Financial Analysis Tools for SMEs

Financial Analysis Tools for SMEsCHAPTER FIVEDISCUSSIONS, RECOMMENDATIONS AND CONCLUSIONSINTRODUCTIONThe SME sector development is seen as a key strategy for economic growth, job gene dimensionn and penury reduction (Agupusi, 20072). This view endeavored to explore and describe the monetary mathematical process measures before long phthisis by manufacturing SMEs in Mauritius. It was underinterpreted due to the fact that many studies were conducted on obstacles faced by SMEs in obtaining finance, but it appe atomic number 18d that not enough were underinterpreted on how these SMEs manage their finances whereas several(prenominal) studies bring that belittled businesses fail because to a greater extent often than not cash flow is not proper(ip)ly managed (Mbonyane, 200618). In this context the Z- order place is presented as a useful unsuccessful person model for SME.This chapter concludes the research project by summarizing the previous chapters and highlighting the resul ts of the empirical hear in Chapter cardinal with respect to the preys of the research. It likewise includes comments on the contribution and bound of the theater of operations as headspring as recommendations and suggestions for future research.SUMMARY AND OVERVIEW OF THE researchChapter One presented the background of the battleground, followed by problem statement, rationale and objectives of the research, a explorative books limited review, research methodology and layout of the Chapters.Chapter Two 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 pecuniary cognitive process skills, which were the digest of this dissect. Moreover, an international comparative depth psychology was presented. A brief discussion of non- pecuniary measures wa s addicted as healthy, followed by monetary performance measures that included pecuniary ratios and loser foresight models.Chapter Three presented the research plan including sampling, data collection, and data analysis.Chapter Four presented the results of the empirical research findings on fiscal performance measures really apply by manufacturing SMEs in Mauritius. Thematic content analysis was apply in presenting the results, taking the themes in the literature of the topic as basis for comparison.Chapter pentad is the final phase of the study and aims at using the data from the literature study and the empirical findings to provide solutions to manufacturing SMEs financial performance metre consort to the findings and through recommendations.DISCUSSIONS OF FINDINGSFINANCIAL PERFORMANCE MEASUREMENTThe first objective of the study was to identify financial hawkshaws currently employ by manufacturing SMEs in measuring 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 total debt (used by six respondents)Current ratio (used by six respondents)Working chapiter to total assets (used by quintupletsome respondents)Cash flow to average total current liabilities (used by five respondents)Gross profit margin ratio (used by four respondents) and schedule turnover (used by four instrumentalists).Gross Profit RatioThe take aim of satisfaction was measured using a likert scale. The conversion of the 5- point Likert- until nowt scale for the satisfaction with current financial performance scale to gild the total score was as follows (not satisfy at all = 1 (1), not satisfied = 2 (2), somewhat satisfied = 3 (3), satisfied = 4 (4), real satisfied = 5 (5)). The higher the call back score signalises 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 relative low level of satisfaction prevails with the owners of the SMEs concerning their current financial performance.It abide 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 advisor to evaluate their financial performance.It can be observed that financial ratios (100%) is the altogether used tool by the SMEs sampled as comp bed to tools such as bring inboards (0%), the loser 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, just now 39 percent of them found the ratios to be useful in helping to purify their financial performance. failure PREDICTIO N MODELThe use of bankruptcy soothsaying models ( other financial tool in the literature) was totally absent among the respondents. In fact, almost all the participant SMEs knew nothing or very(prenominal) little most bankruptcy prediction models. The limited use of ratios and non use of bankruptcy prediction models wins the issue of objective number two which is to recommend necessary improvements on financial performance measurement of SMEs which forget be part of the recommendations. Also, the lack of knowledge of bankruptcy prediction models by interviewees at different SMEs may necessitate applicable training for the financial officers of SMEs that is the issue of objective number three of the study, which exit be part of the recommendations section as come up.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 th eir financial performance, but to a very limited extent. Very few ratios were used by individual SMEs and most of the ratios used were not the best indicators mentioned in the literature. Though, some of the interviewees acknowledged that they direct to use much than ratios. This objective exit 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 acquirable 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 measure out how they are doing financially so as to take necessary measures anytime they find oneself threatened. It was found that most of the respon dents knew nothing 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 trend and further studies need to be conducted for any try on at generalization.For this study for example, either emails were not responded to at all, or potential participants kept postponing, suggesting that the researcher call the following week. In the end, respondents had to be approached at their business premises and supplicateed to participate. It is costly if it is taken into account that many SMEs would decline to participate, but works better 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 large study that would seek to generalize the results, researchers should endeavor to have a more balanced number between small and m edium 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 theory.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 work well not only for the majority of participants, but for businesses in general.It is likewise 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 open 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 specialize d software package (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 software.The Z scratch is in addition a critical business tool managers utilize to make certified business decisions to improve the financial health of the business. The Z Score helps managers quantify the factors contribute 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 contributing 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. center 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 indicate improvements or deterioration in financial cast.The Z Score is a critical tool business managers use to assess financial health. It helps managers come up 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 credit. The Z Score is an effective tool to institute 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 extern al to the companys financial statements. This provides users of the Z Score with a make upent view and taking into custody of a companys true financial health.SMEs should have proper financial planning. They should undertake both financing and investment program concord to financial planning.SMEs should keep all records of financial transactions in a system way. This will provide accurate 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 stick in 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 cultivate in efficiency as well as productivity of SMEs. frank 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 RESEARCH gain ground research could be conducted on a wider scale in an attempt to generalize the findings to manufacturing SMEs in Mauritius and in different regions of Mauritius.Further research could also be done to determine 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, strange 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 little 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 place in this study. Six 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 tha t 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.This study will contribute toward fill 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.