Copyright © eContent Management Pty Ltd. Small Enterprise Research (2014) 21: 2–13.

Research review: A review of the latest research

in the field of small business and
entrepreneurship

Financial management in SMEs

TIM M AZZAROL
UWA Business School, University of Western Australia, WA, Australia

ABSTRACT
This is the first of a series of reviews for Small Enterprise Research that cover recently published
research in the field of small business management and entrepreneurship. The focus of this review is
on financial management in small to medium enterprises (SMEs), in particular working capital
and cash flow management. A total of 18 papers published in the past 12 months are reviewed
summarising their methodology, findings and implications for research, education, policy and prac-
tice. The papers are grouped into four categories. The first are those that provide an overall exami-
nation of the nature of SME financing. The second are those that focus on the relationship between
working capital management and profitability in SMEs. The third group encompass studies of how
owner-managers undertake the management of working capital, specifically in developing
economies. The fourth group examines the relationship between financial management and growth
within SMEs.

Keywords: financial management, working capital, cash flow, small business, SMEs

INTRODUCTION 18 papers relating to the financial management

F inancial management, in particular the man-

agement of cash flow and working capital is
one of the most important challenges facing small
to medium enterprises (SMEs). This was identi-
fied as long ago as the Bolton Committee Report
of the early 1970s that investigated the challenges
facing SMEs in the United Kingdom (Bolton
1971). Despite the passage of time the challenge
of management cash flow and working capital
continues to be a major concern of small firms.
What then is the academic literature reporting in
relation to this issue?
In this article, the first of a series of reviews
for Small Enterprise Research, the findings from
of SMEs are examined and discussed. Only
papers published within the past 12 months were
reviewed and these were identified using a search
of major online academic bibliographic databases
including Google Scholar, plus the extensive col-
lection of journals provided by the University of
Western Australia Library. In searching for arti-
cles published between January 2013 and July
2014 attention was given to works from peer
reviewed journals that addressed the financial
management of SMEs, specifically cash flow and
working capital management. Working capital
refers to the assets and liabilities necessary for the
daily operations of the business and typically

2 SMALL ENTERPRISE RESEARCH Volume 21, Issue 1, 2014

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includes accounts receivable (e.g. debtors and
pre-payments) stock or inventories, and accounts
payable (e.g. creditors and provisions). The
working capital cycle is the flow of cash and
other liquid assets that can move through the
business during its normal trading period; pro-
viding payments for creditors from the collection
of receivables from debtors. The cash conversion
cycle is the process of generating cash from
invoices issued to customers and using this to
pay for the firm’s operations. The efficiency with
which the business manages its working capital
and the speed of its cash conversion cycle are key
determinants of how profitable it is.
THE CHALLENGE OF FINANCIAL
MANAGEMENT IN SME S
The initial three papers reviewed here are by
Abdulsaleh and Worthington (2013), Jindri-
chovska (2013) and Zhong (2014). Each of these
papers provides a useful general overview of the
topic of financial management in SMEs.
The first paper by Abdulsaleh and Worthing-
ton (2013), published in the International Journal
of Business and Management, is a review of the lit-
erature into SME financing. The authors note
that the financial management of SMEs differs
significantly from large firms due not only to size,
but also the way in which small business owner-
managers make decisions. In developing their
literature review the authors examine the organi-
sational characteristics of SMEs (e.g. size, age,
ownership and legal form, location, plus industry
sector and assets structure) and the influences that
these have on financing. They then turn to the
characteristics of the owner-manager and how
gender, age and experience influence the financ-
ing and financial behaviour of SMEs. The paper
subsequently explores the key sources of financing
for SMEs (e.g. equity, venture capital, business
angels, debt such as banks and trade credit, plus
government assistance). Of particular interest in
this paper is its discussion of Islamic financing,
including ‘Musharakah’, a form of Islamic financ-
ing where two or more people collaborate to fund
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Research review: Financial management in SMEs
a business and share any profits or losses. Also dis-
cussed is ‘Murabahah’, where an Islamic bank
purchases goods, such as imports, and on-sells
them for a negotiated profit to the business owner
who pays the bank via instalments. Finally, the
review also examines ‘Mudarabah’, a further type
of Islamic financing involving a contract between
parties in which the profit is distributed via a pre-
agreed ratio, but any financial losses are borne by
the financier and any operating losses by the busi-
ness owner. The paper provides a useful overview
of small business financing with the coverage of
Islamic financing approaches of particular inter-
est. Where the paper is perhaps found wanting is
its lack of a detailed discussion to draw together
all the various threads it has encompassed to pro-
vide an analytical synthesis of the findings. Never-
theless the paper is a good starting point for
anyone seeking to understand the nature of
financing for SMEs and the academic literature
relating to this.
Jindrichovska’s (2013) paper from European
Research Studies sets out with the goal of review-
ing recent studies into the financial management
of SMEs. In particular she aims to examine the
cash flow and liquidity management, asset acqui-
sition and capital structure of such firms to bet-
ter understand the main causes of financial
management for owner-managers. The paper has
a literature review that encompasses work from
the 1980s to the present. It is fairly broad and
provides a good description of the work in each
of the main studies examined. She then moves
onto to examine working capital and liquidity
management including a discussion of a firm’s
cash conversion cycle. There is also a section on
the way in which the financial decision making
of small business owner-managers impacts on the
firm’s balance sheet, which is well explained with
diagrams. The paper concludes with a summary
table of what lessons have been learned from the
study including recommendations for the
‘Healthy Financial Management of SMEs’. This
is a useful and very pragmatic paper with clear
recommendations for practice. Key messages
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 Tim Mazzarol
include having appropriate accounting systems
in place, frequent reporting of cash flow and liq-
uidity along with other relevant key performance
indicators (KPI). Taking advice from profession-
als such as accountants and bankers, plus the use
of cash flow budgets and cost control procedures
are also recommendations to owner-managers.
The paper by Zhong (2014) from the Scottish
Journal of Arts, Social Sciences and Scientific Studies
uses a single case study that provides a focus for
discussion over the financial problems confronting
SMEs. The case is CGM, a company founded in
2009 that is involved in the R&D and commer-
cialisation of bio-medical technology. The case
study tracks the history of CGM through its life-
cycle and the different challenges it faces in raising
capital, managing money and cash flow. It high-
lights the importance of cash flow management to
the firm’s survival and points to the need for
CGM to enhance its corporate governance and
financial management control systems. As a tech-
nology-based start-up CGM offers many lessons
for how such firms require good budgetary control
and prudent financial management. The paper is a
clearly written although largely descriptive
account of the CGM case. However, the author
provides some well-considered lessons for future
management practice that make the case study of
potential value for those seeking to teach princi-
ples of good financial management, or those sim-
ply interested in learning these lessons.
WORKING CAPITAL MANAGEMENT AND
PROFITABILITY IN SME S
Four papers addressed research undertaken into
working capital and cash flow management
within SMEs and the influence this has on prof-
itability. These are by Yazdanfar and Ohman
(2014), Enqvist, Graham and Nikkinen (2014),
Tauringana and Afrifa (2013) and Gul, Khan,
Rehman, Kahn, Khan and Kahn (2013). They
focus on assessing the impact of the cash conver-
sion cycle and working capital management on
firm profitability using quantitative and qualita-
tive analysis.
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The first of these papers by Yazdanfar and
Ohman (2014) was published in the Interna-
tional Journal of Managerial Finance. It examines
panel data from 13,797 Swedish SMEs engaged
in four different industries. The study utilized
regression analysis and drew cross-sectional data
from the period 2008–2011. Of interest to the
researchers was the relationship between man-
agement of the cash conversion cycle and firm
profitability. The study found a significant rela-
tionship between profitability and the cash con-
version cycle, although this was influenced by
the firm’s size, age and industry. A key finding
from the study, albeit an unsurprising one, is that
managers of SMEs can enhance their firm’s prof-
itability by improving their management of
working capital. Because working capital is the
liquid assets found within the firm, the ability to
improve the speed at which cash is generated
from invoices will help enhance profitability.
Enqvist, Graham and Nikkinen (2014) pub-
lishing in Research in International Business and
Finance drew a sample of 1,136 ‘firm year’ obser-
vations from the Helsinki stock exchange cover-
ing the period 1990–2008. The firms’ return on
assets (ROA) was used as a proxy for profitability
along with gross operating income. Regression
analysis was used to examine the data and several
control variables were employed (e.g. firm size,
current ratio, debt ratio). Attention was given to
the economic booms and busts that had impacted
the Finnish economy during the 18 year period
spanned by the data. Twelve hypotheses were
tested. These related to the relationship between
profitability and several independent variables
(e.g. cash conversion cycle, accounts payables
deferral period, accounts receivables conversion
period, inventory conversion period) in general
and during economic cycles. Evidence was found
to support the view that there is a negative rela-
tionship between the cash conversion cycle and
profitability, suggesting that a firm can boost
their profitability by speeding up their cash cycle
and thereby improving their working capital effi-
ciency. A similar finding emerged for the speed of
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the inventory conversion cycle (e.g. stock turn).
Evidence was also found to suggest that the man-
agement of inventories was more important in
economic downturns than during booms.
According to the authors:
Overall the results indicate that investing in
working capital processes and incorporating
working capital efficiency into everyday rou-
tines is essential for corporate profitability. As
a result, firms should include working capital
management in their financial planning
processes. (Enqvist et al. 2014, p. 48)
The study also suggests that falling demand
during economic downturns impacts negatively
on a firm’s working capital and requires careful
cash flow and inventory management. For policy
makers seeking to assist SMEs in difficult eco-
nomic times, policies that can help speed up the
cash conversion cycle and enhance working capi-
tal will be beneficial.
Tauringana and Afrifa (2013), writing in the
Journal of Small Business and Enterprise Develop-
ment also investigated the importance of the
management of the working capital and cash
conversion cycle to the profitability of small
firms. This study sought to test four hypotheses
relating to the relationship between profitability
as the dependent variable, and the independent
variables of inventory holding period, accounts
receivable period, accounts payable period and
the cash conversion cycle. Control variables were
used that included ratios of current assets to
inventory, current assets to total assets, fixed
assets to total assets, leverage and size. A sample
of 133 firms from the United Kingdom was sur-
veyed and a regression analysis used to test the
hypotheses. The data covered a five year period
from 2005–2009. As with the other studies
described here, this study found a significant
relationship between profitability and the effi-
cient management of accounts receivable and
payable. Of more importance to profitability was
management of accounts payable so as to avoid
late payment costs or penalties, interest charges
Volume 21, Issue 1, 2014 SMALL ENTERPRISE RESEARCH
Research review: Financial management in SMEs
and loss of discount terms from suppliers. The
study also found that the management of
accounts receivable and payable was more impor-
tant to profitability than managing inventory or
the cash conversion cycle. For SMEs facing cash
flow constraints the study highlighted the need
to carefully manage accounts receivable and
payable to maximise profitability. However, con-
flicting findings over the relative importance of
accounts receivable and payable led the authors
to suggest that future research should examine
which of the two is more important.
The fourth paper by Gul et al. (2013) from
European Journal of Business and Management
examined a seven year study of the relationship
between working capital management and prof-
itability among SMEs in Pakistan. Like the paper
by Enqvist et al. (2014), the dependent variable
and proxy for firm profitability was ROA. The
independent variables were accounts receivable as
a percentage of sales, accounts payable as a per-
centage of purchases and inventory as a percent-
age of purchases. Regression analysis was used
with a sample of 55 SMEs data from the Karachi
stock exchange and other sources covering the
period 2006–2012. Control variables were firm
size, growth (e.g. annual % increase in sales), and
debt ratio. The results suggested that profitability
was significantly influenced by the speed with
which the firm collects its receivables, which is
consistent with earlier research. The ability of the
firm to speed up the rate of inventory turnover
was also positively associated with profitability.
In essence the paper suggests that firm profitabil-
ity will be improved if the owner-manager can
collect its customer payments faster, pay its credi-
tors more slowly and turn over its inventories
more quickly.
WORKING CAPITAL MANAGEMENT
PRACTICES BY OWNER -MANAGERS
The next eight papers are from Kubickova and
Soucek (2013), Orobia, Byabashija, Munene, Sei-
jaaka and Musinguzi (2013), Mungal and Garbhar-
ran (2014), Uwonda, Okello and Okello (2013),
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 Tim Mazzarol
Abanis, Sunday, Burani, and Eliabu (2013),
Amoko (2013), Stefanitis, Fafaliou and Hassid
(2013) and Van Auken and Carraher (2013). All
focused on the behaviour of SME owner-managers
in relation to working capital and cash flow man-
agement and drew their data from both economi-
cally developed and emerging economies.
Kuickova and Soucek (2013) writing in Euro-
pean Research Studies examined the management
of accounts receivable among SMEs in the Czech
Republic. Of particular interest to the authors was
how much attention Czech SMEs gave to this
aspect of business financing. The study used a
three-stage methodology commencing with case
studies of selected firms, then a survey and then
the data analysis. SMEs were defined as those with
fewer than 250 employees and annual turnover of
less than €50 million. Firms were asked to indi-
cate whether they monitored the status of their
accounts receivable, whether they checked cus-
tomers credit scores, offered discounts, applied
supply/credit limits, specified conditions of pay-
ment for some debtors, and/or used other tech-
niques as an incentive to collect payment on time.
The majority of firms reported monitoring
accounts receivable (93%), checking customer
credit ratings (68%) and imposing conditions on
some customers as a result (77%). Most (76%)
did not offer discounts while many (56%) did not
use supply/credit limits. Further, the majority
(65%) were not using any incentives to speed up
their debtor collection process. The majority
(93%) of firms reported monitoring accounts
receivable throughout their lifecycle (e.g. from
invoice to the receipt of payment). Most (76%)
sent reminders after a set period and almost as
many (72%) reported that they had experienced
having to collect debts. The study suggests that
most of the SMEs surveyed had reasonably good
debtor management systems, but that more could
be done to speed up collection times. The authors
suggest that more should be done via court and
legal systems to assist SMEs to collect unpaid
debts, and to outsource debt collection to special-
ist firms for a proportion of the amount recovered.
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Orobia et al. (2013) in Qualitative Research in
Accounting & Management, focused on the
actions of ten small business owner-managers
from Kampala, Uganda who were engaged in the
management of working capital. This was a qual-
itative study in which the firms selected were
employing between 5 and 49 people. These firms
were drawn from a range of industries including
manufacturers, restaurant and service firms and
agribusiness. The pattern that emerged from
these interviews was one of a largely informal
and intuitive approach to the management of
cash flow and accounts receivable. Informal rela-
tionships were forged with customers who had a
good track record and credit was often extended
to them. Most of these agreements were oral in
nature and did not involve formal record keep-
ing. Debt collection was done personally either
by phone or in person. Overall the findings sug-
gest that the majority of owner-managers used
only informal methods of planning in relation to
cash flow forecasting, and entered into oral con-
tracts with customers who were known to them.
Most financial record keeping was informal and
many kept such information in their memory.
For example, inventory or stock control was gen-
erally a process of keeping an eye on what was
held and ordering more when an item began to
run out. As these firms were generally very small,
it was possible for the owner-managers to keep
on top of their firm’s operations, and many did
not actively bank their money as they did not
generate sufficient cash to save. The authors con-
clude that the study suggests not all small busi-
ness owners need to keep formal records. They
recommend that policy makers avoid treating
SMEs, in particular micro-enterprises, as if they
are large firms.
Mungal and Garbharran (2014) publishing in
the Journal of Economics and Behavioral Studies
addressed the perceptions of small business
owner-managers engaged in the implementation
of cash flow management systems in South
Africa. The paper surveyed 69 small businesses of
which 60% had been operating for less than 5
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years. It examined the use of cash flow and other
financial management techniques. Although
around 65% of firms reported being profitable
over the previous three months and 45%
reported managing cash flow easily, they were
evenly divided over the keeping of formal finan-
cial records; with 45% not keeping such records
and 46% indicating that they did so. The major-
ity (78%) agreed that keeping cash flow manage-
ment records was important, 49% said they
knew what a cash budget was, and 57% sug-
gested that they knew how much money was
coming into the business. However, only 49%
felt that they knew exactly how much money was
spent in the business, 58% reported not having
time to manage cash flow, and only 30% actually
drew up cash budgets. Chi square tests were used
to examine the relationship between knowledge
of cash flow management and reported activities
in cash flow management. This found a statisti-
cally significant relationship between knowledge
of cash flow management and formal record
keeping, suggesting – not surprisingly – that a
relationship exists between the owner-manager’s
knowledge and their implementation of proper
cash management techniques. Further, the
owner-managers who reported the formal man-
agement of cash flow were more likely to report
enhanced profitability. The authors’ recommen-
dations from the study were to provide short
courses on cash flow management, and for
owner-managers to seek outside advice from
local small business support programs to help
them set up cash flow management systems.
Uwonda et al. (2013) writing in the Merit
Research Journal of Accounting, Auditing, Econom-
ics and Finance examined the management of
cash flow in SMEs in northern Uganda. The
sample drawn for the study comprised 120 firms
from the services sector, including motor garages
and petrol stations, health care, hotels and cater-
ing firms, schools, communications and bus
companies. The majority of firms (98%) had
fewer than 50 employees and most (87%) had
been in operation for less than 10 years. A ques-
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Research review: Financial management in SMEs
tionnaire was used to examine the firm’s formal
use of cash flow forecasting and budgeting, profit
management, preparation of financial accounts
records (e.g. profit and loss, balance sheet, cash
flow forecast), and use of financial ratios. The
study found that just over half (56%) of firms
reported preparing cash flow projections and
63% indicated that they prepared cash budgets.
However, only 52% reported preparing formal
financial accounts and only 49% indicated that
they used financial ratios. Despite the lack of for-
mality around 80% of firms reported systemati-
cally monitoring cash flow and 64% indicated
that they adopted systematic approaches to the
control of cash flows. Overall the study found
that 42% of firms did not formally forecast
future cash flows and 20% did not monitor cash
flow. Other findings suggest that many firms
were not employing good practices in relation to
the management of cash flow or credit. The
authors note that many firms were unincorpo-
rated entities operating as sole traders or partner-
ships. Many owner-managers lacked the
knowledge and skills to undertake the necessary
accounting and financial practices. The paper
concludes with a list of recommendations for
SME owner-managers, government policy mak-
ers and future researchers. For the owner-man-
agers there is the recommendation to seek
outside expert advice to implement formal finan-
cial management systems and take control over
cash flow, inventory control and budgeting. For
government agencies the suggestion is to provide
more support to SMEs while also reducing taxa-
tion, enhancing infrastructure, and increasing
small business access to bank financing. The
paper concludes with a call for more research
into financial management, corporate gover-
nance, budgetary and operational controls and
SME performance.
Abanis et al. (2013) in the Research Journal of
Finance and Accounting examined the financial
management practices of SMEs in western
Uganda. Drawing on a sample of 335 firms their
study investigated working capital and cash man-
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 Tim Mazzarol
agement practices using a survey of owner-
mangers. This found that cash flow management
practice amongst these firms was very low and
that most owner-managers reported cash flow
problems. However, very few owner-managers
sought to take action to alleviate this and there-
fore placed their business at risk. Cash budgeting
was not common and cash flow management was
undertaken in a largely ad hoc way. Few firms
were regularly reviewing their cash flow against
budget and current operations. It was viewed as
the reason so many firms were reporting cash
flow shortages. Most firms had no clear credit
policies and did not screen customers for credit
risk. There were high levels of bad and doubtful
debts reported by the firms surveyed. Debtor col-
lection processes were also low and few firms had
well established inventory management systems.
Few firms used debt financing as they were often
unable to secure credit. The owner-managers
were responsible for financial record keeping and
reporting. However, most firms used only infor-
mal record keeping systems and few used profes-
sional accountants or computers and associated
accounting systems. The authors concluded with
the recommendations that the Ugandan govern-
ment needs to support enhanced financial man-
agement training for SME owner-managers and
strengthen laws relating to the collection of
debtors. It was also recommended that steps be
taken to help SMEs gain access to bank financing
and to encourage owner-managers to keep better
financial records and make use of financial
reports for the management of their businesses.
The paper by Amoako (2013) in the Interna-
tional Journal of Business and Management
describes a survey of 210 SME owner-managers
from Kumasi, Ghana. A major focus for this
study was to examine the accounting practices of
these owners. The sample comprised 60% male
and 40% female business owners with a broad
cross-section of ages. About 45% had post-sec-
ondary education levels and 74% reported their
level of accounting skills to be below average. The
owner-managers were engaged in a variety of
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industries, although the majority (60.5%) were
involved in retailing. Most (65%) reported not
maintaining formal accounting records, although
80% reported keeping some records. For the
business owners who kept accounting records the
most important reason was to track accounts
receivable and payable, followed by the desire to
monitor the performance of their business. The
most important reasons given as to why they did
not keep formal accounting records were that
they had no reason to do so, a fear that it might
disclose their financial status to others, and that it
would risk them having to pay more tax. It was
also viewed as time consuming, expensive and
required them to possess technical knowledge.
When asked how they might improve their
accounting practices these respondents suggested
that training programs would help. They also felt
that more should be done to motivate owner-
managers to keep records, and that free account-
ancy services should be offered. The author
recommended that better information be sup-
plied to SMEs on how to keep financial records
with templates for owner-managers to use in their
business. It was proposed that government regula-
tions require all firms to keep financial records in
Ghana, but that any reporting follow clear stan-
dards that would be simple to apply. There was
also a call for the creation of a regulatory agency
to monitor this.
Stefanitsis, Fafaliou and Hassid (2013) writing
in the International Journal of Economics and
Business Research examined the financial knowl-
edge and behaviour of SMEs in Greece. They
drew a sample of 352 firms whom they surveyed
online. The firms were drawn from across the
country with 74% of respondents being men and
26% women who ranged in age from 18 to over
70 years. All firms employed fewer than 250 peo-
ple with 72% employing less than 10. Owner-
managers were surveyed about their use of
professional advisors and sources of information
in relation to financial management. The most
common source of professional advice was from
accountants, although 24% reported seeking
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advice from bank managers, while 29% sought
advice from family, friends and colleagues. Just
over half (51%) reported using newspapers as a
source of information. However, the majority
(75%) reported using the internet for informa-
tion on financial management. The financial
knowledge of the owner-managers and their
financial behaviour in relation to the operation
of their firms was examined using correlation
analysis. This found no statistically significant
relationship between these two variables. How-
ever, weak relationships were found between
investment knowledge and investment behav-
iour, and general financial knowledge and loan
financial behaviour. Further, owner-mangers
with larger firms or higher levels of education
were found to have more financial knowledge
and associated financial management behaviour.
Van Auken and Carraher (2013) in the Journal
of Innovation Management examined the relation-
ship between the frequency with which financial
statements are prepared by SMEs, whether such
financial reports are used to make decisions, and
the confidence that owner-managers have in such
statements. The study drew on a survey of 312
SME owner-managers from the United States.
Regression analysis was used to test two hypotheses.
The first was that there is a direct association
between the frequency of financial statement prepa-
ration and whether such statements are used in
decision making by owner-managers. The second
was that the frequency of financial statement prepa-
ration is inversely associated with the owner’s belief
in the reliability of these statements. The dependent
variable used in the analysis was the frequency of
financial statement preparation (e.g. never,
monthly, quarterly, annually), while independent
variables were the owner-managers’ use of the
financial statements to make decisions and their
perception of the reliability of these statements.
Control variables were gender and size of the com-
munity in which the firm operated. Of the owner-
managers surveyed, 65.4% were male and most
(80%) operated in retailing or services industries.
These firms were also very small with 61% having
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Research review: Financial management in SMEs
annual turnover of less than $100,000. The analysis
found support for both the hypotheses suggesting
that firms that produce financial statements more
frequently are more likely to use them in decision
making, and that frequency of financial statement
generation is related to the owner-manager’s confi-
dence in their reliability. The study also found that
women owner-managers were likely to generate
financial statements more frequently than their
male counterparts. It also found that firms located
in larger communities (e.g. bigger towns) were
more likely to generate financial statements than
those in smaller ones. According to the authors the
study’s findings highlight the importance of fre-
quent generation of financial reports to help small
business owner-managers in their decision making.
The quality of the financial statements and how
owner-mangers understand the data they receive
from them is important. Where the owner-manager
has a better understanding of how to read and use
financial statements the more likely they will have
them produced and used in decision making. The
need for training courses to help owner-managers
read and understand financial statements was rec-
ommended. Future research was called for that
undertook longitudinal analysis of how small busi-
nesses use financial statements during business
cycles. This research might also focus on influences
of region, type of business and owner ethnicity.
FINANCIALMANAGEMENT AND
GROWTH IN SME S
The final three papers are by Solomon, Bryant,
May and Perry (2013), Belghitar and Khan (2013)
and Nunes, Gonclaves and Serrasqueiro (2013).
These explore the relationship between financial
management within SMEs and their growth.
Solomon et al. (2013) publishing in Technova-
tion examined the relationship between the level of
technical and managerial support received by
SMEs in the United States, and these firms’ sur-
vival and growth. Data was collected from surveys
of SMEs that had received face-to-face counselling
from small business support agencies over the
period 2008 to 2011. The study examined four
9
 Tim Mazzarol
hypotheses. The first two related to there being a
positive relationship between the amount of coun-
selling time received and the probability of business
survival, and the financial performance of the firm.
The second two related to there being a relation-
ship between the size of the firm’s revenue and its
financial performance, and the interactional effect
of firm size and counselling hours on financial out-
comes. A large sample of 30,746 firms across 16
different industry sectors was collected by following
up small business owners who had received coun-
selling. A two-stage analysis was undertaken; the
first examined the firms’ survival following the
counselling sessions, while the second examined
the firms’ financial performance. Multiple regres-
sion analysis was used to test the hypotheses. The
results found support for the notion that a positive
relationship exists between the amount of time a
business owner receives counselling and the proba-
bility for their firm’s survival. However, no support
could be found to demonstrate a relationship
between the time spent in counselling and the
financial performance of the firm. In fact a negative
relationship was found. Larger firms were found to
gain more benefits from counselling than smaller
ones in relation to market share, sales, cash flow
and profit margins. The authors suggested their
study indicates that the type of counselling rather
than the amount of counselling is important, par-
ticularly in relation to financial outcomes. This
may be of greater importance for firms of different
sizes. They recommended that government SME
support agencies be customised to meet the needs
of each individual firm. Further, they also suggested
that identifying which firms have the best potential
for survival and growth, and then how to best allo-
cate specific types of assistance was considered a
worthwhile area for future research.
Belghitar and Khan (2013), writing in Small
Business Economics investigated the relationship
between the amount of cash held by SMEs and
the firm’s governance and investment structure.
The study examined 12 hypotheses relating to the
relationships between the amount of cash held by
the firm and its: size, debt leverage, non-cash liq-
10 SMALL ENTERPRISE RESEARCH Volume 21, Issue 1, 2014
© eContent Management Pty Ltd
uid assets, cash flow volatility, dividend policy,
board size, non-executive representation, owner-
ship structure, corporate governance and invest-
ment policy. A sample of 368 SMEs was selected
from a database of stock exchange listed firms
within the United Kingdom. All firms had fewer
than 250 employees and annual turnover of below
£22.8 million. Multiple regression analysis was
used to test the hypotheses. The analysis found
that SMEs with high cash flow volatility and
shareholders who are institutional investors tend to
hold more cash. By contrast those firms that have
higher debt leverage, pay dividends and have
shareholders who are not actively engaged in the
business tend to hold less cash. For firms with high
growth investment opportunities, the study found
that cash holdings were influenced by ownership
structure. In the case of firms with low growth
investment opportunities, the most important
influence on cash holding was debt leverage. The
authors conclude that these findings highlight the
important role that ownership structure plays
within the governance of listed SMEs and the
determination of whether cash is held for future
investment, the retirement of debt, or the distribu-
tion of dividends. However, they note that firms
listed within the UK will be bound by regulatory
codes on directors and that this will influence their
approach to corporate governance and financial
management. The authors suggest that further
research is needed to investigate private companies
and family owned firms. Why SMEs retain large
amounts of cash and its influence on firm per-
formance remains a frontier for future study.
The final paper by Nunes et al. (2013) was
published in Small Business Economics. This study
examined the factors influencing the growth of
SMEs. Eight hypotheses were explored, which
relate to the relationships between firm growth
and age, size, R&D intensity (proportion of rev-
enue invested in R&D), labour productivity,
internal financing and debt. Data was drawn
from the SABI database of Portuguese firms with
companies selected on the basis of their having
fewer than 250 employees, annual turnover
© eContent Management Pty Ltd
below €50 million, and less than €43 million in
assets. The sample comprised 495 ‘young’ and
1,350 ‘old’ firms with data for the period 1999-
2006. Age was determined by a trading history
of plus or minus 10 years at the end of the analy-
sis period. Sub-samples of firms with high-tech
characteristics were also drawn. Probit regression
analysis was used to test the hypotheses. The
dependent variable was growth in sales, while the
independent variables were firm: age, size, labour
productivity, R&D intensity, cash flow (as a
measure of internal financing), debt (as a meas-
ure of external financing), and debt interest. The
study found that the survival of young SMEs was
determined by growth, age, size, labour produc-
tivity, cash flow and debt leverage, while debt
interest burden is likely to impact negatively on
firm survival. For older firms, survival seems to
be influenced by firm age, R&D intensity, labour
productivity and debt leverage. Firm growth
amongst young SMEs was found to be positively
associated with R&D intensity, cash flow and
debt leverage. For older firms the main factors
influencing growth were R&D intensity, labour
productivity and cash flow. All hypotheses were
supported. The authors concluded that firm age
is a relevant factor in determining firm growth
and that greater age and size contribute to slower
growth. In terms of cash flow and debt, the study
suggests that these factors are more important for
the growth of younger firms and they have more
importance for the survival of such firms. The
paper recommended that policy makers direct
financial assistance to younger SMEs to help
them address short term financing needs during
rapid growth. Such firms also experience prob-
lems in raising debt, but may lack sufficient cash
flow to generate the necessary working capital
required for growth. For high-tech SMEs the
authors suggest government provide ‘advanta-
geous lines of credit’ and special tax concessions
for R&D expenditure. Assistance to older SMEs
should take the form of labour force skills devel-
opment to enhance worker productivity. Further
research is recommended in the form of studies
Volume 21, Issue 1, 2014 SMALL ENTERPRISE RESEARCH
Research review: Financial management in SMEs
focusing on the owner-managers and the influ-
ence of internal and external R&D activities.
DISCUSSION
This review of 18 of the most recently published
research papers in the field of small business
financing provides some important insights. The
first three papers provide a useful overview of the
academic literature relating to SME financing.
Abdulsaleh and Worthington’s (2013) review of
the literature is particularly interesting due to the
focus is has on Islamic financing. Jindrichovska
(2013) and Zhong (2014) offer papers that are of
value to anyone seeking to get a more applied
focus on the process of cash flow and working
capital management. The first has some worth-
while accounting concepts and examples that
might be used in teaching programs. The second
is a potentially valuable teaching case for those
studying the financial management requirements
for high-tech SMEs.
The papers by Yazdanfar and Ohman (2014),
Enqvist et al. (2014), Tauringana and Afrifa
(2013) and Gul et al. (2013) provide evidence of
the importance to SME profitability of good
cash flow and working capital management.
Although drawn from a range of different coun-
tries the pattern of findings that emerges from
these studies highlights the need for all SMEs to
focus on better control over the collection of
accounts receivable and the ability to speed up
the cash conversion cycle. In addition, SMEs
need to monitor their working capital require-
ments and to efficiently manage inventory by
using measures of stock turn, creditor strain (i.e.
time taken to pay creditors beyond normal lim-
its), plus debtor and creditor days (e.g. time
taken to collect from debtors and pay creditors).
They highlight the importance of good financial
management and the critical role played by
working capital within a small business.
The eight papers that addressed the working
capital practices of SME owner-managers encom-
pass a range of countries (e.g. Czech Republic,
Uganda, South Africa, Ghana, Greece and the
11
 Tim Mazzarol
United States). Despite the many differences
found in those countries the general pattern that
emerges from these studies is that most SMEs
have largely informal approaches to working capi-
tal and cash flow management. It is clear that
firms in developing economies are more likely to
employ informal approaches to financial manage-
ment. This is due to the relative paucity of regula-
tions that govern businesses in these countries.
Many firms in developing economies operate out-
side the mainstream regulated economy and don’t
need to maintain the same type of financial record
keeping that their more formal counterparts do.
The main reasons small business owners maintain
financial records are for tax compliance. In many
developing economies micro-firms that operate
within the informal economy are less likely to
comply with tax regulations (World Bank, 2013).
However, many firms – regardless of their level
of systems formality – experience problems in col-
lecting accounts receivable. Cash flow manage-
ment including forecasting and budgeting is
important to the financial health of SMEs, and
firms that can improve their cash conversion cycle
and the efficiency of their working capital cycle
will experience more profitability. The growth of a
small firm is related to its profitability and ability
to manage its working capital requirements. As
Van Auken and Carraher (2013) show, there is a
relationship between enhanced knowledge by
owner-managers about financial reporting and
their willingness to generate such reports and use
it for decision making. Information and education
is a key to helping small business owner-managers
avoid financial crises through the implementation
of good management practice, and this seems to
be a problem in many developing economies.
The final three papers suggest that good
financial management is important for SMEs
seeking growth, which is consistent with prior
research (Brinckmann, Salomo and Gemuenden,
2011). For example, Nunes et al. (2013) point to
the key role played by cash flow and debt leverage
in the survival and growth of young companies.
Solomon et al. (2013) suggest that counselling for
12 SMALL ENTERPRISE RESEARCH Volume 21, Issue 1, 2014
© eContent Management Pty Ltd
SMEs should be focused on targeted areas such as
financial management if the financial performance
of the business is to be enhanced. While Belghitar
and Khan (2013) show that prudent management
within SMEs facing cash flow volatility will seek
to build up cash reserves, as will firms seeking to
invest in future growth opportunities.
CONCLUSION
The importance of effective financial management
for SMEs, specifically in the areas of cash flow and
working capital, cannot be underestimated. Many
young firms suffer from a lack of working capital
and poor cash flow during their start-up phase,
and growing firms have a high demand for work-
ing capital. The study of financial management
and how it impacts upon the survival and growth
of SMEs is a field of research that deserves greater
attention. It is clear from this review of recently
published research that there is a positive relation-
ship between effective cash flow and working capi-
tal management and the profitability, survival and
growth of SMEs. These studies also suggest that
for many small business owner-managers, particu-
larly those from developing economies, cash flow
and working capital management practices could
be improved. Future research needs to explore how
the financial management of cash flow and work-
ing capital changes over the lifecycle of the busi-
ness. Are there specific differences across industries
or for firms with different rates of growth, levels of
complexity, size, and age or ownership structure?
Longitudinal analysis is likely to be of most
value in researching this phenomenon, and a
combination of qualitative and quantitative
methodologies should be applied. The former is
of particular use in the investigation of firm and
owner-manager level activity. However, there is
also a need to translate academic research into
outcomes that can be applied within educational,
policy and practice fields. It is not sufficient for
academics to simply sketch out a few brief recom-
mendations for government policy makers or the
practicing small business owner. Stronger linkages
need to be made between research findings and
© eContent Management Pty Ltd
the development of educational programs, policy
recommendations and suggestions for manage-
ment practice. Governments also need to play a
more active role in helping SMEs to improve
their financial management systems and this can
be facilitated through changes to the way taxation
compliance is undertaken. Professional advisors,
in particular accountants, can also play a key role.
Better financial management practices will result
in strong and more profitable SMEs.
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13
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