Financial Analysis Tools for SMEs

Financial Analysis Tools for SMEsCHAPTER FIVEDISCUSSIONS, RECOMMENDATIONS AND finaleSINTRODUCTIONThe SME sector development is seen as a key strategy for economic growth, barter extension and poverty reduction (Agupusi, 20072). This exact endeavored to explore and describe the monetary performance measures currently used by manufacturing SMEs in Mauritius. It was undertaken due to the fact that many studies were conducted on obstacles faced by SMEs in obtaining finance, nevertheless it appe argond that not enough were undertaken on how these SMEs manage their finances whereas some studies shew that small logical argumentes fail because more a great deal than not cash flow is not properly managed (Mbonyane, 200618). In this context the Z-score model is presented as a useful bankruptcy model for SME.This chapter concludes the research promise by summarizing the previous chapters and highlighting the results of the experimental study in Chapter quartette with respect to the objectives of the research. It similarly includes comments on the contribution and limitation of the study as well(p) as recommendations and suggestions for future research.SUMMARY AND OVERVIEW OF THE RESEARCHChapter One presented the background of the study, followed by problem statement, rationale and objectives of the research, a preliminary lit review, research methodology and layout of the Chapters.Chapter cardinal presented a literature review regarding SMEs and their role in the Mauritian Economy. It was shown that the development of a sound SME sector is a key factor in job creation and economic growth for Mauritius. Many obstacles were pointed out as causes of SME failure, including monetary performance skills, which were the focus of this study. Moreover, an international comparative analysis was presented. A brief intervention of non-fiscal measures was given as well, followed by financial performance measures that included financial ratios and bankruptcy omen mode ls.Chapter Three presented the research plan including sampling, data collection, and data analysis.Chapter Four presented the results of the empirical research findings on financial performance measures currently used by manufacturing SMEs in Mauritius. Thematic content analysis was used in presenting the results, victorious the themes in the literature of the topic as basis for comparison.Chapter Five is the final phase of the study and aims at using the information from the literature study and the empirical findings to provide solutions to manufacturing SMEs financial performance amount according to the findings and through recommendations.DISCUSSIONS OF FINDINGSFINANCIAL PERFORMANCE MEASUREMENTThe first objective of the study was to identify financial tools currently used by manufacturing SMEs in measure their financial performance.This objective of the study was achieved during the field study with semi-structured interviews at SME premises that helped gather information on the financial performance measures used by each. The findings revealed the following ratios as the most widely used by respondentsCash flow to meat debt (used by six respondents)Current ratio (used by six respondents)Working capital to total assets (used by five respondents)Cash flow to average total current liabilities (used by five respondents)Gross profit margin ratio (used by four respondents) andInventory turnover (used by four participants).Gross Profit RatioThe direct of satisfaction was measured using a likert scale. The conversion of the 5- point Likert- type scale for the satisfaction with current financial performance scale to illustrate the total score was as follows (not satisfied at all = 1 (1), not satisfied = 2 (2), somewhat satisfied = 3 (3), satisfied = 4 (4), truly satisfied = 5 (5)). The higher the mean score indicates a higher level of satisfaction. Upon computing the mean for this scale,, it was found that the mean was 2.4000, this implies that there is a c arnal knowledge low level of satisfaction prevails with the owners of the SMEs concerning their current financial performance.It can be seen that all of the participants felt that measuring financial performance is important. However, despite the fact that measuring financial performance is important, none of the SMEs used a finance officer or an external consultant to evaluate their financial performance.It can be notice that financial ratios (100%) is the only used tool by the SMEs sampled as compargond to tools such as scarboards (0%), the Bankruptcy Prediction Model (0%) and other models(0%).Based on the results of the analysis, it was found that even though the owners of the SME used financial ratios, only 39 percent of them found the ratios to be useful in helping to improve their financial performance. loser PREDICTION MODELThe use of bankruptcy prediction models (another financial tool in the literature) was totally absent among the respondents. In fact, almost all the par ticipant SMEs knew nada or very little about bankruptcy prediction models. The confine use of ratios and non use of bankruptcy prediction models raises the issue of objective number two which is to recommend necessary improvements on financial performance measurement of SMEs which will be part of the recommendations. Also, the lack of knowledge of bankruptcy prediction models by interviewees at different SMEs may necessitate relevant reproduction for the financial officers of SMEs that is the issue of objective number three of the study, which will be part of the recommendations branch as well.The last objective of the study was to recommend necessary improvements on financial performance measures used by manufacturing SMEs.The study found that most manufacturing SMEs used financial ratios to measure their financial performance, but to a very limited extent. Very a couple of(prenominal) ratios were used by individual SMEs and most of the ratios used were not the take up indic ators mentioned in the literature. Though, some of the interviewees acknowledged that they need to use more ratios. This objective will be part of the recommendation section below.Another objective of the study was to recommend necessary training interventions that would be needed for manufacturing SMEs successful financial performance measurement.The research findings indicated that none of the respondents used any of the purchasable bankruptcy prediction models whereas it was proven in the literature that the models could be used successfully by SMEs as well as big businesses. SMEs could use the models not necessarily for predicting failure, but as a tool to constantly assess how they are doing financially so as to take necessary measures anytime they feel threatened. It was found that most of the respondents knew cipher or very little about the models, and it seemed quite obvious that relevant training is needed.LIMITATIONS OF THE STUDYThese results can only be seen as a flair and further studies need to be conducted for any attempt at generalization.For this study for example, either emails were not responded to at all, or potential participants kept postponing, suggesting that the researcher mobilize the following week. In the end, respondents had to be approached at their business premises and requested to participate. It is costly if it is taken into account that many SMEs would decline to participate, but works improve as procedure and should be considered in future studies.Also, it was noticed that more small businesses (70%) participated in the study because most medium business that were approached declined the invitation. Therefore, for a bigger study that would seek to generalize the results, researchers should endeavor to have a more balanced number between small and medium businesses that participate.There was very limited literature on the topic of financial performance of SMEs as well. This resulted on the study having to be built on theo ry.RECOMMENDATIONSIt is recommended that SMEs use more ratios, especially those in the literature study (Chapter Two) as improvement of their financial performance measures. SMEs should probably consider the use of the six most used ratios as summarized in section 5.3 above, since they seem to be working well not only for the majority of participants, but for businesses in general.It is also recommended that SMEs owners/ managers request and enroll their financial staff for training on bankruptcy prediction models at relevant institutions such as universities. The few models presented in this study may be used by SMEs as well, since they are simple and cheap, and should not pose problems to trained financial staff.Another recommendation would be for those SMEs that can afford it, to try the use of specialized parcel (e.g. PASTEL or PRO ACC5), which were indicated as effective by the few participants who use them. The SMEs would be able to use ratios that are computed from the softw are.The Z Score is also a critical business tool managers utilize to make informed business decisions to improve the financial health of the business. The Z Score helps managers assess the factors impart to poor financial health. Z Score factors that contribute to under-performance working capital, earnings retention, profitability and leverage can be isolated. This enables managers to initiate actions to improve the score of these factors bestow to financial distress. Targeting actions to specific under-performing stress factors allows managers to make capital allocation decisions that mitigate principal risk factors and produce optimal returns.Focus areas for managers to improve Z Score are transactions that effect earnings/ (losses), capital expenditures, equity and debt transactions.The Z Score provides a quantitative measurement into a companys financial health. The Z Score highlights factors contributing to a companys financial health and uncovers emerging trends that indica te improvements or deterioration in financial condition.The Z Score is a critical tool business managers use to assess financial health. It helps managers align business strategies with capital allocation decisions and provide transparency of financial condition to lenders and equity capital providers. Business managers use the Z Score to raise capital and secure creed. The Z Score is an effective tool to turn up credit worthiness to bankers and soundness of business model to investors.The Z Score is based on actual financial information derived from the operating performance of the business enterprise. It avoids biases of subjective assessments, conflicts of interest, brand and large company bias. The Z Score employs no theoretical assumptions or market inputs external to the companys financial statements. This provides users of the Z Score with a consistent view and understanding of a companys true financial health.SMEs should have proper financial planning. They should undertak e some(prenominal) financing and investment program according to financial planning.SMEs should keep all records of financial transactions in a system way. This will provide correct accounting and financial information for making both routine and non-routine managerial decisions by the management of SMEs. This will also enable lending agencies to conduct credit risk analysis and rating agency to carry out the rating job for the SMEs.SMEs should introduce internal audit to restore effective financial control in the SMEs.SMEs need to have an effective management system as well as skilled manpower. This is expected to exert a positive enamour in efficiency as well as productivity of SMEs. Good culture in the firm develops leadership in the organization who can be able to trace the financial distress early and thereby prevent SMEs from the exposition to financial and operating risk.SUGGESTIONS FOR FUTURE RESEARCHFurther research could be conducted on a wider scale in an attempt to ge neralize the findings to manufacturing SMEs in Mauritius and in different regions of Mauritius.Further research could also be done to mould whether the findings of the study are consistent across different sectors.Financial performance measurement of larger enterprises could be another subject of study as well.CONCLUSIONIt is fair to say that, contrary to what one may think, many manufacturing SMEs (with respect to the number of studied SMEs) in Mauritius, use financial ratios (one of the financial tools in the literature study) to measure their financial performance. Though, this use of ratios by the studied SMEs is limited, because only a few ratios are being used by the respondents. Yet again, out of the ratios used, few are among those in the literature that were found to be the best financial measures or good financial distress predictors. None of the respondents used any of the available bankruptcy prediction models. In fact, most of the respondents knew nothing or very littl e about the models. Some of the participants have opted for the use of computer software and are getting satisfying results from them. Although most of the respondents have performed fairly well so far, to improve their financial performance, SMEs should use more of the recognized ratios identified in this study. cardinal ratios were identified to be widely used by the various SMEs interviewed, and because most of the respondents indicated that their financial performance has been satisfying (even though some said there is a need to improve), these ratios should be taken into consideration. SMEs need also to train their financial staff on other financial tools such bankruptcy prediction models that are quite easy to use. It was also pointed out in the literaturereview that ratio analysis and bankruptcy prediction models (since they consist of a group of ratios with variables of different weights) have their shortcomings as well. Therefore they should only be used as an indication.T his study will contribute toward filling the gap in the literature of SME financial performance measurement and if taken seriously by SMEs, will help them in effective financial performance measurement by drawing attention to the various tools that are available to them for that purpose and the necessity of training financial staff on various measures as well.