral part in the management of control sys- surement process, to ensure minimal waste and
tems. Furthermore, this can be described as a attainable customer satisfaction at its highest
regular measurement of results and efficiency of level (Hudson et al. 2001:1105). This could also
services and can also be regarded as a parame- entail SMEs responding abruptly to changing
ter used to quantify the efficiency and effective- markets.
ness of past actions taken or implemented (Tan-
gen 2004: 727). Neely et al. (2002: 32-71) state Financial Measures
that for performance measures to be effective,
four fundamental processes should be deployed. Financial measures are commonly known as
These are as follows. short-term measures and purely based on the
1. Design of the measures: The first step re- past. Their significance is in measuring perfor-
quires a cautious mind, encourages one to mance from four key areas, including, efficiency,
comprehend what should be measured, and liquidity, profitability and capital structure
explains how. (Lodewyckx et al. 2007: 456-457). Each financial
2. Plan and build: A vital stage in the pro- measure stands for a unique purpose. While
cess and one that calls for communication profitability informs users of financial statements
amongst parties involved in the measure- about the performance of an organization, wheth-
ment system, which should access data, er making profits or losses, efficiency informs
be able to explain how to use the measure- users on how business resources are utilized and
ment data, and how to improve performance managed. Capital structure advises on whether
(Neely et al. 2002: 32-71). This could also owners’ capital or borrowed capital is being uti-
require some development of the applica- lized, and liquidity measures how easily assets in
ble technological measurement system. the business can be converted into cash within
3. Implement and operate: The third process, the normal operating cycle. The financial mea-
this involves execution of the plan and surements expounded derive from financial state-
employing developed systems in the plan- ments. There are four components of financial
ning and building stage (Neely et al. 2002: statements which are discussed as follows:
32-71). It could also mean working with iden-
tified and chosen measures in conjunction Statement of Profit and Loss and Other
with well-defined measurement systems. Comprehensive Income
4. Refresh: The fourth stage in the process is
when managers redefine measures to as- The fundamental role of the statement of
certain their relevancy and usefulness. It is profit and loss and other comprehensive income
at this critical stage that obsolete measures is to exhibit the business performance during an
can be discarded and new ones implement- accounting cycle. This statement includes in-
ed, if they are found to be fit for purpose, come earned and expenditures incurred during
and it addresses the performance measure- the financial year (Sowden- Service 2011: 44).
ment that requires development.
Handfield et al. (2009: 709) posit that perfor- Statement of Financial Position
mance measures should categorically define a
company’s strategic goals, improve communi- Statement of financial position is typically a
cation throughout the value chain, and should report of business assets, liabilities well as its
not drift from the strategic objectives in order to equity (net worth) (Sowden-Service 2011: 40).
attain the desired results. Researchers aver that The role of this statement is to categorically
it is important to monitor supply chain perfor- present current and non-current assets and cur-
148 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

rent and non-current liabilities in the statement total cash flow time is determined it can be add-
of financial position, unless a presentation based ed to the profit, to provide an insight into the
on liquidity provides an illustration of informa- rate of return on equity (ROE). This helps top
tion that is more reliable and relevant (Oberhol- management establish the performance that can
ster et al. 2011: 40). be obtained from total capital invested in the
business. ROI plays a significant role not only
Cash Flow Statement on financial but also on non-financial measures
in the supply chain. While its positive impact is
Cash flow statement encompasses cash flow acknowledged and recognized on financial
from financing, investing, and operating activi- growth, this would not be possible without cus-
ties. Its main purpose is to display useful infor- tomer satisfaction resulting from quick response,
mation on historical changes in cash and cash which feeds into customer measures and inter-
equivalents (Oberholster et al. 2011: 489). The nal control measures as a result of sales made
cash flow from operating activities inform the
(Bhagwat and Sharma 2007: 50).
users about the amount of cash from sales of
the company’s goods and services, less the In the manufacturing of products, the cost
amount needed to make or buy and sell those of goods includes purchases from suppliers,
goods and services. Apart from this, cash flow carriage inwards or transport duties where ap-
from investing activities reflects the amount of plicable, work in progress and finished goods.
money the company spent on capital expendi- This signal to the TCA of a firm, which embraces
ture, such as new machinery, equipment, and the flow of costs and poses a need for managers
vehicles. This may include acquisition of other in the SCM to consider all costs engaged in the
businesses. Lastly, cash flow from financing re- value chain to make an informed decision to-
flects inflow of cash from outside financing ac- ward the growth of SMEs.
tivities, such as bank loans. Payments on bank The cost of goods enables managers to mark
loans would however indicate the uses of cash them up in order to arrive at the selling price. All
flow (Sowden- Service 2011: 52). Performance the variable costs incurred are deducted from
indicators from these measures are elaborated the sales to establish the contribution margin.
upon below: When this is realized it indicates a positive light
in terms of viability and the fixed costs are de-
Return on Assets (ROA) ducted to achieve the ‘net margin’. The sales
feed the financial measurement and impact the
In an SC, assets utilized encompass accounts ROI as well as customer measures, and internal
receivable (debtors), property, plant and equip- efficiency measures. The revenues realized in-
ment and inventories. Owing to increased infla- form whether there is a good market for a partic-
tion and deterioration in liquidity it is crucial for ular product. Increased revenues maybe a result
firms to elevate the productivity level of their of happy customers. Innovation and growth may
capital and ascertain the effectiveness and effi- also lead to the company’s competitive advan-
ciency of assets. It is therefore important to deter- tage and a positive impact on the ROI. This is in
mine how costs associated with each asset in con- line with RBV of the firm, where a firm’s capabil-
junction with its turnover impact the ‘total cash
ities and resources are best utilized to enhance
flow time’, which can be measured as the average
number of days required to convert cash invested the performance and growth of business.
in assets into the cash collected from a customer Inventory management is viewed as one of
(Steward 1995, cited in Bhagwat and Sharma 2007: the most important influencers of competitive-
50; Gunasekaran et al. 2004: 338-339). ness while also seen as a key operational perfor-
Return on Assets (ROA) is defined as: mance measure for SMEs particularly in inven-
ROA = Profit before interest expense and taxation tory-intensive industries (Ngubane et al. 2015).
Total Assets Availability of material enables smooth process
Return on Investment (ROI) is defined as: in the production process, and the cost of in-
ROI/ROE = Profit after taxation and preference dividend ventory is determined and calculated with accu-
Equity racy to achieve the correctness of cost of goods
According to Gunasekaran et al. (2004: 339) manufactured. Inventory costs are categorized
and Bhagwat and Sharma (2007: 50), when the according to the following statement:
FINANCIAL MEASURES IN THE 21 ST CENTURY 149

Total Inventory Cost ing the reporting period. Current liabilities in-
clude trade payables, accrued expenses and in-
SC inventories include from raw materials, come received in advance, that is money received
sub-assemblies and assemblies to finished prod- prior to rendering of services to the clients. The
ucts as well as stock in transit (Goldsbuy et al. current ratio allows for liquidity to settle the
2006: 72; Bhagwat and Sharma 2007: 50). short-term debts as they become due (Lodewy-
ckx et al. 2007: 468). This is calculated in the form
Cash Conversion Cycle of a ratio, whereby the higher ratio indicates a
low risk while a smaller ration exhibits a higher
Hausman (2002: 11) writes that conversion risk regarding the unpaid short-term liabilities:
cycle time measures how long it takes for an Quick ratio = Current Assets – Inventory
entity to pay trade payables (creditors), how long Current Liabilities
it takes for trade receivables (customers) to pay Quick ratio eliminates inventory from the
their debts, and how long the inventory stays calculation and only deals with current assets
before it is converted into cash and can also be that are easily converted into cash (Flynn et al.
measured in days and months. For ease of use, 2005: 29). This arises because inventory is not
the above mentioned key terms are defined as easily converted into cash. This ratio intends to
follows in this study. measure cash available to pay short-term liabili-
Trade payables refer to suppliers of raw ma- ties of SMEs in the manufacturing businesses
terial and services to SMEs while trade receiv- as they become due (Lodewyckx et al. 2007: 468).
ables are customers of the SMEs in the manu- SMEs may also realize growth and develop-
facturing businesses. Inventory refers to the raw ment if they take into consideration performance
material, work in progress, finished goods that measures and formally implement them in their
are available and stock in transit. The inventory operation. This would assist them in identifying
costs associated with production and distribu- areas of weakness and so take proactive mea-
tion reflects on TCA of a firm. TCA for the pur- sures towards the development and improve-
pose of the study is based on total costs in- ment of systems and methods in place. Chen
curred by the SCM. (2011: 264) presents suggestions for establish-
The cash to cash (C2C) is an important met- ing effective performance management in SMEs
ric measure because it links across incoming as follows:
material activities through suppliers, and con- Œ Confirm the enterprise’s strategic objective:
nects with the outgoing sales activities to the The enterprise strategic objective of SMEs
customers through manufacturing operations, must be clear and able to filter the objec-
logistics and distribution (Farris 11 and Hutchi- tives down to the departmental and position
son 2002: 292; Azevedo et al. 2013: 215) The C2C levels (Chen 2011: 265).
cycle time may be improved by delaying pay- ΠSet up scientific performance appraisal sys-
ments to creditors while shortening the debts tem: In order for SMEs to determine perfor-
collection period (Farris 11 and Hutchison 2002: mance indicators successfully, employees
295). This may also be improved by reducing must be engaged and their views taken into
the production cycle so as to shorten inventory account, and they should be allowed to par-
days of supply: ticipate in the process (Chen 2011: 265).
Current ratio = Current Assets Again, performance appraisal should be de-
Current Liabilities signed to leverage workforce productivity
Current assets are those that can be easily and take decisions on promotion and in-
converted into cash in a period not exceeding crease in salaries, thus serving the enter-
the accounting cycle. This includes items such prise’s development.
as inventory, cash at bank and other receivables ΠChoose reasonable and effective incentives:
such as expenses paid in advance and income SMEs needs to expose employees’ problems
accrued to SMEs. Income accrued is a result of and help them improve in their jobs in the
monetary value owing from services provided future.
during the financial year. Current liabilities in ΠStrengthen training for employees: SMEs
turn refer to debts owed to suppliers of material should build a thorough and complete train-
and services in SMEs, which can be settled dur- ing system for their managers and employ-
150 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

ees, invite and encourage managers and em- terms, payment schedules, consignment and ti-
ployees to receive performance management tle ownership arrangements.
training in order to equip themselves with
knowledge and knowhow, avoid subjective Implementation and Use of Performance
judgments, and enable effectiveness of the Measurement
performance appraisal system (Chen 2011:
265). It may be essential for managers and direc-
Some of SMEs behavioral patterns that im- tors of SMEs to realize the prominence of per-
pede them from asserting their contribution to- formance measures in an SCM system (Wouters
wards effectiveness and efficiency in SCM in- 2009: 65; Gunasekaran and Kobu 2007: 2820). It
clude high inventory levels. SMEs, particularly is critical to comprehend measures that are im-
manufacturing businesses, appear to be victims plemented and to utilize performance measures
of high inventory levels. They keep large quan- effectively to enable smooth operation, review
and redesign of new processes and systems
tities of stock to cater for uncertainties in cus-
should there be a need (Akyuz and Erkan 2010:
tomer demands, however, this practice leads to 5151). The implementation of performance mea-
higher inventory holding costs, including on sures should be regarded as a decisive step to-
storage, insurance, spoilage, obsolescence and wards a successful manufacturing business that
capital cost of inventory (Hendricks and Sin- requires a maximum functioning capacity of au-
ghal 2005: 17). Again, there is a risk of loss of tomated systems that enables frequent report-
inventory value when these entities keep excess ing devices (Bourne et al. 2000: 761). In addition,
stock and may lead to additional expenditure, a manual performance measurement system may
such as rework and storage costs (Hamisi 2011: be used to some degree to examine individual
1269). On the contrary, Lwiki et al. (2013: 77) performance. However, individual performance
points that too little inventory hampers the pro- may be automated for easy referral and updates
duction process, which often leads to poor ser- on the development. These measures may also
vice delivery. This practice therefore points to be evaluated at strategic, tactical and operation-
TCA, which states that all cost incurred in the al levels (Gunasekaran et al. 2001: 82; Gunaseka-
business SCM are important and firms need to ran et al. 2004: 336).
ensure minimal spending while they ascertain
that quality is maintained to meet the demands METHODOLOGY
of the customers.
This is a quantitative study that followed a
Supply Chain Activities positivistic research paradigm. It focuses prima-
rily on capturing the truth, which already exists
It is important that SMEs indicate to all par- (Coetsee 2011: 84; Fox and Bayat 2007: 78). A
ties involved in the supply chain the necessity structured questionnaire was used to collect data
to comprehend the extent of activities engaged from SME manufactures in Cape Town. The data
in if they are to maximize capability and attain- was analyzed by means of descriptive statistics
ment of goals at the expected times. Supply and used to explain and predict the phenome-
non being studied (Fox and Bayat 2007: 78; Th-
chain encompasses all activities from supplier, omas 2003: 2). In this paper purposive sampling
manufacturer, processes involved in the produc- was adopted to identify relevant participants
tion of goods and services, retailers and even- who were in the appropriate position to provide
tually consumers. A supply chain network, ac- information necessary to answer the research
cording to Klerverlaan (2008: 10), consists of questions of the study (Pascose 2014: 142-143).
three types of flows at operational level namely, The study focused on manufacturing SMEs in
material flows, that is, the physical flow of in- Cape Town where, out of 50 questionnaires dis-
ventory from suppliers until the material reach- tributed only 30 questionnaires were completed
es the final stage-the consumers, this encom- and deemed suitable for analysis.
passes the returns of unsatisfactory products,
servicing, and recycling. Information flows, Questionnaire
which represent placements of orders, tracking
the physical flow until the goods arrive at their The content of the questionnaire was devel-
destination. Financial flows that include credit oped and constructed according to two differ-
FINANCIAL MEASURES IN THE 21 ST CENTURY 151

ent categories. Section A sought to answer the generate descriptive statistics. Data analysis was
research sub-investigative question 1, which done to identify different variables in the ques-
primarily focused on the implementation level of tionnaire measuring financial performance mea-
financial performance measures in SMEs’ SCM. sures in SMEs’ SCM. Descriptive statistics are
The participants were required to indicate wheth- presented using frequency distribution tables
er they agreed to the implementation, ranging (Somekh and Lewin 2005: 221).
from strongly disagree to strongly agree. The
categories encompass the financial performance RESULTS AND DISCUSSION
measures in a SCM. Section B consisted of 12
questions on performance measures, some cat- The objective of the study was to establish
egorical, others requiring yes or no answers, how SMEs perceive the significance of finan-
while others were 4-point Likert scale type of cial performance measures in supply chain
questions. The section was designed to estab- management.
lish the frequency of financial performance eval- The research questions that led to this ob-
uations by small businesses in SCM, the finan- jective read as follows:
cial statements prepared by this entity as well as Which of the following financial measures
the involvement of managers and all members of are implemented in my SCM?
it towards the achievement of organizational Table 2 illustrates the level at which gross
goals. Cronbach’s reliability coefficient was also margin is measured as a financial performance
used as a test of construct validity whereby the measure.
main purpose was to classify items that belong The results indicate that a total of 95.5 per-
together with the view that they were answered cent respondents (38.5% = agree and 57.7%=
similarly, and therefore measure the underlying strongly agree) measure gross margin while 3.8
construct (Burns and Burns 2008: 430; Pietersen percent do not. From an accounting perspective
and Maree 2007: 219). it is difficult to determine the profit or loss made
on the sales of goods if the business does not
Data Analysis use gross margin. Table 3 explains the level at
which net margin is measured by SMEs manu-
Upon completion of data collection, the raw facturers.
data was captured and coded using Microsoft Net margin is used or measured by 88.4 per-
Excel and eventually exported to the statistical cent (26.9%= agree and 61.5%= strongly agree)
software for social sciences (SPSS) in order to of the respondents, while 11.5 percent disagreed
Table 2: Gross margin

Frequency Percent Valid percent Cumulative %

Valid Strongly disagree 1 3.3 3.8 3.8

Agree 10 33.3 38.5 42.3
Strongly agree 15 50.0 57.7 100.0
Total 26 86.7 100.0
Missing System 4 13.3
Total 30 100.0
Source: Fieldwork

Table 3: Net margin

Frequency Percent Valid percent Cumulative %

Valid Disagree 3 10.0 11.5 11.5

Agree 7 23.3 26.9 38.5
Strongly Agree 16 53.3 61.5 100.0
Total 26 86.7 100.0
Missing System 4 13.3
Total 30 100.0

Source: Fieldwork
152 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

to the implementation of this measure. Likewise, this did not pay much attention to this it may be nec-
measure informed the business of its financial per- essary to consider it in order to keep track of how
formance, that is, whether it realized profits or loss- long it takes them to settle their debts when com-
es after all expenses were taken into account. pared to their customer collection period.
The majority of the respondents measured As seen in Table 5, of the 92.5 percent
the gross margin, however net margin received (48.1%= agree and 44.4%= strongly agree) re-
a lower percentage, which is of concern with spondents who measure the creditors’ collec-
regards to how these businesses determine the tion period, 7.4 percent did not utilize the mea-
profit or loss made in any given financial period surement. A similarity of ten percent participants
(Sowden-service 2011: 44). Gross margin and net who did not respond to this question was the
margin are traditional financial measures that sig- one above in the debtors’ collection period.
nal the sustainability of a firm and so should be This inventory on hand established the lev-
considered as important (Kaplan and Norton 1996: el at which SMEs controlled their inventory by
57-63; Gumbus and Lussier 2006: 409; Bhagwat tracing the number of days it took them to con-
and Sharma 2007: 55). Table 4 determines the rate vert their inventory to cash.
at which SMEs measured the debtors’ collection It is important to monitor the day’s invento-
period in order to monitor their debtors. ry on hand because this determines the cash
Respondents (3.7%) did not measure the flow and how long it takes for assets to be con-
debtors’ collection period while a total of 96.3 verted into cash (Table 6). A total of twenty-
percent (40.7%= agreed and 55.6%= strongly three percent participants did not measure their
agreed) of the respondents implemented this day’s inventory on hand, which went together
measure in their businesses. This could be due
to lack of understanding and the knowledge of with a non-response rate of 13.3 percent. This is
the significance of monitoring the cash flow in a alarming as the day’s inventory is at the core of
business. The exception of ten percent non-re- their businesses and as stated by Ngubane et
sponse was also experienced in this measure. al. (2015), inventory plays a vital role in manu-
Debtors’ collection period is the highest mea- facturing businesses and may be used for com-
sured metric under financial measures, at 96.3 petitive advantage. Therefore, failure to control
percent. This is in line with an emphasis made by inventory on one hand may lead to loss of in-
Farris 11 and Hutchison (2002: 294-295), that the ventory value, in cases when excess stock is
C2C cycle may be enhanced by quick collection kept, and additional costs such as rework and
from debtors while keeping their payment period storage costs (Hamisi 2011: 1269), while on the
prolonged. Although some of the respondents other hand, too little inventory may hamper pro-
Table 4: Debtors collection period

Frequency Percent Valid percent Cumulative %

Valid Disagree 1 3.3 3.7 3.7

Agree 11 36.7 40.7 44.4
Strongly agree 15 50.0 55.6 100.0
Total 27 90.0 100.0
Missing System 3 10.0
Total 30 100.0
Source: Fieldwork

Table 5: Creditors payment period

Frequency Percent Valid percent Cumulative %

Valid Disagree 2 6.7 7.4 7.4

Agree 13 43.3 48.1 55.6
Strongly agree 12 40.0 44.4 100.0
Total 27 90.0 100.0
Missing System 3 10.0
Total 30 100.0
Source: Fieldwork
FINANCIAL MEASURES IN THE 21 ST CENTURY 153

Table 6: Days inventory on hand

Frequency Percent Valid percent Cumulative %

Valid Strongly disagree 1 3.3 3.8 3.8

Disagree 5 16.7 19.2 23.1
Agree 11 36.7 42.3 65.4
Strongly agree 9 30.0 34.6 100.0
Total 26 86.7 100.0
Missing System 4 13.3
Total 30 100.0
Source: Fieldwork

duction and increases the likelihood of poor This section provides an understanding and
customer services due to delayed deliveries (Lwi- information on how frequently SMEs evaluate
ki et al. 2013: 77). their financial performance measures, their use
Table 7 highlights the implementation level of financial statements, and which measures are
of inventory turnover to get an overview of regarded as critical success factors in their busi-
whether SME manufacturers take into account nesses. The respondents were asked the fol-
the rate at which their assets convert into cash. lowing questions:
Almost twenty percent (7.7% = strongly dis- ΠHow often do you evaluate financial per-
agree and 11.5%= disagree) of the respondents formance measures in your SCM?
did not measure inventory turnover in their busi- ΠWhich financial statements do you use?
nesses, while 80.8 percent (50%= agree and ΠDo you make use of financial ratios?
30.8%= strongly agree) of the total respondents ΠWhich financial ratios do you make use of
measured inventory turnover and 13.3 percent
to interpret your financial statements?
missing values were encountered as a result of
ΠWhich financial performance indicators
non-response to the question. The finding from
these results is that, contrary to the literature, are regarded as the critical success fac-
SMEs focus more on financial measures (Chia et tors in SCM?
al. 2009: 617; Thakkar et al. 2009: 712). The re- The next three questions were in form of a 4-
searchers are of the view that they do not know point Likert scale ranging from 1= strongly dis-
with certainty what is crucial for their core busi- agree to 4= strongly agree.
nesses and financial measures are not properly ΠDebts are collected on time from customers.
measured. A total of forty percent did not mea- ΠInventory takes longer to be converted
sure their fixed assets turnover, which implies into cash.
lack of understanding of the importance of how ΠAll assets of the business are included in
much the business can make, or is making, from the balance sheet.
the fixed assets invested in it.
Objective two of the study was to determine Evaluation of Financial Performance Measures
the extent to which SMEs recognize the signif-
icance of financial performance measures in From Table 8, it is perceived that some SMEs
supply chain management. recognize the significance of financial measures.

Table 7: Inventory turnover

Frequency Percent Valid percent Cumulative %

Valid Strongly disagree 2 6.7 7.7 7.7

Disagree 3 10.0 11.5 19.2
Agree 13 43.3 50.0 69.2
Strongly agree 8 26.7 30.8 100.0
Total 26 86.7 100.0
Missing System 4 13.3
Total 30 100.0
Source: Fieldwork
154 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

Table 8: How often do you evaluate performance on financial measures in your supply chain implemented?

Frequency Percent Valid percent Cumulative %

Valid Weekly 4 13.3 14.3 14.3

Monthly 18 60.0 64.3 78.6
Quarterly 2 6.7 7.1 85.7
Six Monthly 2 6.7 7.1 92.9
Yearly 2 6.7 7.1 100.0
Total 28 93.3 100.0
Missing System 2 6.7
Total 30 100.0

Source: Fieldwork

For those who measured financial measures, the tries do not know how to account for their books
majority measured on a monthly basis at 64.3 properly. Some respondents did not prepare a
percent, 14.3 percent on a weekly basis, while statement of financial performance. The major
the remaining 21.3 percent shared equally concern was how their profit or loss was calcu-
amongst quarterly, six monthly and yearly. Some lated. Again, some did not prepare a statement
SMEs recognize the significance of financial of financial position, which was surprising since
measures, as indicated in the results presented all assets and liabilities should be reflected in
(Chia et al. 2009: 617; Thakkar et al. 2009: 712). the balance sheet to provide an overview of the
However, measuring financial measures on a business status at a point in time as well as the
weekly and monthly basis does not provide a entity’s net worth. 33.3 percent of the respon-
clear indication of the overall performance of dents’ prepared statement of changes in equity.
these businesses over the accounting period. Seventy percent of the total respondents pre-
In Table 9, responses from the respondents pared cash flow statements for their business-
indicate that SMEs in the manufacturing indus- es. Lack of financial management education may
Table 9: Which financial statements do you prepare?

Statement of Financial Performance

Frequency Percent Valid percent Cumulative %

Valid Yes 24 80.0 80.0 80.0

No 6 20.0 20.0 100.0
Total 30 100.0 100.0
Statement of Financial Position
Frequency Percent Valid percent Cumulative %

Valid Yes 17 56.7 56.7 56.7

No 13 43.3 43.3 100.0
Total 30 100.0 100.0
Statement of Changes in Equity
Frequency Percent Valid percent Cumulative %

Valid Yes 10 33.3 33.3 33.3

No 20 66.7 66.7 100.0
Total 30 100.0 100.0
Cash Flow Statement
Frequency Percent Valid percent Cumulative %

Valid Yes 21 70.0 70.0 70.0

No 9 30.0 30.0 100.0
Total 30 100.0 100.0

Source: Fieldwork
FINANCIAL MEASURES IN THE 21 ST CENTURY 155

have been an impediment (Nitcher and Goldmark A much lower percentage of (57.1%) of the
2009: 1454; Rahman et al. 2010; Tumaini and respondents considered gross margin important
Zheng 2011; Betchoo 2015: 16; Rakicevic et al. for their businesses, compared with 71.4 per-
2016: 31) to proper and accurately drawn finan- cent on net margin. Gross margin is the total
cial statements that represent a fair presentation sales made less cost of goods sold. It is also
of financial statements according to Generaly defined as the residual of sales after all variable
Accepted Acculting Practice (GAAP). costs have been deducted. Almost eighteen per-
cent of the respondents considered ROA es-
Use of Financial Ratios sential to their business. ROA refers to the re-
ward/return, which the business receives from
Table 10 depicts results on whether SMEs the total assets invested in a company.
uses financial ratios to interpret their financial A similar trend from respondents highlight-
statements. ed less consideration of ROE, current ratio and
Some of the respondents did not make use fixed assets turnover of (3.6%), while one hun-
of financial ratios to analyze or interpret their dred percent did not regard the acid test ratio as
financial statements, which may lead to difficul- a critical success factor. The acid test ratio dif-
ty in determining the growth or deterioration of fers slightly from the current ratio with a formula
business performance. However, some SMEs whereby the inventory is deducted from the to-
highlighted that their financial statements were tal current assets. The reason is that inventory
prepared from their head offices, mainly situat- takes longer to be converted into cash.
ed in Johannesburg while others were in Kwa- Significantly, 89.3 percent did regard the debt-
Zulu-Natal. Therefore, these subsidiaries might ors’ collection period as essential. It is wise to
not have had a thorough knowledge of how fi- monitor and manage debtors of the company to
nancial statements were comprehensively pre- avoid delays in cash flow as well as financing
pared. Although 63.3 percent of the respondents liquidity of the business. A total of fifty percent
agreed that they used financial ratios, of them, considered creditors’ payment as significant. If
81.25 percent did not use debt ratio and return to the above debtors were managed properly this
shareholders, 85.4 percent did not use a price earn- should feed into the creditors in ensuring that
ings ratio (P/E), while 77.08 percent did not use cash is collected earlier from debtors, as it is
debt to equity, which indicates lack of understand- paid to suppliers in order to finance the liquidity
ing of the emphasis on cash flow, mainly to max- status and improve the cash flow.
imize the return on investment (Kaplan and Financial measures identified as critical suc-
Norton 1996: 57-63; Niven 2002: 15-17) (Table 11). cess factors in SCM of these SMEs include debt-
ors’ collection period, net margin, gross margin
Critical Financial Performance Measures and creditors’ payment period. The above re-
sults indicate that SMEs value the traditional
A net margin is a result of income less ex- financial measures (Kaplan and Norton 1996: 57-
penses of the business. It is through the state- 63), while it is vital to create a balance between
ment of financial performance that the profit or these measures by taking into account those
loss is determined in the business. Despite 71.4 that promote cash flow, thus maximizing return
percent respondents regarding this measure as on investment (Bhagwhat and Sharma 2007: 55;
significant towards success of the business, it Kaplan and Norton 1996: 57-63). Most of these
is still a concern that 28.6 percent did not con- businesses collect debts from customers within
sider this measure as crucial when measuring 30 days, while maintaining a good reputation
their profits or losses (Table 12). with their suppliers. This information was ob-
Table 10: Do you make use of financial ratios to analyse data from financial statements?

Frequency Percent Valid percent Cumulative %

Valid Yes 19 63.3 63.3 63.3

No 11 36.7 36.7 100.0
Total 30 100.0 100.0
Source: Fieldwork
156 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

Table 11: Which financial ratios do you make use of?

Debt Ratio

Frequency Percent Valid percent Cumulative %

Valid Yes 9 30.0 30.0 30.0

No 21 70.0 70.0 100.0
Total 30 100.0 100.0
Debt to Equity
Frequency Percent Valid percent Cumulative %

Valid Yes 11 36.7 37.9 37.9

No 18 60.0 62.1 100.0
Total 29 96.7 100.0
Missing System 1 3.3
Total 30 100.0
Return to Shareholders (RTS)
Frequency Percent Valid percent Cumulative %

Valid Yes 9 30.0 30.0 30.0

No 21 70.0 70.0 100.0
Total 30 100.0 100.0
Dividend Yield (DY)
Frequency Percent Valid percent Cumulative %

Valid Yes 4 13.3 13.3 13.3

No 26 86.7 86.7 100.0
Total 30 100.0 100.0
Earnings Yield (EY)
Frequency Percent Valid percent Cumulative %

Valid Yes 8 26.7 26.7 26.7

No 22 73.3 73.3 100.0
Total 30 100.0 100.0
Price Earnings Ratio(P/E)
Frequency Percent Valid percent Cumulative %

Valid Yes 7 23.3 23.3 23.3

No 23 76.7 76.7 100.0
Total 30 100.0 100.0

Source: Fieldwork
Table 12: Critical financial measures identified by SMEs in their businesses

Count Column Column Column

N% responses % response %
(Base: Count)

Net margin 20 71.4 19.23 71.4

Gross margin 16 57.1 15.38 57.1
Return on assets (ROA) 5 17.9 4.81 17.9
Return on equity (ROE 1 3.6 0.96 3.6
Current ratio 1 3.6 0.96 3.6
Quick/acid test ratio 0 0.0 0.00 0.0
Debtors collection period 25 89.3 24.04 89.3
Creditors payment period 14 50.0 13.46 50.0
Days inventory on hand 10 35.7 9.62 35.7
Fixed assets turnover 1 3.6 0.96 3.6
Inventory turnover 11 39.3 10.58 39.3
Source: Fieldwork
FINANCIAL MEASURES IN THE 21 ST CENTURY 157

tained during the data collection period and is in tomers are pleased with the quality, speed of
line with Farris 11 and Hutchison (2002: 294- delivery and economical cost of products sold.
295) and Azevedo (2013: 215), who posit that Again, innovativeness may feed into more re-
the C2C cycle might be improved by shortening turn on investments, leading to competiveness
collection from accounts receivable while de- of a firm and thus fulfilling the RBV.
laying payment to creditors.
A total of one hundred percent participants Customer Collection
indicated that the quick or acid test ratio is not a
critical financial measure. Quick ratio eliminates The debtors’ collection period refers to the
inventory from total current assets to determine time it takes for debts to be collected from cus-
the cash flow available to finance short-term tomers. It is advisable that a business should
debts, while being described as a real test of have a shorter collection period and a longer
liquidity (Flynn et al. 2005: 29). If SMEs do not payment period to its creditors to finance the
make use of these measure it may be difficult for cash flow of the business. A total of 77.8 percent
them to determine the number of times their cur- (51.9%= agree and 25.9%= strongly agree) of
rent assets (cash) may be able to cover short- the respondents agreed that their debts were
term liabilities (Lodewyckx et al. 2007: 468). Apart collected on time from customers while 22.2 per-
from the return on equity (ROE), current ratio cent (18.5%= disagree and 3.7%= strongly dis-
and fixed assets turnover were the least critical agree) of the respondents disagreed (Table 13).
financial measures (3.6%) of the response rate, Table 14 represents conversion of assets into
which compromises the RBV on the ground that cash. Just over fifty percent of the respondents
certain assets and capabilities of a firm may be (34.5%= agree and 17.2%= strongly agree) state
utilized and/or lay the premise for competitive that their inventory took longer to convert into
advantage (Barney 1991: 99). ROE is a crucial cash, while below average (37.9%= disagree and
measure in SCM and does not only play a vital 10.3%= strongly disagree) considered speedy
role in financial measures but also impacts the conversion.
non-financial measures, such as internal efficien-
cy and customer measures as a result of sales Business Assets and Balance Sheet
realized (Bhagwat and Sharma 2007: 50; Gu-
nasekaran et al. 2004: 339). Sales made inform Some of the respondents did not include all
whether the product has a good market and more their assets in the balance sheet, which reveals
revenues are likely to flow into the entity if cus- incomplete information on financial position of

Table 13: Debts are collected on time from customers

Frequency Percent Valid percent Cumulative %

Valid Strongly disagree 1 3.3 3.7 3.7

Disagree 5 16.7 18.5 22.2
Agree 14 46.7 51.9 74.1
Strongly agree 7 23.3 25.9 100.0
Total 27 90.0 100.0
Missing System 3 10.0
Total 30 100.0
Source: Fieldwork

Table 14: Inventory takes longer to be converted into cash/sold

Frequency Percent Valid percent Cumulative %

Valid Strongly disagree 3 10.0 10.3 10.3

Disagree 11 36.7 37.9 48.3
Agree 10 33.3 34.5 82.8
Strongly agree 5 16.7 17.2 100.0
Total 29 96.7 100.0
Missing System 1 3.3
Total 30 100.0
Source: Fieldwork
158 MAMORENA LUCIA MATSOSO AND OLUMIDE HENRIE BENEDICT

Table 15: All assets of the business are included in the balance sheet

Frequency Percent Valid percent Cumulative %

Valid Disagree 3 10.0 11.1 11.1

Agree 17 56.7 63.0 74.1
Strongly Agree 7 23.3 25.9 100.0
Total 27 90.0 100.0
Missing System 3 10.0
Total 30 100.0
Source: Fieldwork

the business and also fails the neutral charac- profits or losses in their operations. Interesting-
teristic of financial statements for a response of ly, none of the respondents regarded the acid
88.9 percent (63%= agree and 25.9%= strongly test ratio as a significant financial measure in
agree) agreed that all their assets will included their businesses.
in the balance sheet. In contrast, 11.1 percent
disagree that all their assets were included in RECOMMENDATIONS
the balance sheet (Table 15).
It is imperative for SMEs to indulge in train-
CONCLUSION ing and development for their employees in all
facets of management practices. Formal systems
The aim of the paper was to determine the should be put in place to ensure proper monitor-
extent to which SMEs recognize and measure ing and effectiveness of business processes in
their financial performance in their supply chain. organizations.
Generally, majority of the respondents did make
use of financial measures to a certain extent. The SUGGESTION FOR FURTHER STUDIES
most measured metric was debtors’ collection
period, followed by gross margin. However, An avenue for further studies from this re-
some SMEs did not perceive the significance of search maybe a rigorous interrogation utilizing
inventory days on hand and inventory turnover. sophisticated data analysis method perhaps to
The inventory days on hand provides a clear produce inferential statistics. A larger scope
picture of the movement of inventory and how maybe used to enable generalization of the re-
long it takes for the inventory to convert into sults obtained in this study.
cash as well as turnover, which indicates the
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