Description
working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
THE IMPACT OF WORKING CAPITAL MANAGEMENT DYNAMICS ON PERFORMANCE OF TONGAN ENTERPRISES IN NEW ZEALAND
By Feletiliki Kefu Manisela Finau
A thesis submitted in partial fulfilment of the requirements for the degree of Master in Business (MBus)
UNITEC INSTITUTE OF TECHONOLOGY, NEW ZEALAND 2011
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Declaration
Name of candidate: Feletiliki Kefu Manisela Finau
This thesis entitled: “The Impact of Working Capital Management Dynamics on Performance of Tongan Enterprises in New Zealand” is submitted in partial fulfilment for the requirement for the Unitec degree of Master in Business.
Candidate’s declaration I confirm that:
• • This Thesis/Dissertation/Research Project represents my own work; The contribution of supervisors and others to this work was consistent with Unitec Regulations and Policies. • Research for this work has been conducted in accordance with the Unitec Research Ethics Committee Policy and Procedures, and has fulfilled any requirements set for this project by the Unitec Research Ethics Committee.
Research Ethic Committee Approval Number: 2011-1151
Candidate signature: ........................................................ Date: ...............................
Student number: 1026071
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Acknowledgement
Any major challenging work such as a thesis takes a great deal of time and effort. While the researcher and also writer takes ownership and credit for the final outcome of this piece of work, many professionals and talented people contributed their time, experiences, knowledge and energy. Therefore I would like to acknowledge the following people for their support and guidance during this challenging time of my research journey. Deepest thanks go to Rachel Afeaki chairperson of New Zealand Tonga Business Council (NZTBC) for her willingness to organise and encourage the Tongan SMEs owners-managers to participate in this research journey. A special gratitude to Dr Ken Simpson, head of the Master Programme and senior lecturer who helped me shape up the original business direction in which I was interested, to conduct research that focused on the financial management of Tongan SMEs. Particular thanks to Dr Helen Mitchell, my primary supervisor who was instrumental in the formation of the thesis and her guidance on methodology and writings. Without her guidance I would not have completed this research journey. I am indebted to my secondary supervisor Andrew Slessor (CA) for his supporting role in order to guide me theoretically in this research. My indebtedness and a special thanks to Shelley Eden (senior associate solicitor), Diana Sharma (project coordinator) and Anne Fowke (information librarian), for all their inspiration and guidance during the research journey. My sincere thanks go to Dr Simon Peel, the chairperson of the UNITEC Research Ethics Committee and his colleagues, for their assistance in the application process and finally granting me, approval on 28th March 2011 to conduct this particular research. To Dr Robert Davis, head of the DoMM, Dr Kodicara Asoka Guranatne, the senior lecturer, Dr Nonthipoth Buranavityawut and Dr Alvin Cheng for their contribution and great support during the research project.
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Also a special gratitude goes to Dr Fotu Fisi’iahi and Malia Talakai from the Pacific Student Centre for their encouragement, inspiration and motivation in supporting me during this research journey. A full gratitude goes to all Tongan owners-managers who participated in this research and for their willingness and friendship during the research process. Most profound thanks to my wife Pisila Finau and my two loving children, Lavinia Telisa Finau and ‘Atunaisa Fepale Manisela Finau for their steadfast encouragement and support of me throughout this research. I would also like to dedicate this thesis to my parents, Lavinia Telisa Lama and ‘Atunaisa Fepale Lama for their comprehensive tolerance, emotional and support in order to accomplish this special milestone in tertiary education. Finally, I would like to thank my Heavenly Father for the wisdom, time and knowledge that he gave me in order to complete this challenging and time consuming research. To whom I would like to return all the glory and thanks to be upon his name forever lasting and to whom I would have never completed this thesis without his guidance and tolerance.
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Abstract
Several Tongan businesses operate in different business sectors of Small and Medium Enterprises (SMEs) and contribute wealth to New Zealand economy in terms of value creation. For the success of any Tongan enterprise in New Zealand, the financial management of assets is so crucial. Thus, this research focuses only on the Working Capital Management (WCM) of Tongan SMEs in New Zealand and its direct impact on performance that is vital for business survival and sustainability. WCM deals with the administration of the businesses’ short-term current assets and liabilities that is an important issue for Tongan SMEs’ financial decision making. The business financial performance is measured using working capital ratios, profitability ratios via Du Pont financial analysis.
The purpose of this study is to explore and analyse the impact of working capital management dynamics on financial performance of Tongan SMEs in New Zealand. It also aims to explore how Tongan SMEs manage their various working capital components such as cash, inventory, account receivables, account payables, operating cycle, and credit policy management. Consequently, this develops an appropriate conceptual framework model to illustrate the impact of WCM dynamics on performance and providing some key recommendations that will improve Tongan SMEs use of working capital management.
The primary data was collected from 8 Tongan enterprises and 4 business consultants in Auckland using a qualitative Pacific research method known as “Talanoa Approach (TA)” in the form of semi-structure interviews and a focus-group. The secondary data was captured from a consecutive five years of financial statements of a selected enterprise as a case study. Furthermore the introduction of a Computer Analysis and Qualitative Data Analysis Software (CAQDAS) of NVivo9 articulates and enhances the thematic coding, analysing and conceptualising model in the light of Talanoa Theory (TT) from the collective data. This study concluded by extending the exploratory Pacific research methodology of Talanoa (T) as a default of qualitative research in financial management context. The Talanoa approach was used for data collection and analysis simultaneously. The Tongan SMEs operating in Auckland have been divided into two groups according to the business models they use. Some of them follow the ‘Western Conventional Model’ and some follow the ‘WC Flexible System’ model of managing their ‘working capital’ which impacts on financial performance.
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Table of Contents
Declaration .....................................................................................................................ii Acknowledgement ....................................................................................................... iii Abstract .......................................................................................................................... v Table of Contents .......................................................................................................... vi List of Abbreviations ................................................................................................. viii List of Tables ................................................................................................................ ix List of Figures ............................................................................................................... ix Chapter 1: Introduction – Background, Research Aim and Key Question .................... 1
1.1 1.2 1.2.1 1.3 1.4 1.5 1.6 1.7 2.1 2.2 2.3 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 2.5 2.5.1 2.5.2 2.6 2.6.1 2.6.2 3.1 3.2 3.2.1 3.2.2 3.2.3 3.3 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.4 3.4.1 3.4.2 3.4.3 Introduction ................................................................................................................ 1 Background - Tonga in the South Pacific Region...................................................... 1 Tongans in New Zealand, 1961–2001 ....................................................................... 2 Significance of SMEs in New Zealand ...................................................................... 3 Problem statement - Tongan SMEs in New Zealand ................................................. 4 Aims and Objectives of the Research ........................................................................ 5 The Key Research Question ....................................................................................... 5 Rationale of the Research Topic ................................................................................ 6 Introduction ................................................................................................................ 7 Overview of Financial Management .......................................................................... 7 Objective of Working Capital Management (WCM)................................................. 8 Significance of Working Capital Components Management ..................................... 9 Inventory Management ............................................................................................ 11 Account Receivables Management .......................................................................... 12 Cash Management .................................................................................................... 13 Account Payable Management................................................................................. 14 Operating Cycle ....................................................................................................... 15 Cash Conversion Cycle ............................................................................................ 15 Working Capital Policy............................................................................................ 16 Investing in Working Capital ................................................................................... 16 Short-term Financing ............................................................................................... 17 Business Performance Analysis ............................................................................... 17 DuPont system of analysis and Time-series Analysis.............................................. 18 Key Financial Ratios ................................................................................................ 19 Introduction .............................................................................................................. 20 Research Paradigms or Worldviews: ....................................................................... 20 Quantitative Approach (i.e. Positivist):.................................................................... 21 Qualitative Approach (Phenomenological):............................................................. 21 Quantitative (Positivist) versus Qualitative (Phenomenological): ........................... 22 Research Methodology – Qualitative Inquiry Approach ......................................... 22 What is the nature of reality? (Ontological assumption) ......................................... 23 What is the relationship of the researcher and that being researched?..................... 23 What is the role of values? (Axiological assumption) ............................................. 24 What is the language of research? (Rhetorical assumptions)................................... 24 What is the process of research? (Methodological assumption) .............................. 25 What is the possibility of generalisation? (Generalizability) ................................... 25 What is the possibility of causal linkages (mutual simultaneous shaping)? ............ 26 Research Methods –Using Traditional Pacific Talanoa Approach .......................... 26 Methodological Structure of Research- Talanoa Approach ..................................... 26 Data Collection ........................................................................................................ 28 Data Analysis ........................................................................................................... 34
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Chapter 2: Literatures Review – Working Capital Management................................... 7
Chapter 3: Research Design and Methodology ........................................................... 20
Chapter 4: Results and Discussion of CS1’s WCM (Case Study) ....................................... 40 4.1 Introduction .............................................................................................................. 40 4.2 Case Study – CS1’s Financial Statements Analysis - Financial Ratios ................... 40 4.2.1 Liquidity Ratios analysis of CS1: ............................................................................ 40 4.2.2 Activity Ratios (i.e. Asset Management Ratios) of CS1:......................................... 43 4.2.3 Leverage Ratios of CS1: .......................................................................................... 46 4.2.4 Profitability Ratios of CS1: ...................................................................................... 48 4.2.5 Summary of Talanoa Session with Observation of CS1 (NVivo9-CS1) ................. 53
Chapter 5: Results and Discussion – WCM of Tongan SMEs in NZ .......................... 54
5.1 5.2 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 6.1 6.2 6.2.1 6.2.2 6.2.3 6.3 6.4 6.5 Introduction .............................................................................................................. 54 Research Objective .................................................................................................. 54 Managing of Working Capital ................................................................................. 55 Cash Management .................................................................................................... 58 Inventory Management ............................................................................................ 68 Account Receivables Management .......................................................................... 71 Account Payable Management................................................................................. 74 Summary and Conceptual Models of WCM impacts on Performance .................... 77 Introduction .............................................................................................................. 82 Research Conclusions .............................................................................................. 82 Combination of Talanoa and NVivo9 as Qualitative Approach for SMEs .............. 83 Conceptual Model of WC Flexible System of Tongan SMEs on Performance ....... 84 Empirical Contributions (Group-W, CS1 Case Study and Group-T) ...................... 84 Limitations of the Study........................................................................................... 89 Future Research Opportunities................................................................................. 90 Closing Statement .................................................................................................... 90
Chapter 6: Research Conclusion and Recommendations ............................................ 82
References .................................................................................................................... 92 Appendix 1A: Information for participants ................................................................. 97 Appendix 1B: Participant consent ............................................................................... 99 Appendix 1C: Approval letter from Unitec Ethics Research Committee .................. 100 Appendix 2: Assumptions of the main paradigms ..................................................... 101 Appendix 3: Philosophical Assumptions for Qualitative Inquiry .............................. 102 Appendix 4: DuPont System ...................................................................................... 103 Appendix 5: Results of CS1 Financial Statements Analysis ..................................... 104 Appendix 6: Summary of Talanoa Session with Observation of CS1 ....................... 112 Appendix 7: Recommended WCM for CS1’s Business Performance....................... 113 Appendix 8: Evidences from Interview Talanoa sessions and NVvivo9 Codes: ...... 114 Appendix 9: Conceptual Model of Financial Management ....................................... 134 Appendix 10: Constant Comparison and Classical Content Analysis ....................... 135 Appendix 11: Process of Building Theory from Case Study..................................... 136 Appendix 12; Options for Overcoming a Cash Flow Crisis ...................................... 137 Appendix 13: Conceptual Models of WCM for Tongan SMEs ................................ 138 Appendix 14: Talanoa analysis on Liquidity of CS1 ................................................. 139 Appendix 15: Combined Findings from Talanoa sessions (Group W, T & CS1) ..... 140 Appendix 16: Recommendations for WCM of CS1 & Tongan SMEs ...................... 141
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List of Abbreviations
AAI ACP APM APP ARM BFP BPA CM CAQDAS CCC CS EVA FM FT GAAP JIT NZTBC OC PBT QC RI ROA ROI TA SMEs WA WCCM WCFS WCM WIP Average age of inventory Average collection period Account Payable Management Average payment period Account Receivable Management Business Financial Performance Business Performance Analysis Cash Management Computer Analysis and Qualitative Data Analysis Software Cash Conversion Cycle Case Study Economic Value Added Financial Management Focus Talanoa Generally Accepted Accounting Principles Just-In-Time New Zealand Tonga Business Council Operating Cycle Pacific Business Trust Quality Control Residual Income Return on Asset Return on Investment Talanoa Approach Small and Medium Enterprises Weighted Average Working Capital Components Management Working Capital Flexible System Working Capital Management Working in Progress
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List of Tables
Table 1.3-1: Percentage of Small and Medium Enterprises in New Zealand ......................................................... 4 Table 3.4.2-1: Tongan SMEs Participants for Interviews, Focus Group and Case Study .................................... 29 Table 3.4.3-1: NVivo9 Themes Code for Findings and Discussion ..................................................................... 38 Table 5.2-1: List of Tongan SMEs and Professionals for Talanoa Interviews session and Focus Group ............ 55 Table 5.3-1: Characteristics of Tongan and Western models followed by Tongan businesses in New Zealand .. 57 Table 5.3.3-1: Credit Selection and Standards...................................................................................................... 73 Table 5.3.5-1: Combined Findings from Talanoa sessions ................................................................................... 81 Table 6.5-1 Key ratios for Working capital and performance utilisation ........................................................... 107
List of Figures
Figure 1.2-2: New Zealand Census 1961-2001 ...................................................................................................... 2 Figure 1.2-1: Tonga in the South Pacific Ocean ..................................................................................................... 2 Figure 2.2-1 Conceptual Model of short-term Liquidity of Working Capital Management ................................... 8 Figure 2.4-1 A typical working capital cycle and other cash flows ...................................................................... 10 Figure 2.4.5-1 Operating Cycle; ........................................................................................................................... 15 Figure 2.4.6-1: Cash Conversion Cycle; ............................................................................................................... 16 Figure 3.4.1-1: Structure of Research on the WCM of TONGAN SMEs in Auckland, NZ ................................. 27 Figure 3.4.3-1: Constant comparison analysis: Coding in NVivo9 qualitative software ...................................... 37 Figure 4.2.1-1: Current and Quick Ratios of CS1 ................................................................................................. 42 Figure 4.2.2-1: Activity Ratios of CS1 ................................................................................................................. 43 Figure 4.2.2-2: Total Asset Turnover and Inventory Turnover Ratios ................................................................. 45 Figure 4.2.3-1: Leverage Ratios of CS1 ............................................................................................................... 46 Figure 4.2.3-2: Time Interest Earned of CS1 ........................................................................................................ 47 Figure 4.2.4-1 Net Profit Margin Ratio of CS1 .................................................................................................... 49 Figure 4.2.4-2 Profitability Ratios of CS1 ............................................................................................................ 50 Figure 4.2.4-3 Business performance model overview......................................................................................... 52 Figure 5.3-1: Group -W and Group -T of Tongan businesses .............................................................................. 56 Figure 5.3.1-1: Group - W (Western- Conventional management system of Cash) ............................................. 60 Figure 5.3.1-2: Group- T (Tongan WC Flexible System of Cash management) .................................................. 64 Figure 5.3.2-1: Production cycle adapted from Sherman 2010, p.73 ................................................................... 68 Figure 5.3.3-1: Credit and Collection Techniques for SMEs................................................................................ 71 Figure5.3.4-1: Operating Cycle of Working Capital Components ....................................................................... 75 Figure 5.3.5-1: Tongan WC Flexible System ....................................................................................................... 80
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Chapter 1: Introduction – Background, Research Aim and Key Question
1.1 Introduction
The objective of this research study is to explore and also analyse the impact of working capital management components’ dynamics on business performance of Tongan enterprises in New Zealand. This particular study conveys the knowledge of how significant it is to have a proper management system for WCM in Tongan enterprises in New Zealand. It also discusses the impact of poor management control of WC on enterprises’ financial performance and current practices employed by the Tongan enterprises in New Zealand. Chapter one briefly focuses on the background of Tongan people in the Pacific region and their migration to New Zealand since 1961. It discusses the overview of Financial Management capability and visualises the concept of WCM that is the subject for this research. Chapter two considers the literature that focuses on Working Capital Management and important related components. Articulation of the research methodology using the Traditional Pacific Talanoa Approach and NVivo9 as the default qualitative approaches for this study is given in Chapter three. Chapter four is mainly focused on the case study of a selective Tongan SME in order to verify the impact of WCM on financial performance using the financial ratios analysis called DuPont Analysis System. Similarly Chapter five analyses and discusses the results of Talanoa sessions from the semi-interviews with owners-managers and focus group with the professionals involved in the research. Consequently Chapter six summarises the outcome of the study in terms of WCM impact on financial performance of Tongan businesses in Auckland. The conceptual models have been developed to visualise the dual views from Western and Tongan commercial paradigms.
1.2 Background - Tonga in the South Pacific Region
Tonga is a constitutional monarchy in the South Pacific region. Tonga is located in the South Pacific Ocean within the Polynesian group to the northern-east of New Zealand as shown on the map below (Crocombe, 2001) It was the only Pacific nation never colonised and is independent. There is a democracy movement attempting to change the kingdom into a constitutional democracy. Despite the grim situation in Tonga as statistics have suggested recently, many Tongan
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people perceive their movement and migration to New Zealand as a significant accomplishment (Taumoefolau, 2009).
THE PACIFIC REGION
Source Adapted: Ministry of Pacific Islands Affairs
Figure 1.2-1: Tonga in the South Pacific Ocean
1.2.1
Tongans in New Zealand, 1961–2001
The Tongan immigrants and entrepreneurs started migrating to New Zealand during the 1960s. They migrated with their own values and traditional custom of cultural aspects to a different dynamic commercial paradigm in New Zealand. Migration to New Zealand provided opportunities to learn trades and study professions in various tertiary institutions, such as teaching, nursing and medicine. Some Tongans migrated to New Zealand via the 1970s short-term contractual agreements between the two nations and brought an influx of unskilled workers (Taumoefolau, 2009; Tu’inukuafe, 1990).
Source: Adapted from New Zealand census, 1961–2001(Statistics New Zealand, 2007)
Figure 1.2-2: New Zealand Census 1961-2001
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The above graph shows the increase in New Zealand’s Tongan-born population as immigrants entering in the 1970s and 1980s. By contrast, in the 1990s the community’s major growth was through the New Zealand-born children of those earlier arrivals. In 2001 the New Zealand-born children formed the majority of the Tongan community. Figures for ethnicity are only available from 1991. They are rapidly growing in population with the annual growth rate of 7.5% proportionally within the general population of the Pacific people in New Zealand (Statistics New Zealand, 2007). According to the New Zealand census of 2006 the Tongan population reached almost 19% of the total 266,000 Pacific island people who reside in New Zealand and the third largest by ethnicity.
1.3 Significance of SMEs in New Zealand
Small and Medium-sized Enterprises (SMEs) play an important role in the New Zealand economy (Cameron & Massey, 1999; Frederick & Chittock, 2006; Knuckey, Johnston, & Campbell-Hunt, 2002). Overseas Studies also claim that SMEs play a fundamental role in the global economy (Hasan & Khor, 2009). SMEs are the lifeblood of the New Zealand economy and the government recognises their important contribution to the economy (Ministry of Economic Development, 2010).
The Statistic of New Zealand Business Operations Survey report of 2009 shows that 97% of enterprises employ 19 or fewer people, 89% of enterprises employ 5 or fewer people. This statistical report also shows that SMEs account for 31% of all employees and self-employed people comprise 11% of the labour force. Thus, SMEs are defined in New Zealand as businesses with fewer than twenty employees and are the most common business size in every industry (Ministry of Economic Development, 2010).
The section, Structure and Dynamics in the report of 2010 also confirms that SMEs accounted for 30.6% of all employees and firms with 5 or fewer employees for 12% of all employees. The selfemployed in this 2010 report shows that SMEs accounted for 41.9% of the economy’s total output and firms with 5 or fewer employees had the highest average real profits per employee (Ministry of Economic Development, 2010).The Ministry of Economic Development’s 2010 report on SMEs in New Zealand identified that in 2009 97.2% of firms were found to be small businesses with less than 20 employees as shown in the Table 1.3-1 below.
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Years New Series SMEs as a proportion of all enterprises
2002
2003
2004
2005
2006
2007
2008
2009
96.8%
96.8%
96.9%
97.0%
97.1%
97.1%
97.1%
97.2%
Source: Adapted from Ministry of Economic Development 2010 (SMEs with 19 or fewer employees compared to total population of New Zealand Enterprises 2002-2009)
Table 1.3-1: Percentage of Small and Medium Enterprises in New Zealand
Most articles define SMEs only in terms of the number of employees, but the definitions vary widely between countries. The researcher addressed these inconsistencies by defining SMEs within their national context because it is pointed out that firms with 250 staff (using the EU definition) would be large firms in New Zealand (Collins, Lawrence, Pavlovich, & Ryan, 2007). • European studies mainly use the European Union (EU) definition of SMEs “fewer than 250 staff” • • • Australian studies use less than 200 staff USA and South Korean studies use less than 500 staff, and New Zealand studies use less than 20 staff.
From the above mentioned definitions, the following definition is proposed for the purpose of this study: A small and medium-sized enterprise is defined as any enterprise (business) that is personally owned and managed by the owner-manager and that consists of less than 20 employees. It does not form part of a larger enterprise (business) or group of companies that have access to managerial expertise (Ministry of Economic Development, 2010).
1.4 Problem statement - Tongan SMEs in New Zealand
The typical Tongan enterprise has limited resources, limited cash flows, few customers, is often engaged in management ‘fire-fighting’, concentrates on current performance rather than taking a strategic focus, often has a flat organizational structure and possibly high staff turnover (Hudson, Lean, & Smart, 2001). The motivation to start a business for the Tongan people who are currently residing here in Auckland, New Zealand is varied. They tend to start-ups a business as an alternative for employment but not for long investment. Nowadays Tongan people are able to start business when they get financial assistance from the government or other source. Several Tongan businesses have limited access to any capital funds to start-up. Most of them have to seek debt financing through mainstream banks and other business incubators such as Pacific Business Trust
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(PBT). Many Tongan SMEs have difficulty preparing a business plan, and a financial budget. The business finance, cost and management accounting is a challenge for many Tongan SMEs (S. Prescott, 2009).
A study by McInnes (2000) in New Zealand showed that 94% of the companies did not integrate their working capital management components as proposed by theory. The completed exploratory research of Pacific island business ventures and sustainability established recently in New Zealand, identified several factors associated with both success and failure (McDonald, 2008; J. Prescott, 2004). The studies recognised the problems and critical factors that impact on Pacific Islands Enterprises in New Zealand, e.g. mixed purpose of financial reporting, challenges of managing business finance, challenges of management accounting practices, lack of access to capital funds, lack of community support, fear of failure, taxation issues, records keeping and performance measurement (McDonald, 2008; S. Prescott, 2009).
1.5 Aims and Objectives of the Research
The primary aim for this study is to explore and analyse the Impact of Working Capital Management Components Dynamics on financial performance of Tongan enterprises in New Zealand. The following specific objectives have been developed in order to pursue the main aim of this study. • To investigate the various WCM policies, practices and techniques currently employed by Tongan enterprises in New Zealand • To explore how Tongan enterprises manage cash, inventory, account receivables, account payables and credit policy • To develop a conceptual framework model and provide some key recommendations that will improve Tongan SMEs use of working capital management
1.6 The Key Research Question
The title of this study is “The Impact of Working Capital Management Dynamics on performance of Tongan enterprises in New Zealand”. The primary research question of this study is to find out how Tongan enterprises in New Zealand manage their Working Capital Components in terms of performance? The following sub-questions are designed to answer the primary research question: • What liquidity policies, practices and techniques are employed by the Tongan enterprises to manage Working Capital?
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•
What possible factors impact on the Tongan SMEs’ Working Capital Management performance?
•
How efficient is the working capital management for the Tonga SMEs in New Zealand?
1.7 Rationale of the Research Topic
This study helps to develop an understanding of the advantages and disadvantages of financial practices and techniques of managing Working Capital Components in different commercial paradigms. The study will reveal how critical Working Capital Management Strategies (i.e. policies, practice and techniques) is for the Tongan enterprises in New Zealand in terms of performance. A general conceptual framework model will provide basic guidelines for researchers, accountants and professionals, financial managers, and policy makers in the dynamic business environment of New Zealand. The study will suggest various financial management techniques Tongan enterprises can use to measure their performance in terms of profitability. For example, the Dynamics Current Ratio to assess the firms liquidity status, Activity Ratios, Leverage ratios, Cash Conversion Cycle (CCC), Return on Investment (ROI), and Return on Equity (ROE) (Birt, Chalmers, Brooks, Byrne, & Oliver, 2011; Gitman, 2009).
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Chapter 2: Literatures Review – Working Capital Management
2.1 Introduction
This chapter focuses on extant literatures relating to the working capital management components of the enterprises, and how its components impact on business performance. The researcher critiques the relevant literatures for this study in terms of accounting and financial concepts such as overview of financial management, conceptual model of WCM, objective of WCM and its significance in small and medium enterprises. The review of WCM is importantly revised in terms of the Operating Cycle model that reflects the interested components of WC policy and their shortterm investing and financing concepts. The review of business performance analysis in relation to WCM in SMEs is also briefly discussed.
2.2 Overview of Financial Management
The traditional definition of Finance is the study of funds management and the directing of these funds in order to achieve its particular objectives. The unique objective of a good financial management is to maximise returns that associate with minimising of financial risks simultaneously. In Financial management it is critical to understand the business objectives and financial functions before recognising the major component that is the short-term financial management or the Working Capital Management relative to the day-to-day operations (Brigham & Ehrhardt, 2010; Chandra, 2008; Keown, Martin, Petty, & Scott, 2002; D. Sharma, 2009).
Financial management is also concerned with the creation of economic wealth, maximising the share price for shareholders’ equity, planning and controlling of the business’s financial resources, increasing its profitability and maximising the rate of returns on Equity. It is in the corporate environment that most of the finance literatures have been literately focused on the study of the long-term financial decisions making process (Chandra, 2008; Zietlow, Hankin, & Seidner, 2007). Financial management in firms operate according to problems and opportunities. The owner/manager of a firm is primary relying on its trade credit policy, bank financing, personal financial contributions, operating financing and lease financing. The firms financing options are limited, but also have the same financial problems as those faced by large companies (Arnold, 2008; Gitman, 2009; Sagner, 2010; D. Sharma, 2009). One of the major financial issues facing firms is the deployment of current assets and current liabilities that are the critical elements of Net
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Working Capital Management (NWCM). The primary cause of an enterprise’s failure is the poor control management of Working Capital internally amongst its components. Thus, the finance manager of an enterprise must be alert to the level of working capital changes.
The conceptual model shown in Figure 2.2-1 illustrates the critical portion of the financial management components for this study. The focus is on the operating cycle and the four main components of WC that are cash, debtors (accounts receivable), inventory, and accounts payable.
Financial Management
Working Capital Management
Operating Cycle
Inventory management
Cash management
Account Receivable management
Account Payable Management
Impact on performance
Impact on performance
Impact on performance
Impact on performance
Impact on performance
Figure 2.2-1 Conceptual Model of short-term Liquidity of Working Capital Management
2.3
Objective of Working Capital Management (WCM)
According to Gitman (2009) the objective of Working Capital Management (WCM) is to minimise the Cash Conversion Cycle (CCC) the amount of capital tied up in the firm’s current assets. It focuses on controlling account receivables and their collection process, and managing the investment in inventory. WCM is vital for all business survival, sustainability and its direct impact on performance.
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WCM is an important area of financial management in every business function. WCM deals with the administration of the liquidity components of firms’ short-term current assets and current liabilities (Baker & Powell, 2005; Brigham & Ehrhardt, 2005; Gitman, 2009). The most important current assets are cash, debtors or account receivables, stock or inventory and current liabilities consisting of creditors or account payables, accrued expenses, taxation liabilities, short-term debt such as commercial bills, and provisions for current liabilities such as dividends declared but not yet paid (Birt et al., 2011; Gitman, 2009; D. Sharma, 2009). 2.4
Significance of Working Capital Components Management
Working capital is so important for business day-to-day operations. A decision made on one of the Working Capital components has an impact on the other components. In order to maximise the performance of a business, the Working Capital Management should be integrated into the shortterm financial decision making process (Crum, Klingman, & Tavis, 1983) . Working Capital or Net Working Capital is “the difference between current assets less current liabilities” (Arnold, 2008). In financial annual reports, working capital is defined in an algebraic expression as follows; Net Working Capital (NWC) = Current Assets (CA) – Current Liabilities (CL). The investment in NWC is so vital and helps the capital budgeting analysis of a given firm. Working Capital (WC) can be invested in short-term sources of finance, such as cash, inventories, account receivables, and notes receivables. WC is minimised in terms of payments made to account payables (creditors), account notes payable and other accrued liabilities. In order to balance out the optimal levels of costs and benefits, then the liquidity components of working capital must be managed with appropriate techniques through raising or lowering the stocks, cash, account receivables and account payables (Arnold, 2008; Gitman, 2009).. The model of the working capital cycle is given in Figure 2.4-1, articulates the basic components of WCM interrelationship and their dynamics with the liquidity phase of a given enterprise. The working capital policy must be taken into consideration in order to manage the liquidity elements for a smooth flow of the day-to-day operations in the business (Arnold, 2008). The working capital cycle starts at the purchasing of raw materials from potential suppliers for the production process, through work in progress and ending with finished products. The finished
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goods are kept as inventories, ready to be sold for customers for cash or credit transactions if the accrual accounting system is implemented. If the finished goods (i.e. inventory) are sold on credit to customers then the cash would be tightening in the form of account receivables. These amounts would be collected in accordance with the trade credit policy being given to customers (Arnold, 2008; Maness, 1994).
Trade Debtors Sales Operation Costs Labour, overheads, marketing, distributio ns, etc
Taxation
Fixed Assets Finished Goods Working in Progress (WIP) Raw Materials Trade Creditors Shareholders
CASH
Medium-term finance
Long-term debt
(Source; Adapted from Arnolds. 2008:530)
Figure 2.4-1 A typical working capital cycle and other cash flows
Other Cash Flows Working Capital Cycle
There are related costs influencing every flow of the cycle in terms of opportunity cost for working capital. The two main concepts of Working Capital are known as gross working capital and net working capital. The term Gross Working Capital, is also referred to as working capital that is defined as the funds invested in current assets that are expected to convert into cash in the normal course of business within an accounting period (i.e. 12 months). The total current assets and total current liabilities of a given business are critical for the short-term financial decision making process in terms of working capital management dynamics, leading to the day-to-day operation and performance of the business (Sagner, 2010; D. Sharma, 2009; Vataliya, 2008).
Time and Money embedded in Working Capital Cycle
Every component of working capital namely inventory, account receivables and account payables has two dimensions that are Time and Money when it comes to managing working capital. In fact, the term money (cash) can be moving faster around the operating cycle, or tied up in the operating cycle that can reduce the amount of cash (money) in the business, and depends on the operational policy and dynamics of these components (Arnold, 2008).
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TIME Collecting of account receivables faster Collecting of account receivables slower Better credit trade policy from suppliers Selling of inventory (stocks) faster Slow moving of inventory (stocks)
MONEY (Cash) Cash releases from the operating cycle Cash soaks up in the operating cycle Cash resources increase Free up cash Consuming more cash
2.4.1 Inventory Management
The first component of cash conversion cycle is the average age of inventory. The objective of Inventory management is to turn over inventory as quickly as possible without losing sales from stock-outs. It is an important aspect of working capital management because inventories themselves do not earn any revenue. Holding either too little or too much inventory incurs costs. Inventory is generally made up of three elements such as raw materials, work-in-progress (WIP) and finished goods (Arnold, 2008; Cinnamon, Helweg-Larsen, & Cinnamon, 2010; Gitman, 2009).
Raw Materials
Raw materials are concerned with the goods that have been delivered by the supplier to purchaser’s warehouse but have not yet been taken into the production area for conversion process (Cinnamon et al., 2010). The minimising of the raw materials is ideal in this particular part of working capital. However, this must be offset by the economic order quantities available from suppliers.
Work In Progress (WIP):
Work in progress concerns are when the product has left the raw material storage area, until it is declared for sale and delivery to customers. In this process the working capital must be considered in terms of reducing the buffer stocks, eliminating the production process, reducing the overall production cycle time. The raw materials and finished goods must be minimised in the production area. WIP must be carefully examined to justify how long it takes for products to be cleared for sale. This stage is normally done by the quality control (QC) procedures (Birt et al., 2011; Cinnamon et al., 2010).
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Finished Goods:
Finished goods refer to the stock sitting in the warehouse waiting for sale and delivery to customers. They could be sitting in the warehouse or on the shelf for quite sometime. The owner/manager of the business should find what options are available to dispose of the slow moving items. Should the stock be repacked or reprocessed, and sold at lower discount prices. Sales and operations planning can reduce or eliminate the need for finished goods. The best example of stock management is car manufacturing. The manufacturers normally used the JIT system to deliver finished products. In this way they minimise or eliminate both raw material stock and work in progress, as the stock is now in finished goods (Brealey, Myers, & Allen, 2006; Cinnamon et al., 2010; Van Horne & Wachowicz, 2008).
Common techniques for managing Inventory:
The costs of carrying too much inventory are opportunity cost of foregone interest, warehousing costs, damage and pilferage, obsolescence and insurance. The costs of carrying too little inventory are stock out (i.e. lost sales, delayed service), and ordering costs (i.e. freight, order administration and loss of quantity discounts). The following ordinary techniques are available for effectively managing the firm’s inventory (Birt et al., 2011; Gitman, 2009).
•
Just-in-time (JIT) System:
Just-In-time approach (JIT) is concerned with the delivering of raw materials. When using the JIT system, goods can be delivered directly to the production area, eliminating raw material storage areas. The purpose of using just-in-time approach is to have the supplier carrying the goods rather it being carried by the purchaser (Cinnamon et al., 2010; Zietlow et al., 2007).
2.4.2 Account Receivables Management
Account Receivables (Debtors) are customers who have not yet made payment for goods or services that the firm has provided. The main objective of Account receivables management is to minimise the time-lapse between completion of sales and receipt of payment. In order to significantly increase sales for a business, the customers should be given credit transaction policy. At the same time, the cash budget must show that credit sales create trenched cash flow otherwise it would create cash flow problems if they delay the receipt of cash to meet its financial obligations (Kelly & McGowen, 2010; Lo, Yeung, & Cheng, 2009; Zietlow et al., 2007)
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Kelly & McGowen (2010) suggest that credit customers who pay late or don’t pay at all only aggravate the problem. Thus, it is important for the financial manager or account receivables manager to establish a good policy that controls the advantages of offering credit with the associated costs. Kelly & McGowen (2010) promote the notion of credit policy offered to the credit customers should include the following;
Setting Credit Terms – This portion of the credit policy is concerned with how long should the business extend credit? It also considers what type of discount should business offer to convince credit customers for early payments? Establish Credit Standards – These standards deal with how should the business decide which customers qualify for credit? What type of credit data should it require? How strict should standards be? Design Appropriate Collection Policy – This part of collection policy deals with how aggressive should the business be at collecting overdue accounts? At what point of time does it make sense to take legal action against credit customers who are having late paying accounts, or to turn over the outstanding accounts to collection agencies? It also deals with when it makes sense to work out compromises?
Average Collection Period (ACP):
The Average Collection Period (ACP) is the second component of the cash conversion cycle. This period is the average length of time from a sale on credit until the payment becomes usable funds for the firm (SME) (Megginson, Smart, & Gitman, 2007).
2.4.3 Cash Management
Abel (2008) argues cash is crucial in every business in terms of enhancing its survival and prosperity. The term cash refers to the most liquid of assets, including demand deposits, money market accounts and currency holdings. The key elements of cash management are cash forecasting, balances management, administration of cash receipts and disbursements, and internal control (i.e. bank reconciliation) (Gitman, 2009). Good cash management can have a major impact on overall working capital management. It is objectively used to manage and determine the optimal level of cash required for the business operation and invested in marketable securities, which is suitable for the nature of the business operation cycle (Gitman, 2009). Zietlow et al., (2007) and Gitman (2009) explain that “cash
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management” involves planning for cash inflows and outflows, and determining the optimal balances of cash and near-cash accounts such as marketable securities. Marketable securities are short-term interest-earning financial claims that can be quickly converted to cash without any significant loss of value.
Cash Budget or Cash Flow Forecast
Birt et al., (2011) and Hamilton (1995) explain the preparation of the cash budget in a given business requires a detailed forecast of cash receipts and cash disbursements. It firstly starts from obtaining the monthly forecast of sales revenues, which may normally come out from the assistance of the sales and marketing department of a given business. This forecast gives the relevant information on the collection aspects for all credit sales transactions, and monthly cash receipts from sales can be predicted. The other cash receipts transactions to the business are then added to cash receipts from sales revenues to articulate the total cash receipts. Cash disbursements transactions must then be forecast and summed up for operating, financing and investment needs. In addition the “Net cash flow” is then calculated as total cash receipts deduct total cash disbursements. The opening cash balance is next added to net cash flow in order to arrive at the closing cash balance. Conventionally, if the closing cash balance is positive, then excess cash may be invested in marketable securities. If the closing cash balance is negative, then additional financing may be required (Oliver & English, 2007)
2.4.4 Account Payable Management
Gitman (2009) and Birt et al., (2011) state that Accounts Payable Management objective is to pay creditors as slowly as possible without damaging its credit rating. Accounts Payable and accruals are the two major spontaneous liability sources of short-term financing for a typical firm. Accounts Payables are the major unsecured short-term financing for businesses. They result from transactions in which merchandise (inventory) is purchased. The suppliers might give credit terms together with allowing discount to the purchasers.
Average Payment Period (APP):
The Average Payment Period (APP) is the final component of the cash conversion cycle (CCC), which has two parts in it. Firstly, the time from the purchase of the raw materials until the
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payments is mailed to the suppliers. Secondly, the payment float time (Birt et al., 2011; Cinnamon et al., 2010; Gitman, 2009).
2.4.5 Operating Cycle
Operating Cycle (OC) is the time from the beginning of the production process to collection of cash from the sale of the finished product in a typical business (Gitman, 2009). The OC consists of two major short-term asset categories such ‘inventory’ and ‘account receivable’. It is calculated by adding the average age of inventory (AAI) and the average collection period (ACP). The operating cycle can be algebraically denoted as: OC = AAI + ACP. The flow time line below shows the interrelationship of WC components in the operating and cash conversion cycle.
Time
Operating Cycle (OC)
Purchase raw Sell finished goods Collect accounts Materials on account on account receivables Average age of inventory (AAI) Average collection period (ACP) Average Payment period (APP) Pay account Payable Cash conversion cycle (CCC) Cash Inflow
Cash Outflow Time Source: Adapted from Gitman, (2009, p.602)
Figure 2.4.5-1 Operating Cycle;
2.4.6 Cash Conversion Cycle
Gitman (2009) explains that a cash budget is a forecast of the future cash inflows and outflows of the business and how cash has been used for business operational activities. But the “cash conversion cycle” is the duration of time that cash is tied up in accounts receivables and inventory. In fact, the Cash Conversion Cycle (CCC) is concerned with the amount of time a firm’s resources are tied up. It is mathematically represented by the equation below (Dong & Su, 2010; Gill, Biger, & Mathur, 2010; Gitman, 2009). CCC = Account receivables * 365 + Sales Inventories * 365 Purchases
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- Account Payable * 365 Purchases
CCC = OC – APP
CCC = AAI + ACP – APP
Source: Adapted from Gitman, (2009, p.602)
Figure 2.4.6-1: Cash Conversion Cycle;
When the inventory is purchasing and granting credit to customers ties up cash within the business. Despite cash is transformed into stock and services by purchasing, but the impact is delayed by supplier credit (i.e. purchase on credit). However, the inventory (stock) is transformed into debtors (i.e. Account Receivables) by selling on credit and then cash is collected at a later stage. Gitman (2009) echoes the significance of the average collection period (ACP) that represents the length of time to collect the receipt of cash from customers. Likewise, cash remaining tied up in inventory between purchase and sale represents the average age of inventory (AAI) in the cash conversion cycle.
When the cash conversion cycle (CCC) increases, it will lead to the declining of profitability of a typical business. Thus the owner-managers can create a positive value for the business owners by handling the adequate cash conversion cycle (CCC) and keeping each different component to an optimal level (Gitman, 2009; Oliver & English, 2007; Uyar, 2009). Prior empirical studies summarise a mixed outcome, claiming that there is a strong negative relationship between profitability, measured through gross operating profit, and the cash conversion cycle (T. Afza & Nazir, 2007; Deloof, 2003; Dong & Su, 2010; A. Sharma & Kumar, 2011). 2.5 Working Capital Policy
The effective working capital management policy of enterprises is essential in order to ensure the optimal levels of growth, profitability, and long-term sustainability. Owners/managers of enterprises need to spend more time to manage the current assets and current liabilities effectively, in order to maximising the firm’s value in a way that balances profitability (Baker & Powell, 2005; Preve & Sarria-Allende, 2010; D. Sharma, 2009).
2.5.1 Investing in Working Capital
Van Horne and Wachowicz (2008) state that excessive investment in current assets (cash and marketable securities, accounts receivable and inventory), may lower the value of an enterprise and also diminish profitability. Consequently a sufficient level of current assets needs to satisfy the payments and obligations of current liabilities. If the short-term assets are poorly managed then the
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opportunity costs could be high, e.g., the holding of a large amount of inventory that provides a small amount of return. This means that return on investment on current assets must be greater than the required rate of return in order to cover all the business obligations (Gitman, 2009). The stock-outs of inventory levels can cause a loss in sales leading to diminishing profits. Hence, the determination of investment optimal level in working capital is to the trade-off between liquidity and profitability. However, the financial manager should manage the associated costs with working capital at the minimal level without jeopardising the liquidity required for its ongoing business operations (Arnold, 2008; Baker & Powell, 2005).
2.5.2 Short-term Financing
Every business has several options when it decides to aggregate short-term financing. According to Gitman (2009) the financing of WC enhances the composition and the structure of the business financing in terms of short-term and long-term aspects. Afzar & Nazir (2008) investigated the traditional relationship between working capital management policies and a firm’s profitability in their quantitative study for a sample of 204 non-financial firms listed on Karachi Stock Exchange (KSE) for the period 1998-2005.The study found significant difference among their working capital requirements and financing policies across different industries. Moreover, regression result found a negative relationship between the profitability of firms and degree of aggressiveness of working capital investment and financing policies. They suggested that managers could increase value if they adopt a conservative approach towards working capital investment and working capital financing policies (Shah & Sana, 2006). 2.6 Business Performance Analysis
According to Oliver & English (2007) business performance analysis is dealing with the ‘return on investment (ROI)’ and ‘return on equity (ROE)’. ‘Business Performance Analysis (BPA)’ gives the owners-managers of SMEs the means to look at every possible strategy for improving the return on assets. The SMEs owners would firstly consider the increasing of ‘Net Profit Margin’ in various ways such as increasing the selling price on the same unit sales volume and decreasing cost of sales. The decreasing of cost of sales can be processed by earning more efficient purchasing, efficient management of quality, eliminating waste and reworks, identifying short delivery by suppliers, maximising security of inventory and cash, eliminating undercharging errors and omissions.
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The alternative ways of improving return on assets is by increasing the assets turnover. Under increasing the assets turnover, the SMEs owners would do this by increasing the unit selling price on the same unit sales volume with the same operating expenses, and reducing the assets. When the business assets are reduced, the liabilities and equity would have reduced by the same extent. In maintaining the ‘Net Profit Margin’ while the assets are reducing then it helps to produce a higher return on assets. Birt et al., (2011) argues that business financial performance must be measured to verify achievement of business goals as expressed in a mission statement of the entities. In general all entities have to set their business goals, and evaluate their success by using performance measurement processes. The measure is normally compared with a benchmark such as previous achievement, expectation or competitor achievement, in order to decide whether the performance is good or bad. Performance measurement systems in a typical entity could include measures to evaluate the performance of the entity as a whole, divisions or segments, individual managers and employees, customers, products/services, suppliers or processes (Birt et al., 2011; Kimmel, 2010).
2.6.1 DuPont system of analysis and Time-series Analysis
The DuPont system of analysis (refer Appendix 4) is used in this study to analyse the measurement of financial performance of the selected enterprise’s financial statements as a case study. The DuPont system merges the income statement and balance sheet into two summary measures of profitability in terms of performance such as ROA and ROE.
The DuPont system links the net profit margin with its total asset turnover. The net profit margin measures the business’s profitability on sales while total asset turnover indicates how efficiently the business has used its assets to generate sales. The net profit margin and total asset turnover are multiplied to get the business’s ROA. The return on assets (ROA) is multiplied by the financial leverage multiplier (FLM) to get the ROE (Brigham & Ehrhardt, 2005; Gitman, 2009). For this particular study, the Time-series Analysis (i.e. Trend Analysis) is employed via the DuPont system to analyse the selected company as a case study that involves comparing financial figures through the trends from the 2006 to 2010 financial statements. Time-series analysis evaluates the business’s financial performance over time, utilising financial ratios analysis. It can illustrate to the business owner (CS1) where changes need to happen in order to assist the business profitability. For example, if the trend analysis shows that the business’s liquidity is diminishing,
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the manager will have to take this into consideration and act immediately to enhance the business’s ability to meet its obligation (Hatten, 2008; Raheman & Nasr, 2007).
2.6.2 Key Financial Ratios
Working Capital, can measure how efficiently an enterprise’s management is able to monitor the enterprise’s operation. It is crucial for success to manage short-term assets and liabilities well in accordance with its operating cycle or cash conversion cycle (Sagner, 2010; D. Sharma, 2009). Gitman (2009) and Brigham & Ehrhardt (2010) describe how working capital should be managed and illustrates the benefits in various terms of liquidity, activity (i.e. efficiency), leverage, and profitability ratios. The key financial ratios assist in working capital and performance calculation for the case study of CS1 in this research is presented on the Appendix 5 (refer Table 6.5-1) .
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Chapter 3: Research Design and Methodology
3.1 Introduction
This Chapter is focused on the research design and applicable methodology for this research. The main purpose of this study is to explore and analyse, in terms of profitability the Impact of Working Capital Management Components on business performance of Tongan Enterprises currently operating in Auckland, New Zealand. Chapter 3 consists of 4 sections. Section 3.2 briefly discusses the research paradigms, philosophy and methodology, mentioned in the research paradigms, quantitative versus qualitative approaches. Section 3.3 discusses the research methodology explaining the qualitative inquiry approach (naturalistic) in terms of ontology, epistemology, axiology, rhetoric, methodology, generalizability and causal linkages. Section 3.4 discusses the research methods and techniques used in this study. The study used the method of semi-structured interview, focus group, using the Talanoa approach for collecting of the data. Section 3.4 discusses the combination of Talanoa and NVivo9 for analysing and coding of collective data for this research. 3.2 Research Paradigms or Worldviews:
This section discusses the rationale of the appropriateness of methodology to be used for the research. It also discusses the adapted approach, the method and techniques used to assemble data for the particular study. It considers the methodology and method of qualitative approach or naturalistic paradigm (i.e. Talanoa approach) to thoroughly investigate, analyse and explore the impact of working capital management components dynamic on performance of the Tongan SMEs operating in Auckland, New Zealand. A few extant literatures emphasise the essentials of understanding the philosophical approach that is critical to clarify and identify the research designs suitable for a particular research (Cohen, Manion, Morrison, & Morrison, 2007; Easterby-Smith, Thorpe, Jackson, & Lowe, 2008). Before the researcher progresses to design the appropriate methodology and decide the method and techniques for collecting of data it is necessary to understand the two paradigms or worldviews applicable to the study. Collis & Hussey (2003) state that; “the term paradigm refers to the progress of scientific practice based on people’s philosophies and assumptions about the world and the nature of knowledge” (p. 55). Lincoln & Guba (1985) argues that paradigm holds a worldview that defines for its holder, the nature of the world, the individual’s place in it, and the range of
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possible relationships to that world and its parts. Positivist (quantitative) and phenomenological (i.e. qualitative or naturalistic paradigm) are two methodological paradigms suggested by (Cohen et al., 2007; Collis & Hussey, 2003; Lincoln & Guba, 1985; Patton, 2002). They provide differing views on how research should be conducted. 3.2.1 Quantitative Approach (i.e. Positivist):
Quantitative approach requires the measurement of opinions of many SMEs owner-managers, in order to decide the differences or similarities that may exist from their perceptions and to construct comparisons (Patton, 1990). The nature of the reality (ontology) in quantitative research paradigm is more objective (i.e. purpose) and definitely separate from the researcher (Creswell, Hanson, Clark Plano, & Morales, 2007).
The quantitative approach requires a large sample size of participants to answer pre-written questionnaires and to test hypotheses. The advantage of the quantitative approach is the speed of assembly of the survey and the outcome is fast and gains a large sample of valid information from the interested survey population. The concept of generalisation is applicable due to a large quantity of valid information being gathered from use of written questionnaires (Patton, 1990). A disadvantage of the quantitative approach is its failure to consider people behaviour. 3.2.2 Qualitative Approach (Phenomenological):
The interpretivist paradigm or inductive research is on qualitative data collection that essentially reverses the process found in the destructive research. It focuses on developing theories with a view to explaining empirical observations of the real world. These empirical observations can be based on many factors, for example, they can simply be based on personal experience (Collis & Hussey, 2003; Creswell, 2006; Graziano & Rawlin, 2004; Lancaster, 2005).
Qualitative research does not require the establishment of previous theories or hypotheses. The study can build up new theories based on the actual observations thereby allowing a problem or issue to be studied or approached in several possible different ways with alternative explanations of what is going on (Lancaster, 2005). The qualitative approach will be used to explain the characteristics of the naturalistic inquiry (Lincoln & Guba, 1985).
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This qualitative approach will entail a small number of participants between eight and thirteen of the Tongan SMEs in Auckland metropolitan region. There would be semi-structure interviews with Tongan SMEs owners-managers and other key stakeholders, including business advisors, consultants, banks who cooperate with these Tongan SMEs. Thus, this research outline is consistently applying the qualitative inquiry phenomenon raised by different authors (Chetty, 1996; Eisenhardt, 1989a, 1989b; Hartley, 2004; Yin, 2003). 3.2.3 Quantitative (Positivist) versus Qualitative (Phenomenological):
There are two dominant research paradigms in social science research context known as positivist and interpretivist. Positivist refers to quantitative research while interpretivist refers to qualitative research (Collis & Hussey, 2003; Creswell, 2006). The table on Appendix 2 shows the differences in terms of assumptions between the two main paradigms as per (Creswell, 1997). Miles and Huberman (1994) state that the debate between quantitative and qualitative research has appropriately occurred at the level of paradigmatic and methodological levels. According to (Collis & Hussey, 2003; Jupp, 2006; Saunders, Lewis, & Thornhill, 2007), qualitative and quantitative approaches do not function in isolation. They complement each other and when combined offer a broader view that has found advocacy within business research. According to Voges (2005) quantitative (Positivist) approaches are concerned with measurement of definable constructs while qualitative (Phenomenological) approaches are concerned with uncovering meaning. Some of the extant literatures argue that both approaches can be combined (Eisenhardt, 1989a; Miles & Huberman, 1994). Despite this combination of the two approaches, the researcher is very concerned with mixed-methods and makes the decision to use the qualitative approach only in this study. The quantitative approach is not suitable in this research due to the small number of Tongan SMEs operating in Auckland, New Zealand at present. Thus the researcher considers the qualitative approach is the appropriate methodology for conducting this research. 3.3 Research Methodology – Qualitative Inquiry Approach
The qualitative inquiry approach in this study follows the philosophical assumptions of the qualitative inquiry paradigm, adapted by Creswell (2006) from the “axiomatic” issues advanced by (Guba & Lincoln, 1988). Creswell (2006) argues that the qualitative inquiry research is legitimate
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in its own rights and does not need to be compared with the naturalistic inquiry or quantitative inquiry to achieve respectability in today’s social science research. Creswell (2006) adds to Guba & Lincoln (1988) concerns, the rhetorical assumption that recognises the need to attend to the language and terms of qualitative inquiry. Thus, this study has to adapt and follow the philosophical assumption of qualitative inquiry being appropriate for this research, as shown on the table of Appendix 3. 3.3.1 What is the nature of reality? (Ontological assumption)
Ontological assumption is the first characteristic of qualitative inquiry approach or naturalistic inquiry approach. According to Creswell (2006) ontological issues are related to the nature of reality and its characteristics. In conducting a qualitative research, the researcher has to embrace the idea of multiple realities. The researcher reports the outcome of the study regarding the participants’ (individuals) multiple realities. The report of these multiple realities includes the use of multiple quotes based on the actual words of different individuals and presenting different perspectives from individuals. With regard to this study, it firstly seeks the impact of the WCM on Tongan SMEs business performance that is the reality to be investigated. The experiences of the Tongan SMEs ownermanager in operating business in Auckland, pinpoint the multiple perspectives on managing WCM in the business. The socio-cultural factors of the Tongan SMEs owner-manager impact on WCM would count as one of the perspectives and realities to be inquired. 3.3.2 What is the relationship of the researcher and that being researched? (Epistemological)
In general epistemological assumption is the relationship built by the researcher and the participant. When conducting a qualitative study, the researcher attempts to get as close as possible to the participants being researched. The researcher attempts to collaborate and spend longer time in the field with participants getting to know them and becomes an insider (Creswell, 2006; Guba & Lincoln, 1988). This notion is supported by Wolcott (1999) who indicates good ethnography requires a prolonged stay at the research site. According to Guba & Lincoln (1988) the researcher attempts to reduce the distance or objective separateness between the researcher and the participant being researched. In the positivist inquiry approach the researcher is independent from that being researched Guba & Lincoln (1988) which is in contrast to the phenomenological approach. In
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short, there is no previous relationship between the researcher and the participant being researched in the positivist paradigm.
From the Tongan cultural perspective a “closed relationship” is the fundamental core element within the society. Thus, the epistemological assumption of qualitative inquiry approach is well suited to the Tongan Culture and also other Pacific ethnicities, in terms of values, beliefs, perceptions, humble feelings, languages and ideologies of individuals. These aspects are always imposed on Pacific islands’ identity as the normality of their cultures. Despite there being no preexisting relationship between the researcher and the participants in the study, it is easy for the two parties to formulate the closeness of their relationship during the process. The study is started by building the relationship between the researcher and the Tongan business advisory providers such as New Zealand and Tongan Business Council via the Auckland Chamber of Commerce. 3.3.3 What is the role of values? (Axiological assumption)
In conducting the qualitative inquiry approach, there is a need to consider values. The researcher then has to make explicit those values in the qualitative study. According to Creswell (2006), it is the axiological assumption that can characterise the qualitative research. The researcher can implement this assumption in the qualitative study by admitting the value-laden nature of the research and positively report those values and biases as well as the value of information gathered from the participants.
Only the values that may be relevant to characterise the narrative of the study may be discussed. The researcher can stimulate any kind of interpretation in conjunction with the interpretation of the participant in qualitative inquiry paradigm. In this study, the researcher consequently has the potential of values to facilitate the research in a freely and friendly manner with respect of the values of participants. 3.3.4 What is the language of research? (Rhetorical assumptions)
According to Creswell (2006) the qualitative researcher writes in a literary, informal style using the personal voice, using qualitative terms and limited definitions in the qualitative inquiry method. Over time Greckhamer & Koro Ljungberg (2005) state that the researcher is notorious for using the labels and names of aspects in qualitative study.
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However the researcher in the qualitative paradigm tends to use the rhetorical assumption in writing of the research informally and literary manner. Instead of using quantitative terminologies such as internal validity, external validity, generalizability and objectivity, the qualitative researcher may use terms such as credibility, transferability, dependability, conformability, or validation (Guba & Lincoln, 1988) 3.3.5 What is the process of research? (Methodological assumption)
According to Creswell (2006) methodological assumption is the procedure of qualitative research are characterised as inductive, emerging, and shaped by the researcher’s experience in assembling the data. It follows the inductive process logically, from the ground level up to the stage of generating a theory. The researcher works with details before generations, describes in detail the context of the study, and continually revises questions from experiences in the field. This study follows the similar methodology of inductive logic, studies the topic within its context and uses an emerging design to develop theoretical SMEs business model.
This study constructs its own research structure model as shown on Figure 3.4.1-1.The method used for data collection in this study is known as Talanoa approach. The semi- interviews, focusgroup and case study are scheduled to use in the form of Talanoa for collecting data of the research. Each stage of the research has its own techniques of collecting, coding and analysing of the data from participants. The researcher focuses on the path to analyse the data more carefully aiming to develop an increasingly detailed knowledge of the research topic. 3.3.6 What is the possibility of generalisation? (Generalizability)
The aim of qualitative inquiry under the canopy of generalizability is to develop a unique body of knowledge in the form of working out hypotheses that describe the individual case (Creswell, 2006; Lincoln & Guba, 1985). In positivist inquiry it is aimed to develop a body of knowledge in the form of generalization, which can apply to anywhere in the same control statistical manner. In this study, the researcher attempts to assemble together all the participants’ views, comments and experiences in managing of working capital components in their own businesses.
In the sample selection of Tongan participants for this study, the participants are selected only from the Auckland region. This study follows the theoretical concept founded by Eisenhardt (1989a) of conceptualisation of a model from multiple case studies. The researcher attempts to
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conceptualise a theoretical generalized model for the Tongan enterprises in New Zealand as shown in the sub-section of Theoretical discovery. 3.3.7 What is the possibility of causal linkages (mutual simultaneous shaping)?
Creswell (2006) and Lincoln & Guba (1985) indicate that all entities (researcher and participants) are in a state of “mutual simultaneous shaping” so that it is impossible to distinguish causes from effects. This means that everything influences everything else in all aspects. All elements in the research field simultaneously interact with each other in different ways and there is no need to produce a particular outcome. The end-product accidentally happens as outcome (effect) of the interaction and is known as mutual shaping.
This study analyses and explores the impact of Working Capital dynamics on the performance of Tongan SMEs operating in Auckland. Previous studies, suggested that poor management of working capital may cause the failure of SMEs performance in terms of profitability. The allowance of socio-cultural factors into the business equation of the Tongan SMEs, may influence (impact) on business performance. The mixture of the inappropriate accounting system, accounting practice, and lack of skills may also cause poor performance of Tongan SMEs (J. Prescott, 2004; S. Prescott, 2009). Thus the qualitative (naturalistic) inquiry approach is adapted in this particular research 3.4 Research Methods –Using Traditional Pacific Talanoa Approach
3.4.1 Methodological Structure of Research- Talanoa Approach This section illustrates the unique research approach of qualitative (naturalistic) research (i.e. exploratory approach) that is the traditional research philosophy framework for this particular study. The method uses the Pacific Talanoa approach in semi-structure interview, focus group, and a case study in collecting and analysing of data for this particular study. The Talanoa methodology was adapted from the original work of (Halapua, 2000, 2003, 2007) and its conceptual consistency remains applicable to the research data collection, data analysis, focus group and other theoretical analysis. The theoretical discovery stage focuses on development models using Talanoa theory approach.
In the Pacific way of societal talking, mainly in the Tongan society there is a spectacular kind of oral communication Pacifically known as Talanoa Approach. According to S. Prescott (2009, p.
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60) states Talanoa means to talk, story-telling, expose or disclose the reality of a thought or to unveil the ‘unknown’ of an existing concept. Talanoa concept has the idea of dialogical process in the Pacific (i.e. Tongan) manner. It has always involved two participants in the process of talking and listening, and they must be simultaneously going together (Halapua, 2000; Otsuka, 2005; Vaioleti, 2006; Vaka'uta, 2009). Talanoa is arguably recognised as a traditional methodology of communication as a default in the Pacific research paradigm (S. M. Prescott, 2008). Talanoa is a special methodology of exposing and disclosing processes used by the Pacific academic researchers to collect, analyse and discuss important scenarios in real-life (Goundar, 2005; Halapua, 2007).
1. Pre-study of Tongan Enterprises in Auckland
Literature Review of WCM & Invitation of Participants
P A C
2. -
Sample Selection Criteria sampling- Tongan Enterprises in Auckland Theoretical Sampling - to achieve saturation
I
Next interview TALANOA
F I C
Focus Group and Talanoa (CAQDAS)
3. -
Data Collection Semi-structure interviews, Using Talanoa Recording of interviews using digital recorder (CAQDAS)
Case Study using Talanoa (CAQDAS)
T A L A N
Follow up interviews & Talanoa
4. -
Data Analysis & Coding Using Financial Ratios, NVivo9 and (CAQDAS) Talanoa Approach Discussion and Findings Professional Talanoa and commentary
O A
A P
5. -
Theoretical Discovery & Conceptualised Models Constant Comparison Analyses Discussion and Findings Development of Theory using Talanoa Theory and Case Study
P R O A C H
Figure 3.4.1-1: Structure of Research on the WCM of TONGAN SMEs in Auckland, NZ
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3.4.2
Data Collection
According to Yin (2008, 2009) the qualitative inquiry approach usually belongs to the phenomenological paradigm and is an in-depth study of a particular setting such as an organisation. Thus, there are five stages of data collection and data analysis conducted in this study to be followed when conducting this exploratory research as follows;
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Pre-study of Tongan SMEs in Auckland Sample selection process of Tongan enterprises participants Data Collection (i.e. Semi- structure interviews, Focus Group, and Case study all using Talanoa approach) Data Analysis and Coding –Using financial ratios, Talanoa and NVivo9 Theoretical Discovery and conceptualised Models.
Stage One:- Pre-study of Tongan SMEs in Auckland Stage one is the Pre-study of Tongan enterprises operating in New Zealand. Following is the review of extant literatures, in order to recognise the gap and issue to be investigated. The delivery of invitation letters to the selective group of Tongan enterprises is conducted at this stage. The letter, including information from the Ethical Committee of Unitec Institute of Technology explains the purpose of the study. Finally the researcher sets up the Gantt Timeline, scheduling the semi-structure interviews with the participants according to the agreed time.
Stage Two: Sample Selection Process of Tongan SMEs Participants At this stage the researcher selects participants from the Tongan enterprises who are operating in Auckland metropolitan only. The selection process for this research is based in terms of criteria and theoretical sampling and was guided by the research question shown in chapter one. The point of contacts for the selection sampling heavily depends on the New Zealand and Tongan Business Advisory Council along with the assistance of a selective consultant from the Pacific Business Trust.
The Tongan enterprises participants require to agree and sign the official organisation consent form from the Ethical Committee of the institute, in order to show their willingness to involve in this particular study. The total number of potential Tongan SMEs participants involved in the semi28
structure interviews was 8. They were given with unique codes in the sequence of T1, T2, T3, T4, T5, T6, T7 and T8. Four professionals agreed to have their Talanoa session together in a focusgroup as shown by their unique codes FT1, FT2, FT3 and FT4. There was one company selected amongst the eight participants as a case study (CS1). The communication enterprise was selected for case study due to the availability of financial information for this study. Thus, the total number of participants involved in the semi-structure interview, focus-group and case study was total Talanoa sessions of 13.
Table 3.4.2-1: Tongan SMEs Participants for Interviews, Focus Group and Case Study
Tongan SMEs Category Accounting Firm Financial Services Business Consultancy Retail Coffee Bar Graphic Design & Communication Art Gallery Pacific Business Consulting Services
Code T1 T2 T3 T4 T5 T6 T7 T8
Number of Employees 6-10 10-20 1 4 3 3 1 12
Number of Tongan SMEs Participants 1 1 1 1 1 1 1 1
Total
Focus Group Professionals Business Advisory (Consultants) Business Advisory (Consultants) Business Owner/Manager Chartered Accountant Codes FT1 FT2 FT3 FT4 Number Participants 1 1 1 1
8
Number of Professionals 1 1 1 1
Total
CASE STUDY Graphic Design & Communication Total CODES CS1 Number of Participants 1
4
Number of Case Study 1 1
Overall
13
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Participants are likely to fall in the category of small accounting firm (T1), financial services (T2), business consultancy (T3 & T8), retailing (T4 & T5), graphic design & communication (T6), and art gallery (T7). All these Tongan enterprises are currently operating more than five years. The participants for Focus-Group were voluntarily captured from business advisory (FT1 & FT2), business owners/managers (FT3), and chartered accountant (FT4). All the collecting data, name of participants, audios and videos from these Talanoa sessions are kept in a very safe and locked place. Thus only the unique code is used in this study instead of the participant’s name.
Stage Three: Data Collection- Using Interviews, Focus Group and Talanoa
The data collection process was conducted at stage 3 as per research structure model shown in Figure 3.4.1-1 of the research structure model. The researcher has visualised the data collection process as interrelated activities aiming to gathering good information to answer the emerging research question as explained in chapter one of this study. This qualitative research engaged a series of activities in the data collection process as shown below: • Semi-structure interviews (one-to-one) using Talanoa approach-recording of interviews using digital recorder • Focus Group using Talanoa approach - Discussion and Findings (Four Professionals using Talanoa approach to analyse the Data) • Case Study using Talanoa approach - Only one Selected Tongan SME being observed focusing on liquidity short-term assets and current liabilities of its financial statements
Semi-Structure Interview with Talanoa:
The purpose of using the semi-structure interview with Talanoa is to explore the important elements of WCM in each SME in a more detailed manner, and find the financial practice and techniques employed by the Tongan SMEs. Semi-structure interviews with Talanoa establish new themes leading to a conceptualised theoretical model for WCM in SME. According to Miles & Huberman (1994) the sampling for qualitative research should be purposive rather than random. The semi-structure interview with Talanoa session was only targeted the Tongan enterprises owner-managers in Auckland. Only eight Tongan SMEs were available for semi-structure interviews. The semi-structure interview with Talanoa was carried at the participants’ premises, except one (T6) that was done at the Unitec venue. Each semi-structure interview was a one-to-one correspondent between the researcher as the interviewer and the Tongan SME owner-manager as the interviewee. The duration of each interview was arranged from between 45 to 60 minutes. Each
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interview was followed by the Talanoa session for another 30 minutes, in order to analyse the reality, validity and reliability of the data being announced during the semi-structure interview session. The digital recorders, personal laptop, were pre-tested devices for the recording modes of Talanoa sessions.
All participants signed the organisation consent form and also a participant consent form, prior to the semi-structure interview session, in order to confirm their willingness to participate in this study. These signed consent forms spell out the purpose and the method of how the semi-structure interview and Talanoa would be conducted. The process of the semi-structure interview was conducted in an informal manner, using the direct and indirect questions, aiming to achieve the reality and validity of data regarding the impact of working capital management on business performance.
All participants agreed to conduct the interview and Talanoa sessions in bilingual manner, English and Tongan. Because of the complexity of financial and management accounting terminologies, the participants preferred to use the English version throughout the sessions. The researcher had no previous relationship and collaboration at any time with the participants. Therefore it was critical for the researcher to justify all aspects before conducting the interview and Talanoa sessions. The participants have different attitudes towards the interview and Talanoa sessions with the researcher. Only the professionals for the Focus Group were known to the researcher through the channel of Unitec networking. During the conducting of the semi-structure interview and Talanoa sessions, that participant and the researcher came to understand each other. They built up an overwhelming relationship of bonding in terms of knowing the nature of reality (ontological) and significance of this study.
The data collected from the semi-structure interviews was analysed using the well-known Pacific Research methodology of Talanoa approach. It was used in this particular study to unveil the reliability and validity of the data being collected. Talanoa approach also enhanced the essence of the various suggested ideas assembled from the data collection process being conducted. Talanoa approach provides a highly rate of chance to achieve a greater understanding of the Tongan SMEs, operating in Auckland. It also assists to conceptualise and construct a relevant model for any recommendations and potential suggestions from the collecting data (Manu‘atu, Foliaki, Tu‘itahi, & Prescott, 2008; Vaioleti, 2006).
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Therefore the Talanoa approach is vital for the collecting and analysing of data for the impact of working capital management on business performance of the Tongan SMEs. There are recognised issues in using the Talanoa approach in any Pacific research. The nuances (issues) are included, the entire Pacific traditional attributes such as ethnicity values, business perceptions, passion, talent, experiences, skills and academic knowledge, native language, relationships and interactions with the researcher (Vaioleti, 2006). These issues are importantly considered in order to reach the saturation point of any Pacific study.
Focus Group using Talanoa approach:
A focus group is defined by Collis & Hussey (2009) as a method for collecting data where by selected participants discuss their reactions and feelings about a product, service, situation or concept, under the guidance of a group leader (i.e. researcher in this study). A Focus Group is used in this study and can provide access to forms of data that are not obtained easily during the semistructure interviews or any research methods. The main advantage of using a focus group is the opportunity to observe a large amount of interaction on a topic in a restricted period of time based on the researcher’s ability to collect and facilitate the focus group sessions (Morgan, 1997; Morgan & Bottorff, 2010). However, Morgan (1997) argues that the focus group method also has a disadvantage in the sense of unnatural social settings. A Focus group by itself is limited to verbal behaviour, consists only of interaction in discussion group and is created and managed by the researcher. It is for this reason the Talanoa approach is the appropriate qualitative method to be used in facilitating the focus group in the assembling of qualitative data. Talanoa approach in the focus group would be appropriate as it enables participants to engage and interact actively in a safe and trusted setting.
The focus group in this study is scheduled to cover the duration of 45 to 60 minutes. However the discussion and exchange of relevant ideas regarding the research topic is allowed until it stops when saturating point is reached. Finally the researcher adapts the procedures for focus Group from Collis & Hussey (2009), as follows: 1. Preparing of list of issues to cover during the focus group (this study is using power points presentation) 2. Inviting four professionals with good experience in the Pacific SMEs (Tongan) operations
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3. The researcher creating a relaxed atmosphere when introducing these professionals and explaining the purpose of the focus group, and how it should be done. 4. Starting the session with a broad, open question. This is done on an overhead projector with the prepared visual explanations and examples. 5. Allowing the participants to discuss the issues as the researcher introduces them without any intervention except to ensure that all members have an opportunity to continue to the discussion and all the issues are covered. 6. Talanoa session is gradually applied at the end of the focus group session for analysis the process. 7. The audio and video recording is done by a researcher assistant from the postgraduate students while the researcher focuses on facilitating the session.
Case study using Talanoa approach:
According to Eisenhardt (1989a) states that a case study as a research which focuses on understanding the dynamics present within a single setting. Collis & Hussey (2003) denotes that the case study approach usually uses in phenomenological research (i.e. interpretivist paradigm). It is also an in-depth study of a particular setting such as a business entity. Therefore, the researcher has to conduct the case study using Talanoa approach as the third approach for collecting of data. The purpose of using the case study is to analyse the financial statements as secondary data; to justify and measure the impact of WCM on business performance using various working ratios and profitability measures such as ROA, and ROE.
The Talanoa approach plays an important role in this case study. The researcher and business owner/manager shared the financial issues during the Talanoa session. The combination of observations and exploration throughout the Talanoa session of the case study would have enhanced the validity of the financial information related to the business performance. The calculation of the performance in terms of profitability is done, using the traditional profitability measures as mentioned above. This profitability measurement process validates the level of WCM impacts on business performance of Tongan SME in New Zealand.
The secondary data of financial statements from this case study helps the calculation of working capital ratios and financial performance ratios. This case study has followed the process of building theory suggested by Eisenhardt (1989a). It is getting started with the definition of the research
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question followed by the selecting the case. The selected enterprise was from the communication sector which has the available financial information for this study. The data collection in this case study adopted the Talanoa approach in discussing the process of working capital management internally.
The data analysis is also done through Talanoa session and financial ratios analysis in order to justify the impact of the working capital management on the business financial performance of the Tongan enterprises. The Time-Series approach is adopted for comparison of the financial ratios analysis based on the consecutive five years (from 2006 to 2010) financial statements of the selected communication company (CS1). The DuPont system analysis is also adopted to calculate the measurement of business financial performance in terms of ROA and ROE. The relevant literatures for case study are closely applied in order to build validity, and construct theoretical saturation from the case study. 3.4.3 Data Analysis
Stage Four: Data Analysis using Talanoa session, NVivo9 & Financial Ratios: The first method of data analysis was the using of Talanoa session after each semi-structure interview for more than 45 minutes. The data analysis was scheduled to be conducted in four stages of Talanoa session, transcribing, summarising and thematically coding. The first stage was done during the Talanoa session. The second stage was the transcribing of the videos, audio tapes and translation process. The third stage was the summary of the main concepts from the transcripts using excel worksheet templates. For the final stage of data analysis was the coding of the transcripts into categories and themes.
Step 1: Talanoa approach
During the semi-structure interview session, the researcher has noted down the main concepts to be analysed in the Talanoa session. In this first stage, both researcher and the participant discussed data thoroughly, in order to understand the effects of Working Capital Management dynamics on performance of the business. At the beginning of the Talanoa session, the researcher reaches out with an indirect question encouraging the participant to reason out the important issues of the data. The researcher used a very high quality digital tape recorder to record the Talanoa session for transcription process in the second stage.
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Step 2: Transcribing and Translating
When the Talanoa session is completed then the researcher saves the recording data and prepares for the transcription process, i.e. recording the data into text documents using English as a preferred version for writing the report. Another challenging role is the translating of the texts from Tongan into the English version. This is done intentionally in a careful way in order to keep the validity of the collected information. The next stage involved importing the Talanoa transcripts into the NVivo9 for more coding, analysis and modelling process.
Stage 3: Summarising and Validation
For validation purpose, the researcher uses the “word document and excel spreadsheet” interchangeably for transcribing and coding of the data numerically before importing to NVivo9 for further more coding and analysis process and modelling. The table below shows the category and unique code for professionals involved in the focus group.
Focus Group Professionals Business Advisory (Consultants) Business Owner/Manager Chartered Accountant
Codes FT1, FT2 FT3 FT4
Number of Professionals 2 1 1
Total
4
Step 4: Categorising and Thematic Coding in NVivo9
The data coding process was conducted at stage 4 of the data analysis. The using of NVivo9 software and Talanoa approach are the two methods of analysing the collective data from the semistructure and focus group for this research. The analysis of qualitative data including coding data into categories that organise it and portray it to one or more frameworks, or set of ideas, are carried out (Lofland, Snow, Anderson, & Lofland, 2006). OSR International, the developer of NVivo, advocates providing the researcher with a set of tools to assist the researcher in understanding an analysis of qualitative data (Bazeley, 2007). Thus, there are five main principal ways in which NVivo supports analysis of qualitative data as follows (Bazeley, 2007):
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1) 2) 3) 4) 5)
Managing of data Manage ideas Query data Graphically model Report from the data
In NVivo, conceptual maps, flow charts, or purely exploratory diagrams can be created using the modelling tool, and are generically referred to as models. The NVivo9 software is used to assist the researcher in the concept-building process and also helping with the organising of the conceptual framework development of working capital management for enterprises. The NVivo9 software is used in this study to organise data in a systematic manner and to recognise patterns lying between the data (Bazeley, 2007).
The coding process employed predetermined themes and categories. However, when a different issue emerged it was categorised to illustrate the pattern explaining the dynamic of working capital management practices. One of the advantages of using the coding and analysis approach was an opportunity to view issues from all the participants. Various narratives; dialogues in telling stories and presenting other evidence emerged from their natural settings (Auerbach & Silverstein, 2003). The study has a large amount of qualitative collected data to be analysed. Therefore, this typical study was needed a systematic approach to organize and manage the collected data.
The researcher imported all the collected data from the excel worksheet template into NVivo9. All the importing data should be kept in the source folders, with applicable code names. After importing of data into source folder in NVivo9, the next step was the creating of a Nodes folder for the Coding process. The creation of each Node was vital for coding and thematic process. The importing documents were read and coding started by copying and pasting into the appropriate Node folder and also Tree Nodes (i.e. sub-category). The NVivo9 qualitative software consists of few important folders such as Sources, Nodes, Classifications, Collections, Queries and Reports as shown below.
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Figure 3.4.3-1: Constant comparison analysis: Coding in NVivo9 qualitative software
Seven types of Qualitative data analysis techniques using NVivo9
Leech & Onwuegbuzie (2011) outlined seven types of qualitative data analysis techniques. They presented in their study the step-by-step guidance for conducting these analyses by using computer-assisted qualitative data analysis software (CAQDAS) called NVivo9. Specifically the seven analysis techniques are as follows; 1. Constant comparison analysis 2. Classical content analysis 3. Key-word-in-context analysis 4. Word count analysis 5. Domain analysis 6. Taxonomic analysis 7. Componential analysis. All these seven types of qualitative analysis techniques can be conducted by using the NVivo9 in this study. Only Constant comparison and Classical content analyses are highly used for data analysis within NVivo9. The other five analysis techniques are randomly used, but not much in this study. Constant Comparison Analysis is the most commonly used qualitative data analysis and was developed by Glaser & Strauss (1967). Classic content analysis is almost the same as constant comparison analysis but the themes and codes are counted to identify the concepts were predominantly discussed. Thus, the features of NVivo9 assist to facilitate these two specific analysis techniques in articulating themes from the interviews data contents of Tongan SMEs in
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this study refer Appendix 10. The Table 3.4.3-1 below shows the possible themes created by the researcher in NVivo9 for findings and discussion.
Table 3.4.3-1: NVivo9 Themes Code for Findings and Discussion
Nvivo9 Themes Code WCM
SMEs Unique Code
Nodes- Free Nodes
Tree-Nodes (Sub-themes)
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
CM
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
IM
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
ARM
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1 T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
APM
Cash Inventory Account Receivables Working Capital Account Payable Management Operating Cycle Performance & Profitability Working Capital Ratios Cash Flow Forecast Cash Budget Cash Management Motives of Holding Cash Cash Conversion Cycle Raw Materials Work-In-Progress Inventory Finished Goods Management Just-In-Time Inventory Control Account Average Collection Period Receivables (ACP) Management Average payment period Account Payable (APP) Management Operating Cycle Cash Conversion Cycle Investing in WC Financing of WC Aggressive policy Conservative policy Defensive policy DuPont System Analysis ROA ROE
OC WCP
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1 T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4 CS1
Working Capital Policy
BFP
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4 CS1
Business Financial Performance
Stage Five: Theoretical Discovery using Case Study and Talanoa Approach
Talanoa Approach means to move beyond the description and to generate or discover a theory, an abstract analytical schema of a process (S. M. Prescott, 2008; Vaioleti, 2006). The participants in
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the study would have many more experiences in the process that explain practice and also provides assistance to form a framework for further research. According Prescott (2008) the key idea is that the theory-development does not come off the shelf, but rather it is generated in data from selective participants experienced in the process. Thus, Talanoa approach is a default Pacific qualitative research design in which the inquirer generates a general explanation (i.e. a theory) of a process, action, or interaction shaped by the views of a large number of participants (Otsuka, 2005; Vaioleti, 2006; Vaka'uta, 2009).
The Talanoa Approach is an unstructured system of Pacific oral communication. However in this study the researcher changes the Talanoa Approach to be systematic and a constructive approach depends on the nature of the Talanoa sessions context. The systematic approach states that the researcher investigates to develop a theory systematically, to explain a process, action, or interaction on any interested topic of research. The systematic approach typically involves conducting a few interviews based on several visits to the field for assembling data to saturate the categories, or seeking information to add-on until there is no more to be found. The researcher collects data and analyses observation and produces documents from the data immediately.
The constructive approach of Talanoa, advocates that the constructivist Talanoa approach depends on the researcher’s views, learning about the experience within embedded, hidden networks, situations, and relationships, and making visible hierarchies of power, communication, and opportunity. This constructive approach of Talanoa session places emphasis on the views, values, beliefs, feelings, assumptions, and ideologies of individuals rather than on the methods of research (Halapua, 2007; Otsuka, 2005; Thaman, 2002; Vaka'uta, 2009).
Thus Talanoa approach is used to provide the theoretical framework for this study and also construct a conceptual model for the Tongan SMEs in New Zealand. This provides a means of investigating, exploring, identifying and explaining the actual financial practices and techniques employed by the Tongan SMEs in Auckland.
This study is also adopted the model from Eisenhardt (1989a, p. 533) as shown in the Appendix 11 associate with Talanoa approach in constructing a conceptual working capital management model for the Tongan SMEs in New Zealand.
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Chapter 4: Results and Discussion of CS1’s WCM (Case Study)
4.1 Introduction
This Chapter covers the results of CS1’s financial statements trends analysis, using the key working capital ratios via the DuPont system such as liquidity ratios, leverage ratios, activity ratios, and profitability ratios. The financial ratios analysis justifies the impact of working capital management on CS1’s business financial performance.
The findings from the Talanoa sessions and observation with the CS1’s business owner/manager is analysed and discussed in the context of western commercial financial management in New Zealand. Thus the discussion in this Chapter is only referencing to the CS1’s Talanoa session and observation. The summary of the Talanoa sessions and observation with CS1’s owner/manager is also briefly discussed with reference made to NVvcivo9-CS1. 4.2 Case Study – CS1’s Financial Statements Analysis - Financial Ratios
To make sound financial decisions within CS1’s business, financial ratios play an important role in terms of analysing the financial statements relative to its financial performance. The financial ratios articulate the relationships showing the relative size of some financial quantity to other financial ratios within CS1’s business. According to Hatten (2008) there are four main important categories of financial ratios to be used in financial statements analysis. These are the liquidity, activity, leverage and profitability ratios.
For the purpose of analysis, ratios are useful only when compared to other ratios. Hatten (2008) and Gitman (2009) discuss the three ratio comparisons that can be employed. For example, the benchmarking analysis, which compares industry leaders; industry average analysis is to compare firms’ financial ratios to industry averages; and trend analysis, for comparing a single firm’s present performance with its own past performance, preferably for more than two years. 4.2.1 Liquidity Ratios analysis of CS1:
The term liquidity refers to the ability of a firm to satisfy its short-term obligations as they become due. It also refers to the solvency of the firm’s overall financial positions. Liquidity can assist the shareholders’ wealth maximization, and can enable long-term lenders and creditors to understand the current safety margins of a given firm to pay its loan obligations (Eljelly, 2004; McInnes,
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2000). The two main ratios used to measure the cash flow problem of a firm are known as Current Ratio and Quick Ratio. Working Capital components such as cash, inventory, account receivables and account payables affect the liquidity of a firm in the form of cash flow (Brealey et al., 2006; Maness, 1994). When an enterprise operates with a lack of cash, it has trouble in collecting its accounts receivable. If it is short of inventory, it may face difficulties keeping up with demand for its products and services, and revenues will be affected (Gitman, 2009; Van Horne & Wachowicz, 2008).
Current Ratio and Quick Ratio:
The current ratio is one of the commonly cited financial ratios as it measures the firm’s ability to meet its short-term obligations. This process is done by dividing the business’s current assets by its current liabilities. Current ratio assumes that both account receivables and inventory can be easily converted to cash. A current ratio of 1:1 or less is considered to be low and indicative of financial difficulties. A current ratio of 2:1 is recommended to be a desirable minimum. A current ratio that is more than 2:1 often suggests excessive liquidity that may be adverse to the business’s profitability (Boone & Kurtz, 2010; Gitman, 2009; Hatten, 2008).
The quick-ratio (acid test) is similar to the current ratio except that it excludes inventory, which is the least liquid current asset. It measures the business’s ability to meet its current obligations with the most liquid of its current assets (Boone & Kurtz, 2010; Brealey et al., 2006; Gitman, 2009; Hatten, 2008).
Case of CS1’s Liquidity Ratios Analysis outcome:
According to Hatten (2008) and Gitman (2009) a current ratio of 1.0 or less is considered to be low. It indicates to the financial controller or manager that there is a financial difficulty facing with the business at that point in time. The current ratio of 2.0 or more frequently suggests excessive liquidity that may be adverse to the business’s profitability.
Current Ratio = Current Assets Current Liabilities
Quick ratio = Current assets – Inventory Current Liabilities
Liquidity Ratios:
Current Ratio Quick Ratio Short fall %
2006
1.04:1 1.04:1 0
2007
0.98:1 0.98:1 2%
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2008
1.11:1 1.11:1 0
2009
0.75:1 0.75:1 25%
2010
0.77:1 0.77:1 23%
Liquidity Ratios of CS1 (2006-2010)
1.20 1.00 Ratios 0.80 0.60 0.40 0.20 0.00 2006 2007 2008 Years Figure 4.2.1-1: Current and Quick Ratios of CS1 2009 2010 0.75 1.04 1.11 0.98 0.77 Current Ratio: Quick Ratio
A review of the current and quick ratios (liquidity) of CS1 (per Error! Reference source not found.) shows they are both exactly the same. This indicates that CS1 is mainly focused on selling services to its customers instead of products. Moreover, the closing inventory amount is omitted from the business balance sheet due to incomplete stock take processes. As the graph in Error! Reference source not
found.demonstrates,
CS1 can only cover its current liabilities 1.04 times and 1.11 times with its
current assets in 2006 and 2008 respectively. The current ratios of 1.04 in 2006 and 1.11 of 2008 recognise that CS1 has $1.04 and $1.11 of current assets for each $1.00 of current liabilities. In conducting the Time-series or Trends Analysis comparison with the other current ratios of 2007, 2009 and 2010, it can be seen that CS1 is having difficulty in meeting its obligations within these financial years. However CS1 is doing well in 2006 and 2008, in the area of liquidity, albeit with some room for improvement. CS1 has fallen short of covering its obligations with 2%, 25% and 23% in 2007, 2009 and 2010 respectively (refer Error! Reference source not found.). The Talanoa session with the owner of CS1 reveals the same aspects of concern as demonstrated by the graph in Error! Reference source not found. (refer table in Appendix 6). Thus the management of CS1 is very concerned about the account receivables collection policy that absolutely inconsistently applied. Within the financial years of 2009 and 2010 there were huge cash flow problems for the business that had a negative impact on the business’s financial performance. Moreover, the graph in Error! Reference source not found. illustrates that CS1’s current liabilities were not able to be paid in 2009 and 2010, due to cash flow problems and poor management of current assets within the business.
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The owner/manager of CS1 mainly focuses on completing services for customers and does not consistently focus on the collection of cash inflow from customers (NVivo9-CS1). CS1’s owner/manager confesses that there is no business plan in place in order to manage its current assets and current liabilities. This confirms that the financial forecasting and budgeting are totally out of the business operating cycle of CS1. The external accountant is only focused on preparing CS1’s annual financial reports, without any further assistance in the establishing of cash-flow forecasting with neither operational nor capital budgeting (NVivo9-CS1). 4.2.2 Activity Ratios (i.e. Asset Management Ratios) of CS1:
Activity ratios measure how fast various accounts in a particular business are converted into sales or cash. These ratios are frequently used to measure how efficiently a business uses its assets to generate sales or cash. It also provides a measure of how effectively an organisation is using its assets to generate net income. There are four important Activity ratios in the business context: inventory turnover, average collection period, fixed asset turnover, and total asset turnover (Boone & Kurtz, 2010; Gitman, 2009; Hatten, 2008).
Case of CS1’s Efficiency (Activity) Ratios Analysis Outcome
Account Payment Period =Account Payable Ave purchase per day ACP = Account Receivable Ave Sales per day
Inventory turnover = Cost of Goods Sold Inventory
Activity Ratios:
Inventory Turnover Total Asset Turnover Average Collection Period (ACP) Average Period Payment (APP)
2006
NA 3.07 42 179
2007
NA 2.35 20 165
2008
NA 3.48 26 152
2009
NA 7.50 40 256
2010
NA 6.94 31 50
Activity Ratios of CS1 (2006-2010).
300 Number of Days 250 200 150 100 50 0 2006 2007 2008 Years Figure 4.2.2-1: Activity Ratios of CS1
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256 179 165
152 Average Collection Period
42
20
26
40
31
50
Average Payment Period
2009
2010
Inventory Turnover Ratio
The Inventory Turnover ratio measures the liquidity of the business’s inventory to identify how quickly goods are sold and replenished. When the business turns over its inventory more quickly during selling process has a higher turnover ratio that generally implies efficient inventory management (Birt et al., 2011; Brigham & Ehrhardt, 2005; Hatten, 2008).
It is difficult for the researcher to calculate the Inventory Turnover Ratio for CS1. This is because the balance sheets for five consecutive financial years do not show any inventory figures. Further, activity analysis shows that stock control is an issue. CS1’s manager explained the omission of inventory figures from the current assets section of the balance sheet as being a focus mainly on selling time and services rather than selling products. However the statements of financial performance for all financial years reported the purchase of raw materials, labour costs, and other related overheads. Moreover CS1’s manager confirmed that these costs are related to manufacturing of finished products ordered by relevant customers. Therefore the omission of inventory figures affects the real balance sheet. It also indicates that the Inventory control system is not properly practiced in CS1.
Average Collection Period Ratio:
Average Collection Period is a measure of how long it takes a business to convert a credit sale into a cash form. Gitman (2009) and Hatten (2008) discuss that all businesses extending credit must compute this ratio in order to determine the effectiveness of their credit giving to customers and their collection policies. High average collection periods indicate to the business managers, how many uncollectible account receivables must be managed. Here low average collection periods indicate overly restrictive credit policies have been granted to customers.
Throughout five consecutive financial years CS1 collecting of receivables averaged 31.8 days. By comparison, using Trend Analysis, the collection of credit sales in 2007 and 2008 was 23 days faster than 2006, 2009 and 2010. CS1 seems to have had many uncollectible receivables in 2006, 2009 and 2010, with high average collection ratios of 42, 40, and 31 days respectively. The low average collection period of 20 days and 26 days for the periods of 2007 and 2008; may indicate overly restrictive credit-granting policies in CS1. Thus, this inconsistent method of account collection policy is showing a negative impact on cash flow and financial performance.
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Total Asset Turnover
The Total Asset Turnover Ratio measures how efficiently the business uses all of its assets to generate sales. A high ratio generally reflects good overall management. A low ratio may indicate flaws in a business’s overall strategy, poor marketing efforts, or improper capital expenditures (Gitman, 2009; Hatten, 2008; Oliver & English, 2007).
Using the financial data from CS1’’s statement of financial performance and statement of financial position, the researcher computed the total asset turnover ratio via the DuPont analysis system and established the outcome as shown in the graph below.
Total Asset Turnover = Sales Total Assets Activity Ratios: Inventory Turnover Total Asset Turnover 2006 NA 3.07 2007 NA 2.35 2008 NA 3.48 2009 NA 7.50 2010 NA 6.94
Activity Ratios of CS1 (2006-2010)
8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 7.50 6.94
Ratios in times per year
3.07 2.35
3.48 Total Asset Turnover Inventory Turnover
2006
2007
2008 Years
2009
2010
Figure 4.2.2-2: Total Asset Turnover and Inventory Turnover Ratios
The graph shown above demonstrates how efficiently CS1 uses all of its assets to generate sales for each financial period. Based on the figures given on the graph mentioned above, 2006, 2007 and 2008 all have low ratios of 3.07, 2.35, and 3.48 respectively, which indicate flaws in CS1’s business in those years. This may be caused by poor marketing strategy, lack of overall business strategy (i.e. vision, mission, and plan) and other financial factors such as lack of forecasting and budgeting in all areas. The ratios of 2009 and 2010 both show high turnover ratio overall, indicating the efficient usage of all assets to generate volume of sales revenues.
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4.2.3
Leverage Ratios of CS1:
According to Gitman (2009) Leverage Ratios measure the extent to which a firm uses debt as a source of financing and its ability to service that debt. It refers to the magnification of risk and potential return that come with using other people’s money to generate profits. Hatten (2008) states the two important leverage ratios to be considered are the Debt Ratio and Times-Interest-earned.
Debt Ratios
Debt Ratio measures the proportion of a business’s total assets acquired with borrowed funds. The total debt is the combination of short-term debts, long-term debts and other long-term obligations. A high ratio indicates a more aggressive approach to financing and is evidence of a high-risk, high expected-return strategy. A low ratio indicates a more conservative approach to financing (Gitman, 2009; Hatten, 2008)
Debt Ratio = Total Debt Total Assets
Leverage Ratios:
Total Assets Total Liabilities Debt Ratio
2006
$ 254,948 $ 248,539 97% $ $
2007
237,776 271,238 114% $ $
2008
206,825 235,126 114% $ $
2009
132,227 210,272 159% $ $
2010
102,525 154,636 151%
Debt Ratio of CS1 (2006-2010).
160% 151% 140% Percentage of Debt (%) 120% 100% 80% 60% 40% 20% 0% 2006 2007 2008 Years Figure 4.2.3-1: Leverage Ratios of CS1 2009 2010 Debt Ratio 114% 97% 114% 115%
Trend analysis of CS1’s debt ratio as per the graph shown above, demonstrates the proportion of CS1’s total assets acquired with its borrowed funds. There is a concern facing CS1’s owner/manager with regard to its debt ratios throughout these consecutive financial years. The
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incremental analysis of debt ratios indicates that CS1’s business has a very aggressive approach to financing and is evidence of a financial high-risk, associated with a high-expected-return strategy. CS1’s debt ratio also indicates that CS1 has financed 97% of its assets with borrowed funds in 2006. That is, $0.97 of every $1.00 of funding for CS1 has come from debt financing. Moreover, CS1 assumes to be very aggressive in financing its assets from borrowed funds. Between 2007 and 2010 the trend demonstrates the same aggressive approach of financing option, indicated by incremental debt ratios of 114%, 114%, 115% and 151% consecutively.
Time Interested Ratio
Times interest earned ratio is a leverage ratio that computes the firm’s ability to meet its interest requirement. It shows how far operating income can decline before the business will likely experience financial difficulties in servicing its debt obligations. A high Times interest earned ratio indicates a low-risk situation but may also suggest an insufficient use of leverage. A low ratio indicates that immediate action should be taken to ensure that no debt payments will go into default status (Hatten, 2008)
Time Interest Earned = Operating Income Interest Expense 2006 2007 2008 -$ $ $ $ 4,729 5,833 471 6,304 -0.75 $ $ $ $ 4,680 549 9,284 9,833 47.59% 0.48 $ $ $ $ 19 700 26,904 27,604 0.07% 0.001 $ $ $ $
Leverage Ratios: Net Profit/Loss after Depreciation Interest Interest -Other Total Interest Expenses Time Interest Earned (%) Time Interest Earned
2009 6,263 607 37,276 37,883 16.53% 0.17
2010 -$ 17,159 $ $ $ 2,987 2,681 5,668 -3.03
-75.02%
-302.73%
Time Interest Earnedof CS1 (2006-2010)
1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50 -3.00 -3.50 0.48 2006 -0.75 2007 0.00 2008 0.17 2009 2010 Time Interest Earned
Percentage (%)
-3.03 Years
Figure 4.2.3-2: Time Interest Earned of CS1
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In 2006 CS1’s business had a negative operating income of -0.75 times its interest obligations compared to the adjacent financial periods. The worst scenario of time interest earned occurs in 2010, which shows a negative operating income of -3.03 times its interest obligations. This low ratio indicates that CS1 is facing serious financial problems and must not have been able to meet its debt obligations. CS1’s financial manager needed to have taken immediate action to avoid all debt payments being in default status. However, CS1 could have ended up with having to liquidate, caused by its inability to meet debt repayments given its financial circumstances. In order to prevent this, CS1 should have been restructuring and implementing new financial control practices. 4.2.4 Profitability Ratios of CS1:
Gitman (2009) notes that the profitability of a business is an essential factor to be considered by management when forecasting, and planning the business day-to-day operations. Profitability ratios are important measures of the ability of a business to turn its sales into profits and also to earn profits on assets and owner’s equity commitment. Investors, creditors and shareholders all consider profitability to confirm the returns on their investment (ROI) or return on total assets (ROA). They may also assess the financial risks associated with their investment. In this study the following three profitability ratios are used to measure the business financial performance in terms of profitability: Return on Asset (ROA), Return on Owner Equity (ROE) and Net Profit after Taxes (NPAT).
Net Profit after Tax (NPAT)
Net Profit After Tax (NPAT) measures the percentage of sales dollar that remains as profit after all expenses, including taxes have been paid. The NPAT ratio is widely used as a measure of management efficiency. However, a low net profit margin ratio may indicate that expenses are too high relative to sales revenues. Net Profit Margin is computed by dividing the net profit after tax by total sales (i.e. cash and credits).
Net Profit Margin = Net Income Sales
Profitability Ratio
Net Profit Margin (NPM) Net Profit Margin (NPM) Net Profit (Loss) After Tax Sales
2006
-0.60% -0.006 -$ 4,729 $ 782,376
2007
0.84% 0.0084 $ 4,680 $ 559,564
2008
0.003% 0.00003 $ 19 $ 720,410
2009
0.44% 0.0044 $ 4,384 $ 991,222
2010
-2.41% -0.0241 -$ 17,159 $ 711,588
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Net Profit Margin (%) of CS1
1.00% 0.50% Percentage (%) 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% Years -2.41% 2006 2007 -0.60% 0.84% 0.44% 0.00% 2008 2009 2010 Net Profit Margin (%)
Figure 4.2.4-1 Net Profit Margin Ratio of CS1
CS1’s business generated losses of 0.6 cents and 2.41 cents for each $1.00 of sales in 2006 and 2010 respectively. This means that CS1 could not pay its operating expenses, interest and taxes in these two financial periods. CS1 only managed to generate 0.84 cents and 0.44 cents of after-tax profit for each $1.00 of sales made by CS1 in the financial periods of 2007 and 2009 respectively. The NPAT ratios express the high rate of operating expenses inherent by CS1 relative to revenues gained from sales. Therefore the financial manager of CS1 should look at the variable costs with a view to minimising these in a controllable manner. Management accounting techniques such as breakeven point analysis or Cost Volume Profit Analysis should be implemented in order to guide this issue to an acceptable level.
Return on Asset (ROA) and Return on Equity: Return on Investment or Return on Asset
The return on asset ratio (ROA) or return on investments (ROI) indicates the business’s effectiveness in generating profits from its available assets. Return on Assets is literally used to assess the profit-earning performance of the business’s assets. It relates the net profit after tax in the income statement to the assets in the business’s balance sheet. A high ratio on return on asset shows effective management and good opportunities for future business growth. ROA reflects “Operating Decisions” over buying, selling, expense control and asset management. Thus, this ratio should always be examined in conjunction with the gross profit margin and net profit margins (Brealey et al., 2006; Gitman, 2009; Hatten, 2008; Oliver & English, 2007).
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ROA = net profits after taxes total Assets Profitability Ratio Total Assets Net Profit (Loss) After Tax Total Equity Return on Assets (ROA or ROI) Return on Equity (ROE) 2006 $ 254,948 -$ 4,729 $ $ 2007 295,943 4,680
ROE = Net Profit After Tax Owner’s Equity 2008 $ $ 248,971 19 $ $ 2009 184,993 4,384 $ -$ 2010 132,115 17,159
$
6,409
-1.85% -13%
$
24,705
1.58% 19%
$
13,845
0.01% 0.14%
-$
25,279
2.37% -17%
$
22,521
-12.99% -76%
Profitability Ratios of CS1
40.00% 19% 20.00% 0.60% Percentage (%) 0.00% -20.00% -40.00% -60.00% -80.00% -100.00% Years -76% 2006 -13% 2007 2008 2009 -17% 0.84% 0.14% 0.00% 0.44% -2.41% 2010 Return on Assets Return on Equity
Figure 4.2.4-2 Profitability Ratios of CS1
CS1’s net profit/loss after tax margin from 2006 to 2010 represents the combined effects of pricing, the effectiveness of the marketing mix in creating sales, and the control of costs incurred in the process of doing business. CS1’s net profit margin and asset turnover are disclosed, but it is their combined effect on CS1’s business return on assets or investment that matters the most. Net profit for all years is low which indicates that total assets are significantly increased. This causes a drop in the return on assets (ROA or ROI). In theory CS1’s total sales are having the same effect as being reflected from the graph on Figure 4.2.4-2. Moreover, CS1’s business is operating on a low net profit margin to carefully monitor the rate of asset turnover.
According to CS1’s manager the concept of return on investment is not managing effectively in his business context. This statement reflects on the graph shown above which indicates the ineffective
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management of using assets to generate profits within the business. It seems that the ownermanager of CS1 may use the business assets for his own use instead of the business’s financial and operational purposes. In 2006 CS1 imposed a negative ratio on its return on investment that is poor relative to its net profit and gross profit respectively. In fact, the owner/manager of CS1 admits that all personal assets such as computers, lap-top and photocopier are all in an operating lease and also used for business operational activities.
The graph shows that CS1 will have limited opportunity to grow the business in the future due to ineffective management of assets to generate and reinvest profits back into the business. In terms of profit after tax, CS1’s owner-manager withdrew a huge portion of profits for his own use and left almost zero as retained earnings to fund business activity. It can be seen that owner and business are not separate. CS1’s owner admits that the profit generates from business operations, is not a “return on investment”, it is his own share from his hard work within the business. The concept of ‘Return on Investment” is accordingly totally irrelevant in CS1 business context.
Nevertheless, the CS1’s owner-manager suggests that “Return on Investment” means a lot to him personally in terms of flexibility in time and effort to run the business. He gets flexibility in working hours and is able to assist his relatives and friends in terms of remittance of funds and employment. Thus, these attitudes of the owner-manager towards the business create uncertainty for this business’s survival. From the graph in Figure 4.2.4-2, CS1 achieve a negative ratio of 12.99% in 2010 which demonstrates the impact of poor working capital management on business performance. This is a big threat for CS1 to sustain its profitability for growth and its future survival.
According to CS1’s owner-manager the external accountant only prepares financial statements without helping to analyse and interpret the business performance. The financial statements analysis is never used in CS1 business context. Moreover, CS1 offers the Tongan community nonmonetary services without having a good return on business performance. Consequently, CS1’s owner-manager admits that this kind of approach to the business creates huge pressure on him and the family in terms of not being able to meet his business obligations. CS1’s owner-manager says that the business was almost at the point of liquidation and he was almost bankrupt. In fact, the creditors have a greater financial stake in the business than CS1’s owner.
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Return on Equity (ROE)
“Return on Equity” measures the return the business earned on its owner’s investment in the business. The higher the return of equity ratio, the better off financially the business owner will be. The return on equity is highly affected by the amount of borrowed funds (financial leverage) used by the business and so may not provide an accurate measure of management effectiveness (Hatten, 2008).
Net Profit Margin ROA - Return on Assets
×
Asset Turnover
Operating Decisions
ROE -Return on owner's Equity
÷
Owner's Equity Ownership ratio Financing Decisions
÷
Total Assets
Source: Adapted from Western Conventional Model adapted from Oliver & English, 2007, p.112, figure 7.4
Figure 4.2.4-3 Business performance model overview
According to Oliver & English (2007) the return on owner’s equity is like the interest rate on a bank saving account. It represents the interest rate earned by the owner’s investment in the business. The return on owner’s equity ratio is valuable because it allows the business owner to compare the rate of return from the owner’s investment in the business with the returns earned from other investment opportunities. Thus the ROA ratio is a measure of the owner’s investment in the business. It reflects financing decisions having been made as to how much capital has been borrowed and how highly the business is leveraged. The business performance model overview in Figure 4.2.4-3 indicates that there are two types of decision-making affecting the “Return on Equity” ratio of every business. Operating decisions affect the income-producing capacity of the business and reflect in the business’s return on assets. Financing decisions affect the ownership ratio that amplifies the return on assets to arrive at the rate on the funds the owners have invested in the business (Oliver & English, 2007). Therefore, this business performance model analysis (the DuPont system analysis) is used to calculate the
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return on owner’s equity ratio for CS1’s business performance as reflected graphically on Figure 4.2.4-2.
CS1’s ROE is -13%, -17% and -76% in 2006, 2009 and 2010 respectively. These ratios indicate that CS1’s owner funded the business mainly with borrowed funds. CS1’s owner explained that during 2010 he finally realised there were problems with the business and started to get good financial advice and assistance from professionals. Debt financing was reduced significantly and the volume of sales revenues increased. CS1’s owner started to contribute more capital and retained some of the profits in the business. In fact, CS1’s owner realised that equity financing was more critical to increase return on equity, and reduced the business debts that in turn helped to minimise the risk of business failure. 4.2.5 Summary of Talanoa Session with Observation of CS1 (NVivo9-CS1)
Building on the improvements made in 2010, CS1 has put in place some further improvements for the current financial year. CS1’s owner-manager advised that the business is currently looking to raise the percentage per unit sale volume by controlling to a certain percentage advertising and marketing spending, decrease the cost of sales by improving policies and procedures, and reducing administration expenses, refer Appendix 14. The recommended working capital management guidelines for CS1’s business performance are listed in the tables shown in Appendices 15 and 16.
These possible guidelines are prepared for managing of cash, inventory, accounts receivable, accounts payable and business performance. For cash management, it is recommended the forecast short-term cash flows (cash receipts & cash disbursements), and preparing of the cash flows forecast should be taken on a timely basis. Inventory management focused on the optimising of inventory level and production efficiency, increasing inventory turnover, using Just-In-Time inventory order system and stock take process for inventory controlling purpose. Accounts Receivable management focused on the improving of credit and collection process in terms of three elements such as credit policy, sales and collection. Accounts Payable management focused on reconciling the suppliers’ statements and payments should be made on the last date. Business performance is measured by using the key financial ratios such as ROA or ROI, ROE, in order to measure the liquidity, activity ratios, and leverage and profitability ratios via the DuPont Analysis system.
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Chapter 5: Results and Discussion – WCM of Tongan SMEs in NZ
5.1 Introduction
This Chapter discusses the findings from the qualitative research on the impact of working capital management dynamics on the performance of Tongan enterprises in New Zealand. These findings from the Talanoa interviews session are discussed in the context of the financial management of Tongan enterprises in order to provide answers for the primary research question stated in chapter one. The discussion in this chapter is referenced to a number of Talanoa interview sessions with eight Tongan enterprises and a focus group of four Tongan professionals with respect to CS1as analysed in Chapter 4. The confidentiality of these Tongan enterprises and professionals is secured as per the Unitec Ethics Research Committee policy. The methodological structure research shown in Chapter 3 is used as the unique framework to facilitate the discussion in this chapter. Moreover, the discussion in this Chapter is literally linked to the study of CS1’s financial interpretation in Chapter 4, in order to justify the reality and validity of the findings for this research. The combined summary of findings from CS1, Tongan businesses of Group-W and Group-T are listed in Table 5.3.5-1of this Chapter.
5.2
Research Objective
The primary aim for this study is to explore and analyse the Impact of Working Capital Management Components Dynamics on financial performance of Tongan enterprises in New Zealand. The following specific objectives (propositions) have been developed in order to pursue the main aim of this study.
•
Explore how Tongan enterprises manage inventory, account receivables, cash, , account payables and credit policy
•
Investigate the various WCM policies, accounting practices and techniques currently employed by Tongan enterprises in New Zealand
•
Develop a conceptual framework model and provide some key recommendations that will improve Tongan SMEs use of working capital management
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Table 5.2-1: List of Tongan SMEs and Professionals for Talanoa Interviews session and Focus Group
Tongan SMEs Category Accounting Firm Financial Services Business Consultancy Retail Coffee Bar Graphic Design Art Gallery Consulting Services Total
Code T1 T2 T3 T4 T5 T6 T7 T8
Number of Employees 6-10 10-20 1 4 3 3 1 12
Number of Tongan SMEs Participants 1 1 1 1 1 1 1 1 8
Focus Group Professionals Business Advisory Business Advisory Business Owner/Manager Chartered Accountant Total
Codes FT1 FT2 FT3 FT4
Number Participants 1 1 1 1
Number of Professionals 1 1 1 1 4
5.3
Managing of Working Capital
This section seeks to emphasise that the concept of businesses’ net working capital is the difference between its current assets and current liabilities within the financial accounting period as defined in Chapter 2. In some Tongan businesses working capital management involves maintaining the appropriate level of current assets such as cash, inventory, accounts receivables and current liabilities such as account payables, to finance the Tongan businesses (Kelly & McGowen, 2010; Keown et al., 2002; Zietlow et al., 2007). Tongan small and medium enterprises included in this study include a small accounting firm, financial services, retailer, graphic design, art gallery, coffee bar and consulting services. These enterprises operate in two specific models of business framework. Some enterprises
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follow the western model of business operation and some Tongan enterprises operate freely in their own Tongan flexible system of business operation in New Zealand. From the findings of this study, they are categorised in terms of the business model (accounting system) they use for business operation as follows. Group -W
Small accounting firm (T1) Financial Services (T2) Retail- Beverage & Food (T4) Coffee Bar (T5) Consulting Services (T3 &T8) Professionals (FT1, FT2, , FT4)
Follows Western Business Framework
W - business Model
Group – T
Graphic Design (T6) Art Gallery (T7)
Business Owner (FT3) Figure 5.3-1: Group -W and Group -T of Tongan businesses Follows Tongan Business Flexible System
T- business Model
Based on the findings from the Talanoa sessions with T6 and T7, the researcher identified the same financial issues found in the CS1 case study discussed in Chapter 4. T1, T2, T3, T4, T5, and T8 follow the western business model of running their own businesses, while T6, T7 and FT3 follow their Tongan flexible system of business operation dynamics. The discussion in this section mainly focuses on the management of the working capital components of the businesses mentioned. This study also identified the same findings that previous authors spelled out in their empirical studies. Kelly & McGowen (2010) explain that the management of current assets involves trade-offs; either too high a level of current assets or too low a level of current assets can create financial impact on the business performance overall. This statement reflects well on the Tongan businesses that are aggressive in using the current assets in all business performance aspects. Moreover, the effective management of Tongan businesses working capital involves making relevant investment decisions with respect to the nature, type and amount of every current asset within their business. Not only that but it depends on the planning and forecasting of cash flow by considering the internal and external financial factors as the percentage of sales method used by the Tongan businesses in group-W who follow the western business model (refer T1, T2, T3, T4, T5 and T8). The Table 5.3-1 below
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demonstrates the actual characteristics of the two groups’ views and systems (Tongan and Western business models) in terms of current assets and current liabilities associated with other business performance, structure and tax issues.
WORKING CAPITAL MANAGEMENT 1 Cash Flow Management Group T Tongan systems and Views (Flexible system) – (T6, T7, FT3) No Cash Budget (Forecast) No operational budgeting, Remittances issue, Cash flow problem arises Cash and Credit transactions Flexible management system of cash No Perpetual Inventory Control Flexible system for stock control in T6 of Group-T, Selling time and services No Credit trade policy, No account collection policy in place, more than 12 months, Bad debts Flexible accounting system for controlling of account payables Flexible accounting policy or procedures Group W Western system and Views (Conventional) (T1, T2, T3, T4, T5, T8, FT1, FT2, FT4) Cash Flow Budget, Cash Receipts and Cash Disbursements, Borrow Cash Shortfall, Distribute Profits Proper system in place for reconciliation and controlling. Motives of holding cash for the reinvestment (Invest excess cash) Inventory Control system, LIFO, FIFO and Weighted Average. Just In Time (JIT) Selling time and services, Costing and analysis Control Accounts, system in place, aging of debtors and credit terms policies in place (30, 60 an 90 days)Aggressive, conservative and defensive policies Control System in place, Motives of holding cash Maintaining good relationship with suppliers Negotiating discounts or other terms to improve cash flows Good processes reduce likelihood of error Interrelationship of WC components such Cash, Raw Materials, Debtors, Finished Goods in a complete ‘Operating Cycle’(Purchasing, Services, Collections, Sales) Cash conversion cycle – (AAI, ACP, APP) Register with Company office. Separate entity, Utilisation of Financial and Management Accounting. Proper business plan implemented and using MYOB for accounting Preparing of Financial Statements, Accounting Entity or Business is a Separate Entity, Measuring of Profitability using Financial Ratios etc Performing Audit program Reinvesting of retained earning Paying taxes based on IRD system
2
Inventory Management
3
Account Receivables Management
4
Account Payables
5
Flexible System of Operating Cycle (i.e. Mixed and Confused) Operating Cycle Incomplete
6
No business plan, using accounting software with limited skills, Combination of owner and business, Business structure & Business Financial Performance Flexible and Unstructured system Measures Business performance by Cash at Bank balances No auditing, No analysis and interpretations of financial performance and position. Cash Flow statement is not prepared Outstanding taxes, GST and FBT are paid irregularly
Table 5.3-1: Characteristics of Tongan and Western models followed by Tongan businesses in New Zealand
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The subsequent discussion on the cash, account receivables, inventory and account payables management and others is focused on the contrast of Tongan and Western business models of managing of their Working Capital Components. The findings from focus group Talanoa session are so relevant in identifying financial management issues and enhancing the impact of working capital management on business performance of Tongan businesses in New Zealand. 5.3.1 Cash Management
Cash is always in the spotlight of every business in order to pay its employees, potential suppliers, accounts payable and also income taxes to the Inland Revenue Department. Businesses owned by shareholders need cash to pay dividends and other obligations. In fact, most businesses nowadays want to hold enough cash to meet unexpected contingencies. However cash has one serious shortcoming compared to other current assets: it earns little or no return (Brigham & Ehrhardt, 2010; Cinnamon et al., 2010). Group– W: (Western business model) In discussion with T1, T2, T3, T4, T5 and T8 business managers/owners that followed the western business model of operating a business here in New Zealand, they explained that cash management is one of the major challenges for them. T1, T2, T5 and T8 stated that good cash management within the business is the fundamental core element in all aspects of their business sustainability. In order to keep up positive cash inflow, relationships with customers must be kept to a high level through the application of proper policy and procedures (NVivo9-T1-105). T1 thoroughly discussed his cash flow forecast (cash budget) that is the important part of his financial planning and controlling of his business operation. He manages to do his projections for all revenues and expenditures at the beginning of the financial year. TI explains that he takes into consideration the Tongan social and cultural factors in constructing the employees cost budget for the financial year (NVivo9-T1-65). T1, T2, T5 and T8 use MYOB accounting software to manage their cash flow and records keeping of the business. In fact, the owners/managers of T1, T2 and T5 are all professional Tongan accountants and members of the New Zealand Institute of Chartered Accountants
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(i.e. NZICA). They are successful in business because they are well educated people with practical experience in the business arena. T2 indicated that his cash reconciliation is carried out at the end of every business day and is the essential part of his cash control system within the business. He said that there is a welldefined procedure in place for all employees to follow in every branch throughout New Zealand and also in Tonga. Where employees do not follow the control mechanism for cash transfers, they normally misused the funds and ended up stealing bulk of cash from their file within the system (NVivo9-T2-141). T2 and T5 reluctantly prefer to use cash accounting only in operating their businesses. According to the discussion during the Talanoa session with them, they suggested that cash accounting transactions are mainly preferred by them and suit their type of business here in New Zealand. It is simple to operate and also avoids credit transactions that are a preferred way of running business back in Tonga. T5 also mentioned that he managed his working capital by not having any accounts receivable in his ledger. He does not want to bother chasing customers for uncollected debts and so does not have any debtors in his business. This is a good practice.T8 advised that he does the same thing in his business because all the capital funds are provided from the New Zealand Government. The type of business he operates is assisting the unemployed people to gain work experiences and skills to enhance their chance in the small and medium enterprise sector.
Managing of Cash more effectively
Cash is conceptualised as the central fundamental element of every business’s operations (Sherman, 2010). Tongan businesses T1, T2, T3, T4, T5 and T8 of Group- W follow the western conventional management system of cash as shown in the Figure 5.3.1-1 below.
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Invest excess cash
Borrow cash shortfall
Cash disbursements
Cash On Hand
Cash Receipts
Distribute profits
Source: adapted from Cash Management for SMEs by Jeffrey D. Sherman, 2010, p. 4 Figure 5.3.1-1: Group - W (Western- Conventional management system of Cash)
In order to manage cash more effectively amongst Tongan businesses of Group-W, there are potential factors to be considered as building blocks for successful cash management. Tongan businesses in Group-W suggest that all Tongan businesses should construct a planning and monitoring cash schedule in order to control cash and prevent loss within the business. T2 and T4 advise that a business should have its own bank account for its own services and other products. They recommend that collecting cash receipts from account receivables is more efficient when using the right techniques and correct accounting policy. The control of the cash disbursements is vital which may help to optimise the operations to reduce cash requirements. Further borrowing and credit transactions must be forecast and also excess funds must be invested as retained earnings for business growth and further expansion when it is needed. According to Sherman (2010) the optimisation of cash management, helps to improve the business’s control system, better manage risk and enhance operations. In fact, improving cash management in Group-W of Tongan businesses will result in increasing their businesses' profits and maximising cash availability or at least reducing bank overdrafts.
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Budgeting and Forecasting- Planning and Monitoring Cash
In the context of cash management, budgets and forecasts are very powerful and useful tools. According to the outcome of Talanoa session with T1, T2, T3, T4, T5 and T8 they are all aware of the need to have a financial plan (budgeting and forecasting) and associated monitoring procedures for cash and cash equivalent in their businesses. They explain that good cash management is very important for managing working capital in the business. If the business does well in marketing and sales to earn revenues, but is not implementing a good cash management system to monitor cash properly, it is a waste of time and effort to run a business here in New Zealand. They recommend a few techniques to follow in managing cash in business. They first suggest the accounting software system should be realistic and simple to monitor and control cash in the business. Cash budget or Forecasts must be prepared at the beginning of the financial year as a roadmap for the business as a whole. T1 explains from the Western business Model perspective that there should be a master budget that controls all factors to be flexible during the financial year when this is needed. Thus this statement is relatively matched up with the suggestion made by Hatten (2008) and Gitman (2009).
Cash Flow Budgeting
Hatten (2008) and Gitman (2009) explain the significance of a cash budget as an important tool in cash management. They mention that main objective of cash budget is to estimate the future cash shortages or cash surplus balances of a business via a forecast of cash receipts and cash disbursements during the financial accounting period. Moreover, a cash budget can possibly highlight future deficiencies and surpluses of cash. A cash budget can accordingly be useful in many ways. T8 explains the importance of having a cash budget up front when he applies for government funds to finance his business. He must have a cash flow forecast in place. He explains that cash budget allows him time to arrange additional financing within the business. It also reveals the amount and timing of surplus cash available for investment in the business. T1, T2 and T5 reveal that cash budgets assist their businesses to forecast and plan the time for debt repayment. Moreover, a cash budget shows the amount of cash available for dividend payments to shareholders (refer T2). The directors of T1 and T2 refer to a cash budget as one
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step in the process of applying the solvency test prior to authorising a distribution to the company shareholders. T3 reveals that the cash budget is useful as a supporting document that may be required by financing institutions (i.e. banks) for loan applications. FT4 supports the above mentioned statement made by T1and T2, i.e. the fundamental need to have cash budget in the business and he extends this concept by suggesting the capital expenditure (Capex) in a business in a similar manner (NVivo9-FT4-100). According to Hatten (2008) and Gitman (2009) the cash budget is normally used for both short-term and long-term planning in a given business. Within the short-term cash budgets may forecast the week ahead and are necessary to break down on a daily basis in order to plan for daily changes in cash account balance. For the medium and long-term cash budgets tend to forecast for at least 6 to 12 months, revealing monthly changes in cash account balances. T1 fully explained the procedures he used for cash flow forecasting and projections of his business expenditures and revenues. T1 uses excel spread-sheets to undertake all projections and budgeting for cash and other operating facilities of his business (NVivo9-T1-67). Group– T: (T- business model) Analysis of the Talanoa session with T6, T7 and FT3 reveal that the system they use to operate their businesses is called WC Flexible System or No System. They just operate their business according to what happens on the business day with the mindset of what they would have proposed to do on the day. They suggest that the nature of their business controls most of their business activities and operations. They are both concentrating on providing services and trying to complete every job on time without worrying about the other side of the business such as managing cash flows. The talents and skills they have persuade them to act in this manner and totally ignore the management of cash inflows and outflows simultaneously.
T6 explains that the WC Flexible system is the key to his business operation. He loves to be flexible in time and effort to do things in his own business. He is very creative and innovative in designing new ideas to match up any business strategy of a given job. In fact, he confesses that WC Flexible system consists of no business plan, no cash flow forecast, no operational or capital budgeting, no cash control policy, and no reserves for business contingencies. Moreover, cash flows are a major problem for his business. He admits that
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Financial Management is a major challenge for his business. He arguably should retain someone to handle all financial matters while he concentrates on marketing and selling services to his customers (NVivo9-T6-34).
Cash Flow Management of Group – T (T6, T7 and FT3)
T6, T7 and FT3 state the nature of the WC Flexible system they use in their business operations creates financial difficulties. Managing cash flows is a major challenge for them. There is no cash budget (forecast) which creates a mixed system of handling of cash within the business. This type of WC Flexible System may apply to the case study (CS1) discussed in Chapter 4 that demonstrates cash flow problems and other financial difficulties. The findings emphasise that WC Flexible System used by Group-T in managing their working capital components (i.e. cash management), causes a major impact on the businesses’ financial performance. This flexible system allows the owner/manager to withdraw a bulk of cash for his own use as owner’s shares from the business.
T6 admits that the balance of his ‘drawing account’ is huge in comparison with the amount of retained earnings re-investing in the business for its own future growth. In fact, the working capital components of his business are not controllable or manageable due to the WC Flexible System he has used to operate his business for so many years. T6 confesses that he almost went into liquidation at one stage due to a shortage in cash inflows to meet his business obligations. Moreover, the view of flexible system of cash management that many Tongan businesses (refer T6, T7 and FT3) advocate in this study has a number of risk implications on the business performance. The conceptual model in Figure 5.3.1-2 demonstrates the view of a Tongan flexible system of cash management in their entrepreneurship.
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Borrow cash shortfall Bank Overdrafts
Cash disbursements
Business Risk Financial Risk “Flexible system Shortterm Liquidity Risk
Cash Receipts
WCM (Cash On Hand)
Ret ained Earnings
Remittances (relatives, community) Distribute profits Drawings as shares (Dividends)
Figure 5.3.1-2: Group- T (Tongan WC Flexible System of Cash management)
Business Risk of Group-T
Gitman (2009) states business risk is the chance that the business will be unable to cover its operating costs. T4 emphasises and supports Gitman’s statement above that business risk would possibly emerge if there are no regulations or clear policies to control business activity (NVvio9-T4-71). T6 spelled out that cash flow has been one of his business risks (problems) for more than five financial years. The cash and credit transactions are both extremely exercised in the business. Thus this study recommends further research on business risk for Tongan business in New Zealand.
Financial Risk of Group-T
Gitman (2009) and Oliver & English (2007) recommend that level of financial risk is driven by the predictability of the business’s operating cash flows and its fixed-cost financial obligations. T4 of Group-W suggests, it is important to get specific financial advice to give appropriate and fair procedures for a business activity to follow (NVivo9=T4-92,
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NVivo9=T4-78). This study recommends that further research is done on financial risk associated with business risk for Tongan businesses in New Zealand.
Short-term Liquidity Risk of Group-T
This study finds that the short-term liquidity risk is related to working capital management of the Tongan businesses in New Zealand. The analysis of short-term liquidity risk requires an understanding of the operating cycle as being explained in Chapter 2 of this study. If a business can delay all cash flows to suppliers, employees, and others until it receives cash from customers, and receives more cash than it must disburse, then the firm will not likely encounter short-term liquidity problems (Stickney, Brown, Wahlen, Baginski, & Bradshaw, 2010).
T6 and T7 of Group-T cannot time their cash inflows and outflows precisely because of the flexible system they use in business. This means that the owner-managers of these two particular businesses require weekly or semi-monthly payments from customers in order to meet their outgoings, whereas their customers may delay payments for more than 30 days. T6 admits that the cash out flows to assist the production of their products in a given financial year can exceed the cash inflows from the lower level of sales of prior financial accounting periods. This inconsistency of cash inflows and cash outflows causes the business to operate at a net loss for a certain financial period. It is frequently found that the interrelationship of the working capital components in the operating cycle results in a net cash outflow instead of a net cash inflow.
Drawings of cash, Remittances and Sharing- Group-T
To recall the drawings concept of cash by the owner from business bank account is for the purpose of remittance made to relatives and communities in Tonga. T1 and T2 of Group-W emphasise the fact that many Tongan businesses usually withdraw cash from their business in order to support their relatives in Tonga in terms of ‘remittance’. T1 categorises ‘remittance’ as default social welfare for many Tongan, and that has a negative impact on the business financial performance (NVivo9-T1-182).
T1 from Group-W and T6 from Group-T agreed that remittance is a kind of sharing in Tonga traditional cultural aspects. It does not matter how serious the future impact on the business
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financial performance is, but it is necessary to help out the relatives and families members in Tonga and also the same here in New Zealand (Nvivo9-T1-154 & 155).
T6 admits that he looks after many members of his family and his wife’s mother back in Tonga. This statement raises an important issue regarding the traditional Tongan social and cultural influences on their business performances. The researcher recommends that there is a need for further research on social and cultural factors that impact on business financial performance (NVivo9-T6-104)
Motives for Holding Cash of Group-W
T1, T2, T3, T4, T5 and T8 of Group-W realise the motives of holding cash for their business everyday operational transactions. In the classical approach, Tongan businesses in Group – W are assumed to hold cash because it is a medium of exchange that can be used to carry the everyday business transactions. According to Keynes (2006) there are three motives behind the demand for cash (i.e. money) in every business; Transactions motive Precautionary motive or ( Safety motive) Speculative motive (Keynes, 2006) Keynes (2006) explains that the transactions motive is to hold cash for the everyday business operational transactions. T6 and T7 of Group-T say that the transaction motive is determined primarily by the level of people’s transactions and it is proportional to their income. Some cash balances in Tongan businesses like other businesses are needed to pay for certain predictable obligations as they fall due, such as employees’ wages, suppliers’ bills and taxes to the Inland Revenue Department of New Zealand.
Keynes (2006) believes the safety (or precautionary) motive is also needed in addition to holding money (cash) to carry out current business transactions. As not all day-to-day payments are predictable, some additional cash balances are needed to allow for unforeseen cash needs. For Tongan businesses, these funds could be invested in interest-earning marketable securities that are transferred into cash as the need arises (NVivo9-T2-25).
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Keynes (2006) believes that the mount of precautionary cash balances, business people want to hold is determined primarily by the level of transactions that they expect to make in the future and that these transactions are proportional to income. Thus, T1 and T2 excel the same perception the ‘Keynes (2006)’ postulates, the demand for “precautionary cash balances” are proportional to income. Consequently, Keynes (2006) suggests that cash is the store of “wealth” and called this a reason for holding cash the speculative motive. In fact, a few Tongan businesses (refer Group-W) may maintain additional funds (cash) in interest-earning marketable securities in order to take advantage of unexpected investment opportunities as they arise. Thus the speculative motive for Tongan businesses is to take advantage of potential investment whereas the precautionary motive relates to unforeseen operating and financing needs.
Overcoming a ‘Cash Flow Problem’ of Group-T
However the findings from the Talanoa sessions with T1 of Group-W suggest potential steps to optimise cash inflows and decelerate cash outflow for Tongan small businesses in New Zealand. Thus T1 finally recommends the possible ways of managing cash flows to avoid liquidity risk in the Tongan businesses in New Zealand and are listed in Appendix 12 (NVivo9-T1-53).
Oliver & English (2007) supports the above findings from Talanoa session with Tongan businesses of Group -W to overcome a cash flow problem. If the business cash flow remains positive there is no need for concern. If the business bank balance drives into negative, these are the following suggested options to be considered. 1. Shorten the operating cycle - Increase the efficiency of Operating Cycle’s components and reduce the cash committed to them. Increase the stock-turnover and reduce the average age of trade debtors (account receivables), while maintaining the same level of sales. This requires more aggressive collection of account receivables and tighter control of inventory level 2. Increase the net profit margin - This can be done by increasing price, reducing cost of sales, reducing operating expenses. 3. Reduce the sales volume - Reduction in sales volume decreases the investment in the working capital components of the operating cycle. One way to slow down sales
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while increasing both Net Profit Margin and cash flow is to selectively increase prices. 4. Increase the trade payables - Stretch payments to suppliers beyond the selling terms. This may risk business reputation. 5. Short-term borrowing - Short-term borrowing of cash is used to finance temporary increases in working capital. 5.3.2 Inventory Management
Inventory constitutes the central element of the production cycle. This production view is applied to services and manufacturing simultaneously. Inventory may be purchased for resale or there may be a production process that converts inventory received into another form of inventory for subsequent sale (Sherman, 2010).
Purchase
Inventory
Sale
Raw Materials
Work in progress
Finished Goods
Figure 5.3.2-1: Production cycle adapted from Sherman 2010, p.73
In this study only FT4 and T5 of Group-W and T6 of Group-T are involved in buying and selling physical stock (i.e. beverage and foods). These businesses mainly involve cash transactions. FT4 advocates the importance of inventory, to have a proper perpetual control system to monitor and manage inventory in the business. FT4 actively follows the western conventional model of inventory management as nominated by Arnold (2008) in Figure 2.4-1of Chapter 2. FT4 of Group-W discussed in the Talanoa session the actual perpetual inventory system to monitor and control its stocks (NVivo9-FT4-56).
Just-In-Time Inventory Ordering Technique
FT4, T4 and T5 recommend the Just-in-Time method of ordering inventory for their businesses. According to Sherman (2010) Just-in- time is an approach to managing inventory that strives to minimise inventory of raw materials and WIP by receiving raw materials
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inventory as it is required. Using the Just-in Time inventory ordering system would be useful for all businesses to enhance and monitor the availability of the inventory level in the business. It helps to reduce the amount of carrying costs tied up in stock that in turn may increase the cash flow of operating activities in the business. Following up from the previous discussion of cash flow, Just-in-time is recommended to control the level of inventory in the business. T4 notes that Just-in-Time is also effective at exposing bottlenecks in their beverage and food business activity. FT4 supports T4’s perception with his comment as follows: “........We do. We do it. But it is more order form and its managed by us, probably my father, he does the ordering. And he knows what he needs; we have a bit of forecasting of what’s coming up. And especially with it being a bit tough on cash flow and you don’t hold too much stock because you can order quickly (NVivo9-FT4-58)”.
Perpetual Inventory System
Kirkwood et al., (1986) discuss the critical parts of costing and controlling of inventory level in a given business. They note that western perpetual inventory techniques such as Last-InFirst-Out (LIFO), First-In-First-Out (FIFO), Weighted Average (WA) and Actual (identifiable) have been exercised inevitably in many SMEs. A perpetual inventory system allows much greater control over the inventories and it is generally recognised to be the best (Kirkwood et al., 1986). In this study FT4 and T5 adopt the Weighted Average Cost method. It is assumed that inventory items are completely intermingled and so a new weighted average cost price is calculated after each item of purchase. FT4 comments that the Weighted Average Cost method is used to calculate the costs attributed to the sale and the closing inventory balance (NVivo9-FT4-64, 62 & 119).
o Flexible system for Stock Control in T6 of Group-T
T6 of Group-T fails to control its inventory due to improper perpetual inventory techniques implemented in the business. This is linked to the WC Flexible system adopted by this particular business to manage its working capital. The closing inventory figure is not recorded due to there being no stock take at the end of the financial year. T6 admits that
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there is no stock control system and that this aspect of financial management is totally ignored. T6 does not know that looking after its trading stock is an important element of the Operating Cycle and has a major influence on cash flow. FT2 of Group-T argues that some of the Tongan businesses are having a challenge in deciding the right stock to be ordered (NVivo9-FT2-66). FT1 comments that some Tongan businesses in New Zealand ignore the significance of management and financial accounting in keeping the records of business transactions. This means that there is no accounting system in place to keep the records of inventory in some Tongan businesses in New Zealand (NVivo9-FT1-68).
o Selling Time and Services – Group-W
Most of the Tongan businesses of Group-W and Group-T are actively selling time and services as inventory in their businesses. These Tongan businesses sell services instead of tangible goods. T1 and T2 discuss the fundamental elements of costing and budgeting for the variables and fixed costs involved in the work-in-progress of their professional services. In the Talanoa session T1 articulates the western process of inventory management process. This particular business starts the professional services by designing the services in their normal practices and also minimises levels of services (inventory) required. Every service has to be allocated to staff as purchase orders just like in a retail and manufacturing business. Once the job order is received then the costing process is calculated for each job. Finally the accounting process is produced using MYOB for the particular job and then followed by the billing process and mailing the bill to customers.
o Costing and Analysis of Inventory or Services of Group-W
Sherman (2010) notes there is a need for inventory costing system to track business inventory cost in order to determine the profitability of particular products or services and customers. Costing is an important element in small business to control jobs and make them more efficient. T1 of Group–W follows the conventional costing system according to regulations and accounting standards. Cost and management accounting is fully utilised in the business for costing and records keeping of its professional services (NVivo9-T1-53).
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o
Informal Costing System of Group-T
The findings from the Talanoa session with T6 of Group-T are that he formulates his own informal costing system to calculate jobs and projects from potential customers. Despite informality of the costing system T6 states that labours hourly rates, direct materials and overheads are still considered for costing of jobs and projects.
T6 and T7 consider that some Tongan businesses are not interested in costing because of its complexity. They are mainly focused on cash inflow rather than considering the significance of jobs or projects costing. FT4 of Group-W reveals that the costing practices of many Tongan businesses depend on the nature and size of their businesses (NVivo9-FT4-119). 5.3.3 Account Receivables Management
Credit and Collection
According to Kelly & McGowen (2010) accounts receivable represent what credit customers owe the firm. Allowing customers to buy on credit can significantly increase sales. As the discussion of the cash budget in Chapter 2 shows, credit sales can create cash flow problems because they delay the receipt of cash the business needs to meet its financial obligations. All credit customers who pay late or do not pay at all only exacerbate the problem. Credit and Collections can be broken down into three main elements credit, sales and collections, and there are specific processes for each element.
CREDIT Elements Processes Setting credit policy Evaluating customer credit and setting credit limit
SALES
COLLECTIONS
Prompt fulfilment and Invoicing Accurate and up-to-date customer records
Prompt follow-up of accounts Alternative payments channels: cheque, credit cards, electronic funds, direct, debits etc
Agreed and understood terms and conditions
Source adapted from Sherman, 2010. p. 67
Figure 5.3.3-1: Credit and Collection Techniques for SMEs
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Sherman (2010) states that each process has the potential to improve (reduce) accounts receivables balance if done “thoughtfully”. T4 of Group-W suggests that Sales are the essential element of the operating cycle that drives the business activity to achieve ‘breakeven point’ in order to cover the cost of sales and then generates profit as the ‘bottomline’(NVivo9=T4-76).
Credit Trade Policy and Collections of Group-W
According to T1, T2 and T5 of Group-W, it is important for Tongan businesses in New Zealand to have a well thought-out policy that balances the advantages of offering credit with the costs. T1 thoroughly explains the working capital policies used in his business that follows 100% the Western Conventional Method of managing accounts receivable. Kelly & McGowen (2010) suggest the key elements of the Western Credit Trade Policy should include:
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Setting credit terms: For how long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments? T1 of Group-W in this study emphasises the significance of setting credit terms giving 21 days to pay and 5% discount as an incentive system for customers to pay their payments promptly (NVivo9T1-57).
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Establishing credit standards: How should the business decide which customers qualify for credit? What type of credit information should it require, and how strict should its standards be? T1 allows the ageing of debtors to be factored into the account receivables management process in terms of 30, 60 and 90 days associated with 5% discount respectively (NVivo9-T1-92 & 93).
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Deciding on an appropriate collection policy: How aggressive should the business be at collecting past-due accounts? At what point does it make sense to take (or at least threaten to take) legal action against late-paying customers or to turn over the accounts to collection agencies? T1of Group-W also discusses that his business has an aggressive policy for the collection of account receivables. Old bad debts are then written off as per his business credit standards and collection policy (NVivo9-T1- 95 & 107).
Credits selection techniques of T1 of Group-W
From previous accounting experiences and his education T1 suggests a few selected techniques of deciding the credit allowance to be given to customers. Credit selection is
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given based on their characters, capacity, capital they own, collateral assets available for use and their economic circumstances. According to Gitman (2009) five credits selection techniques as standards to be implemented in every business as follows:
Table 5.3.3-1: Credit Selection and Standards
1. Character 2. Capacity
Regards the applicant’s record of meeting past obligation Checks the applicant’s ability to repay the requested credit, emphasis on cash flows and debt ratios to assess the applicant’s capacity in order to meet obligations Considers the financial strength of the applicant as reflected by its ownership position (i.e. analyse the applicant’s debt relative to equity and profitability ratios) considers the amount of assets the applicant (customer) has available for use in securing the credit Checks the current economic and business climate (i.e. credit transactions)
3. Capital
4. Collateral. 5. Conditions
Source Adapted: Gitman (2009. p. 612-613)
Gitman (2009) and Hatten (2008) discuss that business will sometimes contemplate changing its credit standards in order to improve returns and greater value for shareholders or owners equity.
‘Smart Fee Model’ for Account Receivables Collection of T1- Group-W
T1 suggests that an essential aspect of managing accounts receivable is using a unique collection method known as the Smart Fee Model. Under this Smart Fee Model the customers can open an account with them and randomly drops in small amount of cash as a reserve for future payment. Once the account is due for payment then the amount is deducted from this particular account balance at the point of time (NVivo9-T1-136).
‘NO’ Account Receivables for FT4, T2 and T8 of Group-W
T2, T8 and FT4 do not have accounts receivable in their businesses because they solely trade in cash. T8’s business is totally funded from the Government. FT4 says that having a zero balance for accounts receivable is vital in order to avoid any cash flow problem within the business. He does, however, lend money to relatives and these cash loans can be difficult to collect (NVivo9-FT4-111).
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‘NO’ Credit Trade and Collection Policy for T6, T7 and FT3 of Group-T
The concept of the WC Flexible System used in T6, T7 and FT3 of Group-T’s businesses has an unplanned credit trade policy and unstructured collections strategy. T6 admits that the age of accounts receivable causes cash flow difficulties in the business. FT3 schedules the collection of account receivables for the 20th of every month but unfortunately fails to keep it up consistently. Moreover, huge amounts of accounts receivable are being written off as Bad debts due to being outstanding for more than six months (NVivo9-FT3-42). 5.3.4 Account Payable Management
By comparison, Account Payables analysis is more complex than that of Accounts Receivable since the accounts payable relates to both cost of sales and to expenses. In order to analyse the account payables more accurately, the management accounting team should look at the inventory purchases instead of cost of sales and expenses excluding salaries and wages (Sherman, 2010).
Maintaining Good Relationships with Suppliers (Creditors) of Group-W
T1, T3, T4, T5, T8 and FT4 of Group-W, are very concerned to manage their account payables in order to maintain good relationships with their creditors. In terms of maintaining their good relationship with suppliers, the negotiation of discounts, target market and system are taken into account in order to improve their cash flows. Consequently, they are consistently paying their creditors mainly on the 20th of every month (NVivo9-FT4-76).
Good Accounting Records System of Group-W
All the Tongan businesses of Group-W are currently using proper accounting software such as MYOB and XERO, in order to record their business accounting transactions. This accounting practice helps them to record and manage every transaction in a proper financial and managerial accounting system. Thus financial statements are prepared as from source documentation up to the final accounts including the analysis of the financial position (NVivo9-T5-64& 90).
Account Payables Control Account of Group –W (i.e. Control System in place)
The Accounts Payable Control Account is part of the main control account system practices by the Tongan businesses of Group-W who are following the Western Conventional Model of financial accounting records system (NVivo9-T5-90).
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WC Flexible accounting system for controlling of account payables of Group-T
Many owners-managers of Tongan businesses are not concerned about managing accounts payable. The flexible system used by T6 and T7 causes a big challenge for them in order to control their accounts payable properly. T6 states that Money Works accounting software is used for their accounting records system but it is limited. Despite this challenge, T6 and FT3 of Group-T attempt to pay their creditors on the 20th and 26th of the month respectively. The main issue that arises is the cash inflow in order to settle all the accounts payable outstanding balances (NVivo9-FT3-72).
Operating Cycle
Sherman (2010), Arnold (2008) and Gitman (2009) state that the Operating Cycle is a series of activities that continually transform the interrelationship of working capital components mainly cash, inventory, accounts receivables and accounts payables. Cash is the ‘King’ is the main central element of this operating cycle. The Operating Cycle repeats itself continuously, if there are no bottlenecks to restrict its flow. To recall the operating cycle discusses in Chapter 2 of this study, the conceptual model of the potential Operating Cycle is represented as follows:
CASH
PURCHASING
SERVICES
RAW MATERIALS
ACCOUNTS RECEIVABLE / PAYABLES COLLECTIONS SALES FINISHED GOODS
(Source; Adapted from Arnolds. 2008:530)
Figure5.3.4-1: Operating Cycle of Working Capital Components
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Interrelationship of Working Capital Components of Group-W
The Operating Cycle model in Figure5.3.4-1 is applied to the Tongan businesses of GroupW. T4 and T5 carry out retailing of beverage and food and selling of coffee in the forms of this Operating Cycle. In the Talanoa session T4 and T5 discuss the significance of understanding the interrelationship of working capital components in the operating cycle. T4 suggests that when bottlenecks do happen in the operating cycle, they cause a stop and start reaction disrupting a smooth flow in the processes of purchasing and selling goods. Because their businesses operate a cash only businesses ‘Cash is the King’ (NVivo9=T4-76 & 96).
o Cash conversion cycle- ( AAI, ACP, APP) of Group-W
Sherman (2010) states that cash is transformed into inventory (i.e. stock) and services via the purchasing process of the cycle, but the impact is delayed by supplier credit. Inventory is transformed into accounts receivable (i.e. debtors) by selling on credit. Accounts receivables are transformed back into cash when payment is collected from customers.
T4 discussed the impact of the other working capital components on cash flow of the business. For example, if the collection of accounts receivable from customers slows down then cash will dry up. The purchase of inventory will be affected and is reduced. T4 and T5 note that once purchases have been cut, sales will decline when inventory runs out. However when the business has to carry too much stock it is going to affect the cash flow and put much more pressure on the business financial performance.
The objective of cash flow budgeting discussed in section 5.3.1 is to keep the operating cycle running smoothly. Consequently, the shorter the operating cycle, the less cash is required to invest in inventory and accounts receivable and it is easier for the owner-manager to maintain cash flow (Oliver & English, 2007). T1, T2, T4 and T5 support the concept of ability to control the length of the operating cycle that plays the essential part in cash flow management (NVivo9=T4-74).
‘WC Flexible System’ of Operating Cycle (i.e. Mixed and Confused) of Group-T
The operating cycle of T6 and T7 of Group-T is totally a mix and match concept and very confused system of managing its working capital components. It is unstructured and very complex to follow in terms of working capital management. From the findings of the focus group using the Talanoa approach FT3 discuss the embeddedness of socio-cultural
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characteristics of Tongan people involved in starting a business in the Western Commercial paradigm. Many Tongan businesses preserve Tongan social status in the way they are run. It is hard for Tongan businesses to separate the personal effects from the business entity. Thus this is called a Tongan WC Flexible System of Operating Cycle of business (refer Figure 5.3.1-2) (NVivo9-FT3-21).
FT3 recommends that Tongan business people should keep separate their social and cultural status from the way they run their business in order to become successful here in New Zealand (NVivo9-FT3-21). This study finds out that the influence of socio-cultural traditional Tongan status on business success and failure is a huge area needing future study. 5.3.5 Summary and Conceptual Models of WCM impacts on Performance
Palangi or Western Conventional Model of Group-W
‘Financial Performance’ is a measure of performance such as profit or rate of return on assets that is based upon applying generally accepted accounting principles (GAAP) (Deegan & Samkin, 2006). Under the Western Conventional Model used by T1, T2, T3, T4, T5 and T8 of Group-W, their business financial performance is measured in terms of profitability analysing the key ratios of Net Profit After Tax (NPAT), Return on Investment (ROI) and Return on Equity (ROE). Therefore the business performance analysis of CS1 discussed in Chapter 4 shows how Tongan businesses of Group-W analyse and measure business performance using financial ratios in the ‘Palangi way or Western Conventional Model’ (NVivo9-FT2-23) .
Other Related Accounting Concepts impact on Tongan SMEs
Financial and Managerial Accounting concepts are completely practiced by the Tongan businesses of Group-W in preparing of their accounts. T1, T2, T4 and T5 emphasise the significance of other related business concepts prior to Working Capital Management in the Tongan business. These financial and managerial concepts are known such as accounting entity or business is a separate entity, business planning and budgeting, succession planning, financing of business (debt and equity), understanding of the business concepts (business model), capital investment, and advantages of using information technology system. They are considered to be very critical in order to control and manage the working capital components in the Tongan businesses.
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Business is a Separate Entity or Accounting Entity
The Accounting Entity concept regards the business as being a separate entity from the owners. All business transactions are recorded from the viewpoint of the business and the owners are kept as separate outsiders. Therefore ‘business is a separate entity’ or an ‘accounting entity’(Kirkwood et al., 1986).
T1, T2 and T4 of Group-W discussed the fundamental aspects of keeping the Tongan businesses activities separate from the owners’ books of accounting systems. This proposal is supported by FT4 from the Tongan Professionals’ ‘Focus Group’ Talanoa session. Thus the following comments from T1 and FT4 represents their view of an accounting entity being a separate legal entity (NVivo9-T1- 31, 214 & NVio9-FT3-17). FT2 emphasised that all Tongan entrepreneurs should be taught in the Tongan community to understand the significance of business concepts. It is not a sudden element of life but it is a separate entity to be strategically planned and implemented with correct accounting practices and appropriate procedures (NVivo9-FT2-102).
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Business Planning and Budgeting
The concepts of business planning and budgeting are the essential elements of starting of a business. They help the owners-managers of small businesses to work smarter rather than work harder. The business plans are categorised into three main types such as Marketing plans, Operating plans and Financial plans (Oliver & English, 2007). T1 explains that Tongan businesses should have a Marketing plans that is all about identifying and satisfying market segments and their needs, and finally creating a strong competitive advantage (NVivo9-T1-213). Operating plans are concerned with day-to-day operations, work flows and efficiency of Tongan businesses. T1, T2, T3, T4, T5 and T8 suggest that financial plans are used for budgeting and quantifying the marketing and operation plans in dollar amounts. Moreover, planning assists the owners-managers of Tongan businesses to avoid viewing the future in a negative aspect (NVivo9-T8-10).
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The concept of Business Planning enables Tongan businesses (refer Group-W), to recognise problems and seek quick assistance from business advisers such as PBT and the Tongan Council Advisory Committee. Business planning assists in reaching the target of smooth growth to avoid future crises. T1 emphasises that business planning and budgeting help Tongan businesses to monitor and control business performance to achieve business goals.
•
Financial Structure - Debt and Equity Financing
Business financing is a huge area for Tongan SMEs in New Zealand. It is a challenge for Tongan SMEs to decide the right proportion of finance needed for their businesses. According to T1 and T2 many Tongan businesses (refer Group-W), are heavily reliant on equity finance for starting their businesses. It is really hard for them to gain access to debt financing from other financial institutions due to the high financial risk of their businesses. Thus T2 suggests that Tongan businesses should be aware of the financial risk when using debt financing in regards to their affordability of debt servicing (NVivo9-T2-113).
The concept of Equity Financing is mainly practiced by the Tongan businesses in New Zealand. In equity financing the owner advances their capital in the business with the expectation of a good return on investment. This is a permanent part of the capital structure. The business owners can increase the equity capital by investing more of their money in the business (Oliver & English, 2007). T2 discusses the importance of equity financing for Tongan business in New Zealand. There is a need for further research on Financial Structures for Tongan business in New Zealand or in a Western Commercial Paradigm (NVivo9-T2-25 & 117).
Conceptual model of WC Flexible System of Group-T impacts on Performance
This section is linked to the case study of CS1 discussed in Chapter 4 in terms of business financial performance. In fact the outcome of CS1 case study discussed in Chapter 4 demonstrates that similar findings emerge from the Talanoa Interview sessions and focus group with the Tongan businesses and Professionals of Group-T. Moreover this section also identifies the impact of the WC Flexible System of Group-T on business financial performance and completes a conceptualised model.
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According to the findings from the Talanoa session with Tongan Professionals many Tongan businesses follow this WC Flexible System of working capital management traditionally. Their businesses have financial problems and fail to survive for a long period of time. The WC Flexible System seriously influences the financial performance of their businesses. Thus based on the findings and discussion of Tongan WC Flexible System in this Chapter and CS1 discussed in Chapter 4 the researcher has developed a conceptual model for Tongan businesses of Group-T (refer to T6, T7 and FT3) and CS1 case study (refer Chapter 4).
Accounts Payable Accounts Payable Bank Overdrafts (Borrow cash shortfall)
Accounts Payable Cash disbursements
Business Risk Financial Risk “Flexible system
Inventory WCM (Cash On Hand) Account Receivables, Cash Receipts
Liquidity Risk
Remittances (relatives, community)
Retained Earnings
Distribute profits
Drawings as shares (Dividends)
Figure 5.3.5-1: Tongan WC Flexible System
However the following table demonstrates the combined findings from the Talanoa sessions with Group-T (refer Chapter 5) and CS1 (refer Chapter 4) in contrast with the findings emerge from the Talanoa sessions with Tongan businesses of Group-W (refer Chapter 5).
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Table 5.3.5-1: Combined Findings from Talanoa sessions WORKING CAPITAL MANAGEMENT 1 Cash Flow Management
Findings from Group T and CS1
Findings from Group W
References
No business plan in place, No Cash Budget (Forecast) No Operational budgeting,, Drawings of Cash and Remittances Cash flow problem arises , Cash and Credit transactions Flexible management system of cash
Cash Flow Budget, Cash Receipts and Cash Disbursements, Borrow Cash Shortfall, Distribute Profits, Proper system in place for reconciliation and controlling. Motives of holding cash for the reinvestment (Invest excess cash)
Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W
2
Inventory Management
3
Account Receivables Management Account Payables Management
No Perpetual Inventory Control Flexible system for stock control in T6 and T7 of Group-T, Selling time and services, Informal Costing System No Credit trade policy, No account collection policy in place, more than 12 months, No Account Receivables Control Accounts Bad debts Flexible accounting system for controlling of account payables Flexible accounting policy or procedures
Inventory Control system, LIFO, FIFO and Weighted Average. Just In Time (JIT) Selling time and services, Costing and analysis Control Accounts, system in place, aging of debtors and credit terms policies in place (30, 60 an 90 days)- Aggressive, conservative and defensive policies Control System in place, Motives of holding cash Maintaining good relationship with suppliers Negotiating discounts or other terms to improve cash flows Good processes reduce likelihood of error Interrelationship of WC components such Cash, Raw Materials, Debtors, Finished Goods in a complete ‘Operating Cycle’(Purchasing, Services, Collections, Sales), Cash conversion cycle – (AAI, ACP, APP) Register with Company office. Separate entity, Utilisation of Financial and Management Accounting. Proper business plan implemented and using MYOB for accounting
Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1, Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W
4
5
Operating Cycle
Flexible System of Operating Cycle (i.e. Mixed and Confused) Unstructured and Incomplete, Cash conversion cycle is a challenge No business plan, using accounting software with limited skills, Combination of owner and business, Flexible and Unstructured system
6
Business structure & Business Financial Performance
Measures Business performance by Cash at Bank balances No auditing, No analysis and interpretations of financial performance and position. Retained Earnings is not consistent Cash Flow statement is not prepared Outstanding taxes, GST and FBT are paid irregularly
Preparing of Financial Statements , Accounting Entity or Business is a Separate Entity, Measuring of Profitability using Financial Ratios etc Performing Audit program Reinvesting of retained earning Paying taxes based on IRD system
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Chapter 6: Research Conclusion and Recommendations
6.1 Introduction
This Chapter provides the final conclusions of the research findings. These findings have been achieved on the basis of financial analysis of a case study and discussion from the results of Tongan SMEs and Tongan professionals in New Zealand via the traditional Talanoa Approach and NVivo-9 qualitative analysis software. The findings assist in providing answers to the primary question set out in Chapter 1. The primary research question for this research study is how do Tongan enterprises in New Zealand manage their Working Capital Components in terms of performance? Following the recommendations for further study with regard to Tongan SMEs Working Capital Management in New Zealand, the suggested recommendations are given based on the findings from Talanoa sessions with Tongan businesses of Group-W, Group-T outlined in Chapter 5 and CS1 case study discusses in Chapter 4. 6.2 Research Conclusions
As discussed in Chapter 1that Tongan SMEs contribute to the New Zealand economy in various businesses profiled such as accounting firms, retail, financial services, art gallery, business consultancy, graphic design and communication. Chapter 1 discussed the characteristics of SMEs in New Zealand in contrast with the definition of SMEs in other countries. It also briefly outlined the overview of financial management in relation to SMEs in New Zealand. Consequently it identified the portion of ‘Working Capital Management Components’ such as Cash, Inventory, Accounts Receivable, Accounts Payable and Operating Cycle that are chosen to be analysed and their impact on Tongan SMEs financial performance. These ‘Working Capital Management Components’ have been discussed in the context of the literature in Chapter 2. The contribution of this study is now discussed. Firstly it includes the combination of Talanoa and NVvio9 (refer section 6.2.1) as a potential qualitative approach for SMEs research in business context (refer Chapter 3). Secondly the development of theory and conceptual model of Tongan SMEs WCM as discussed in Chapter 5 (refer section 6.2.2). Thirdly the empirical contributions to the literature of SMEs ‘Working Capital Management’ are discussed in Chapters 4 and 5 (refer section 6.2.3).
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6.2.1
Combination of Talanoa and NVivo9 as Qualitative Approach for SMEs
The combination of Talanoa and NVivo9 Approach is recognised as a potential qualitative approach for further research of SMEs (i.e. Tongan SMEs). Chapter 3 discusses the Talanoa Approach as a means to move beyond the description and to generate or discover a theory, an abstract analytical schema of a process similar to Grounded Theory. Talanoa Approach has been used in many previous studies in various areas in the academic and business context (Halapua, 2007; Otsuka, 2005; S. Prescott, 2009; Thaman, 2002; Vaka'uta, 2009). Talanoa and NVivo9 are used in this particular study to collect data, and the analysing and coding process of the qualitative data.
The Talanoa Approach is an unstructured system of Pacific oral communication. Despite the unstructured characteristics of Talanoa Approach, the researcher considers it to be a systematic and constructive approach that depends on the nature of the businesses context involved in this particular study. The systematic approach requires that the researcher investigates to develop a theory systematically, to explain a process, action, or interaction on any interested topic of research. The systematic approach typically involves conducting a few interviews based on several visits to the field for assembling data to saturate the categories, or seeking information to add-on until there is no more to be found. The researcher collects data and analyses observation and produce documents from the data immediately.
The constructive approach of Talanoa depends on the researcher’s views, learning about the experience within embedded, hidden networks, situations, and relationships, and making visible hierarchies of power, communication, and opportunity. This constructive approach places emphasis on the views, values, beliefs, feelings, assumptions, and ideologies of individuals rather than on the methods of research (Halapua, 2007; Otsuka, 2005; Thaman, 2002; Vaka'uta, 2009). The discussion of NVivo9 is also undertaken in Chapter 3. OSR International, the developer of NVivo9, advocates only to provide the researcher with a set of tools that will assist the researcher in understanding an analysis of qualitative data (Bazeley, 2007). In NVivo9, conceptual maps, flow charts, or purely exploratory diagrams can be created using the modelling tool, and are generically referred to as models. The NVivo9 software is used to
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assist the researcher in the concept-building process and also helping with the organising of the conceptual framework development of working capital management for enterprises. The NVivo9 software is used in this study to organise data in a systematic manner and to recognise patterns lying between the data (Bazeley, 2007). Consequently, the combination of Talanoa and NVivo9 Approach is a potential contribution to SMEs research context.
6.2.2 Conceptual Model of WC Flexible System of Tongan SMEs on Performance
This section is linked to the case study of CS1 discussed in Chapter 4 in terms of business financial performance. In fact the outcome of CS1 case study discussed in Chapter 4 demonstrates that similar findings emerge from the Talanoa Interview sessions and focus group with the Tongan businesses and Professionals of Group-T. Moreover this section also identifies the impact of the WC Flexible System of Group-T on business financial performance and completes a conceptualised model.
According to the findings from the Talanoa session with Tongan Professionals many Tongan businesses traditionally follow this WC Flexible System of working capital management. Their businesses have financial problems and fail to survive for a long period of time. The WC Flexible System seriously influences the financial performance of their businesses. Thus based on the findings and discussion of Tongan WC Flexible System in Chapter 5 and CS1 discussed in Chapter 4, the researcher has developed a conceptual model for Tongan businesses of Group-T (refer to T6, T7 and FT3) and CS1 case study (refer Chapter 4) as shown in Figure 5.3.5-1.
6.2.3 Empirical Contributions (Group-W, CS1 Case Study and Group-T)
Cash Flow Management Section 5.3.1 discusses the current practices and policies employed by the Tongan SMEs of Group-W and Group-T respectively. In fact that Tongan SMEs of Group-W employed the ‘Western Conventional Model’ of managing WCC in their businesses.
In managing cash in Group-W they consistently construct cash flow budgeting consisting of cash receipts and disbursements. This helps to manage cash flow more effectively throughout the day-to-day operation of the business. The concept of budgeting and planning are always considered by these Tongan businesses of Group-W in order to monitor their cash
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position from weekly and monthly basis in relation to the master budget of both operating and capital expenditure (Capex). Motives of holding cash are seriously employed by these Tongan businesses of Group-W, in terms of transactions motive, precautionary motive and speculative motive. These techniques of motives of holding cash provide assistance in monitoring cash transactions in the day-to-day business operation. It also saves additional cash for the safety of the business operation and any unexpected obligation in the future. MYOB and XERO accounting software are both well presented as useful accounting package for their businesses financial and managerial records keeping.
The Tongan SMEs of Group-T and CS1 case study both employed an informal accounting practice in managing of cash flow in their businesses. This informal accounting system is known as WC Flexible System model of managing WC in Group-T and CS1. The nature of this WC Flexible System is inconsistent and unstructured. The concept of cash flow budgeting is not considered. Simultaneously controlling and planning need not be accounted for in this WC Flexible System. The WCM impact on business performance is much riskier, with the expectation of business failure. The business and financial risks include the drawings of cash, short-term bank overdraft and remittances and sharing are recognised to be the most nuances of the impact on Tongan businesses performance. Section 5.3.1 also discusses recommendations from the findings to overcome the cash flow problem of GroupT and CS1.The Tongan businesses of Group-T use the Moneyworks accounting software for recording of business transactions. Finally the cash portion of retained earning is rarely reinvested into the business capital structure. Inventory Management Section 5.3.2 discusses the relevant accounting practices employed by the Tongan SMEs of Group-W, CS1 and Group-T to monitor inventory in their businesses. This Group-W splits the Tongan SMEs into two categories namely services and retail. But they still follow the Western Conventional Model of managing WCC in their businesses.
The findings from this Group-W state that T4 and T5 use the Weighted Average method for perpetual control inventory system in their retail businesses. In section 5.3.2 this also includes the concept of inventory which is the central element of the production cycle as Figure 5.3.2-1. Just-In-Time is recommended to be the suitable method of ordering inventory
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for ‘retail’ businesses in Group-W and T6 of Group-T. In fact Tongan businesses of Group-T (refer T6), still use the WC Flexible System for managing of its inventory. Thus there is no appropriate perpetual inventory control system to monitoring stock of Tongan SMEs of Group-T. This means that the concept of financial and management accounting techniques and practices are not properly executed by this Group-T. The costing system used by GroupT is also informal and privately owned because of its flexibility. Moreover the costing and analysis of inventory and services of Group-W is an important element in their businesses. It provides a need for an inventory system to track and determine the profitability of particular products or services and customers. MYOB and XERO accounting software are suitable for Inventory management of Group-W. In control system of inventory, the monthly stocktaking process is systematically carried out in order to achieve the closing balance of inventory in every month. Accounts Receivable Management Section 5.3.3 discusses the practice and techniques employed by Tongan SMEs of Group-W, and Group-T respectively. The discussion focuses firstly on credit trade policy and collection of accounts from potential customers. The specific processes and elements of credit, sales and collections are considered in this section. Following the suggestion from Group-W that sales is the essential element of his business operating cycle which drives the business activity to achieve break-even point in order to cover coast of sales and then generates out profit for the business growth.
Group-W discussed the credit and collection techniques for SMEs. Setting up a credit policy and evaluating customers for credit limit are very important. In relation to sales the process of prompt fulfilment and invoicing of customer are recommended to be accurate and the customers’ records always kept up-to-date. Consequently agreed and understood terms and conditions of credit sales are critical. Under the collections process accounts receivable should be followed up promptly and regularly. Alternative payment options are recommended to be simple and costless such as issuing of cheques or electronic funds etc.
Kelly & McGowen (2010) suggest that the key elements of the ‘Western Credit Trade Policy’ should include, setting credit terms, establishing credit standards and deciding on an appropriate collection policy. This questions how aggressive should the business be at
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collecting past due-accounts. Tongan businesses of Group-W adopt the aggressive policy of debtors’ collection process. Gitman (2009) suggests that five main credits selection techniques as standards for both small and medium enterprises such as character, capacity, capital, collateral and conditions of debtors.
Section 5.3.3 also discusses that there is no accounts receivable for FT4, T2, and T8 of Group-W. They normally carried out their business activities on a cash basis only. The financing of T8 business is subsidised from government grants. Thus the zero balance of accounts receivable is exercised in their businesses. Findings from Talanoa sessions with T6, T7 and FT3 of Group-T recall the WC Flexible System reflects the unplanned credit trade policy and unstructured collections strategy in their businesses. This means that there is no credit trade and collection policy for Tongan SMEs of Group-T. Thus Group-T notes that cash flow problem and creation of bad debts are recognised to be negatively impact on their businesses performance. Accounts Payable Management Section 5.3.4 discusses that ‘accounts payable’ analysis is quite complex than the ‘accounts receivable’. In analysing accounts payable more accurately, the management accounting team of the business should look at the inventory purchases instead of cost of sales and expenses excluding ‘salaries and wages’ (Sherman, 2010).
Findings from Group-W Talanoa sessions emphasise the significance of maintaining relationships with potential suppliers or creditors. The negotiation of discounts, target market and system are very important to be considered in order to improve cash flows. Thus the payment date is recommended to be on the very last day of the payment schedule. MYOB and XERO are actively presented to keep the records of all accounts payable and the accounts payable control account. Most of the Tongan businesses of Group-T are not concerned about the management of accounts payable. This is reflected on the WC Flexible System they use, which results in uncertain cash inflow to settle all the accounts payable on time. Operating Cycle According to Sherman (2010), Arnold (2008) and Gitman (2009) the Operating Cycle is a series of activities that continually transform the interrelationship of working capital
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components. It is measured in elapsed time by summing the average age of inventory (AAI) and the average collection period (ACP). Gitman (2009) discusses that ‘Operating Cycle’ is the time from the beginning of the production process to collection of cash from the sale of finished goods. It is algebraically formulated in the equation as follows: OC = AAI +ACP.
‘Cash is the King’ it is the central element of the Operating Cycle in every business. Section 5.3.5 discusses the interrelationship of the working capital components of Tongan SMEs of Group-W and Group-T. T4 suggests that when bottlenecks occur in the Operating Cycle, they cause a stop and start reaction that disrupts the smooth flow of the Operating Cycle in the purchasing and selling of finished goods. The Cash Conversion Cycle (CCC) is the operating cycle less the average payment period. It is algebraically written as: CCC = OC – APP or CCC = AAI + ACP –APP. It represents the amount of time the business’s resources are tied up (refer Figure 2.4.6-1)
Findings from Talanoa sessions with Tongan SMEs of Group-T discuss the WC Flexible System of Operating Cycle of business (refer Figure 5.3.5-1). FT3 discusses the embeddedness of Tongan socio-cultural characteristics in the Operating Cycle causes the bottlenecks of the working capital management in their businesses. Consequently Operating Cycle has been conceptualised in terms of WCM indicates the embeddedness of sociocultural factors (refer Appendix 13). • Business Financial Performance
Section 5.3.6 discusses the two conceptual models, the Western Conventional Model and WC Flexible System of WCM utilised by the Group-W, CS1 and Group-T in this study. It also discusses the impact of WCM on the financial performance of the Tongan businesses. According to Deegan & Samkin (2006) that financial performance is a measure of performance such as profits or return on assets (ROA) which is based upon applying generally accepted accounting principles (GAAP).
Findings of Talanoa sessions with Tongan SMEs of Group-T suggested that performance is measured by ‘cash at bank account balance’. It is also measured with the volume of disposal income and revenue received from the business activities. The bank account balance acts as the measuring tool for cash flow statements in the Tongan SMEs. Thus the cash flow
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statement is never prepared. Financial analysis and interpretations of financial performance and position are never carried out in the Tongan businesses studied. The discussion of CS1 in chapter 4, suggested that the financial ratios analysis using the DuPont system is suitable for Tongan SMEs. The financial results of CS1 discusses in chapter 4 create recommended financial plan for WCM of any Tongan SME operating in the Western Commercial Paradigm (refer Appendices 7 & 16).
The primary research question is focused on the impact of working capital management on performance of the Tongan operating in New Zealand. Thus the findings from the case study and Talanoa sessions with Tongan businesses answers the research question with respects gaps to fill in Tongan business literature. 6.3 Limitations of the Study
This study is a qualitative research using the Pacific Traditional Talanoa Approach and NVivo9 qualitative software to collect the data from eight Tongan SMEs, and four Tongan professionals. A Talanoa session was also carried out with one business owner-manager as a case study (refer CS1). The purpose of ‘case study’ is to verify the validity and reliability of collective data, using key financial ratios to analyse and explore its WCM impacts on the financial performance. A combination of Talanoa and NVivo9 sessions were also conducted within the Tongan church kava ceremonies in order to triangulate the essence of data relation to Tongan business context, focused on WCM.
The participants involved in this research were chosen from a number of Tongan SMEs via New Zealand Tongan Business Council (NZTBC) in 2011. The participants for the focus group were chosen from a number of Tongan professionals throughout the Tongan community in Auckland. The challenge of this study is the willingness of the participants to involve in this business research. Not only that but the limited numbers of Tongan SMEs operating in New Zealand. This particular study is intended to explore the current policies and techniques of Working Capital Management (WCM) employed by the Tongan SMEs in New Zealand. Consequently some of the Tongan businesses currently followed the Western Conventional Model of managing Working Capital in their businesses and some Tongan businesses employed their own WC Flexible System as per findings and discussion in chapter 4 and 5.
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6.4
Future Research Opportunities
This study has identified some key areas for further research in order to fill the gap for Tongan SMEs research in the Western Commercial Paradigm such as New Zealand. The following bulleted points are recommended for further study using both qualitative and quantitative approaches in relation to Tongan SMEs operating in New Zealand. • • • • • • • • • Socio-Cultural Factors impact on Tongan SMEs performance in New Zealand Human Resources Management practices of Tongan SMEs in New Zealand Marketing Management practices of Tongan SMEs in New Zealand Environmental factors affect Tongan SMEs operation in New Zealand Success and failure of Tongan Entrepreneurship in New Zealand Taxation Compliance of the Tongan SMEs in New Zealand Financial and Management accounting of the Tongan SMEs in New Zealand Business risk management is a challenge for Tongan businesses in New Zealand. Financial Structure for Tongan business in New Zealand or in a Western Commercial Paradigm. Closing Statement
6.5
Working Capital Management (WCM) practices and techniques are very important for Tongan SMEs operating in the western commercial paradigm. This study provides the awareness of the Tongan owners-managers in relation to the fundamental role played by the components of WCM in any form of business operation in New Zealand. The findings from the Talanoa sessions with Tongan business owners accomplished the aim of this study as discussed in chapter 1 focusing on the components of WCM such as cash, inventory, accounts receivable, accounts payable and their interrelationship within the Operating Cycle. T1, T2, T3, T5, FT1, and FT2, recommend the government website for all businesses; http://www.business.govt.nz/starting-up/cash-flow-forecasting, as a very useful website for all small and medium enterprises in New Zealand. This website provides all relevant information for starting up a business, managing and growing of a business here in New Zealand. It also provides information about compliances related to any type of small and medium enterprises and how to construct a business plan with comprehensive template for a cash flow forecast and other related financial forecasts. It also provides procedures in how to
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deal with cash flow problems in a business and demonstrates step-by-step how to calculate break-even point for sales of any product in the business.
The findings also helped to develop the two conceptual models of WCM for the Tongan businesses and Western Conventional Model as discussed in chapter 5 and 6 (refer Appendix 13). These conceptual models demonstrate the dynamics of the WC components within the business operating cycle. This study has addressed the issues of ‘WC Flexible System’ for managing of working capital components, leading for business risks, financial and liquidity risks in relation to performance. Finally the findings from this study may assist financial policy providers and accountants for Tongan businesses in New Zealand and other western countries.
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Appendix 1A: Information for participants
Date: 2 February, 2011
Dear Sir/Madam,
Project: “The Impact of Working Capital Management Dynamics on Business Performance of Tongan Enterprises in New Zealand”
My name is Feletiliki Kefu Manisela Finau. I am writing to invite you to participate in my academic research project that I am conducting as part of the requirement for a Master in Business Management that I am doing through Unitec Institute of Technology of New Zealand. Your agreement to take part in this research project will be greatly appreciated. Participation is voluntary and confidential. The purpose of this research is to understand the current business practices around Working Capital Management that are used by the Tongan Small and Medium Enterprises’ (SMEs) in Auckland. This research will therefore, analyze how the five chosen Working Capital Management Components: (1) Cash; 2) debtors or account receivables; 3) stock or inventory; 4) accounts payables and 5) operating cycle; impacts the business performance of Tongan Small and Medium Enterprises’ (SMEs) in Auckland. In order to pursue the main aim of this study, the following specific objectives have been identified: • To investigate the various working capital management practices and techniques that are currently employed by Tongan SMEs in Auckland • To explore how Tongan SMEs integrate the five working capital management components identified above in the equation of the ‘Operating Cycle’ • Finally, to develop a conceptual model and to provide some key recommendations that will improve Tongan SMEs use of working capital management The result of this research will provide some key recommendations that will assist Tongan Small and Medium Enterprises (SMEs) operating in Auckland and in New Zealand in order to enhance their financial management and maximization of profit and growth. Your participation will involve in a focus-group among five to seven Tongan professionals from the Tongan community here in Auckland. The focus group will be facilitated by the researcher in the Pacific way of Talanoa session. The focus-group will take approximately 45-60minutes. The venue for the focus-group will be held at the Unitec Institute of Technology of New Zealand. I will also seek your permission to allow me to tape record the Talanoa session in which I will later transcribe. All features that may or could identify you will be removed. All information collected will be stored in a lock and secure place and will only be accessible to the researcher and his supervisors. If you agree to participate, you will be asked to sign a consent form. This will not stop you from changing your mind if you wish to withdraw from the project. However, because of our schedule, any withdrawals must be done within 2 weeks after I have collected data from the focus-group. Your name and information that may identify you will be kept completely confidential. All information collected from you will be stored on a password protected file and only you, the researcher and my supervisors will have access to this information. All participants in this research project will be identified ONLY by code reference without disclosing the organisation’s or participant’s name.
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This study has been approved by the Unitec Research Ethics Committee (UREC). If you have any concerns regarding this research project, please feel free to contact or notify the: UREC Secretary Research Office Building 180, Room 3008 Unitec New Zealand Private Bag 92025 Auckland Ph. 815 4321 ext 6162 Email: [email protected] For more information about this project, please contact me or my supervisors. Our contact details are noted below. Principal supervisor: Dr Helen Mitchell, Department of Management and Marketing Faculty of Creative Industries and Business Unitec Institute of Technology Private Bag 92025 Auckland, New Zealand 64 9 815 4321 Ext 7011 Email: [email protected].
Yours sincerely, ............................
Feletiliki K.M Finau
BCom (Accounting & Finance) - University of Auckland PGDipBus, GDipProfAcc – UNITEC Institute of Technology of New Zealand Master Student Department of Management and Marketing Faculty of Creative Industries and Business Unitec Institute of Technology Auckland, New Zealand Telephone: 64 9 815 4321, Home: (09) 818 3908, Mobile: 021-0234-5545 Email: [email protected] or [email protected] UNITEC RESEARCH ETHICS COMMITTEE REGISTRATION NUMBER (UREC): 2011-1151 This study has been approved by the UNITEC Research Ethics Committee from (29/03/2011) to ( 28/03/2012 ). If you have any complaints or reservations about the ethical conduct of this research, you may contact the Committee through the UREC Secretary (ph: 09 815-4321 ext 6162). Any issues you raise will be treated in confidence and investigated fully, and you will be informed of the outcome.
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Appendix 1B: Participant consent
Participant consent form Title of Project: “The Impact of Working Capital Management Dynamics on Business Performance of Tongan Enterprises in New Zealand” Project Supervisors: Dr Helen Mitchell (Principal Supervisor) Andrew Slessor (Associate Supervisor) Researcher: • Feletiliki Kefu Manisela Finau (aka Fredrick Finau)
I have had the research project explained to me and I have read and understood the information sheet given to me. I understand that I do not have to be part of this if I do not want to and I may withdraw at any time prior to the completion of the research project. I understand that everything I say is confidential and none of the information I give will identify me. The only persons who will know what I have said will be the researcher and their supervisor. I also understand that all the information that I give will be stored securely on a computer at Unitec for a period of 5 years. I understand that my discussion with the researcher will be taped and transcribed by the researcher. I understand that I can see the finished research document if I choose to. I have had time to consider everything and I give my consent to be a part of this project.
•
•
•
• •
Participant Signature: ………………………….. Date: ……………………………
Project Researcher: ……………………………. Date: ……………………………
UREC REGISTRATION NUMBER: 2011-1151 This study has been approved by the UNITEC Research Ethics Committee from ( 29/03/2011) to ( 28/03/2012). If you have any complaints or reservations about the ethical conduct of this research, you may contact the Committee through the UREC Secretary (ph: 09 815-4321 ext 6162). Any issues you raise will be treated in confidence and investigated fully, and you will be informed of the outcome.
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Appendix 1C: Approval letter from Unitec Ethics Research Committee
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Appendix 2: Assumptions of the main paradigms
Assumption Ontological Question What is the nature of reality What is the relationship of the researcher to what is researched? What is the process of research? Positivist (Quantitative) Reality is objective and singular, apart from the researcher Researcher is independent from that being researched Deductive process, Causes and effect Static design categories isolated before study Context-free. Generalisations leading to prediction, explanation and understanding Accurate and reliable through validity and reliability Source: Creswell (1997, p.5) Phenomenological (Qualitative) Reality is subjective and multiple as seen by the participants in a study Researcher interacts with that being researched
Epistemological
Methodological
Inductive process, Mutual simultaneous shaping of factors Emerging design categories identified during research process Context-bound. Patterns, theories developed for understanding
Accurate and reliable through verification
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Appendix 3: Philosophical Assumptions for Qualitative Inquiry
Assumption 1.Ontological Question What is the nature of reality? Characteristics) Reality is subjective and multiple, as seen by participants in the study Implications for Practice Research uses quotes and themes in words of participants and provides evidence of different perspectives Researcher collaborates, spends time in field with participants, and becomes an “insider” Researcher only discusses values that shapes the narrative and includes his or her own interpretation in conjunction with the interpretations of participants Researcher uses an engaging style of narrative, may use firstperson pronoun, and employs the language of qualitative research Researcher works with particulars (details) before generations, describes in detail the context of the study, and continually revises questions from experiences in the field Researcher tries to consolidate the views and experiences together of participants Researchers and participants are both in a state of mutual simultaneous shaping and it is impossible to distinguish causes from effects
2.Epistemological
3.Axiological
What is the relationship of the researcher and that being researched? What is the role of values?
Researcher attempts to lessen distance between himself or herself and that being researched Researcher acknowledges that research is value-laden and that biases are present
4.Rhetorical
What is the language of research?
Researcher writes in a literary, informal style using the personal voice and uses qualitative terms and limited definitions Researcher uses inductive logic, studies the topic within its context, and uses an emerging design
5.Methodological
What is the process of research?
6.Generalizability
What is the possibility of generalisation?
Aiming of inquiry is to develop an unique body of knowledge in the form of working strategies that describe the individual case
7.Casual linkages
What is the possibility of causal linkages?
Source: (Creswell, 2006; Guba & Lincoln, 1988; Lincoln & Guba, 1985)
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Appendix 4: DuPont System
Sales revenues $
minus
Cost of goods sold $ Income statement Net profit after taxes $
minus
Operating expenses
divided by
Net Profit Margin %
Sales $
minus
Interest expense $
multiplied by
Sales $ Current Assets $
Return on Assets % (ROA) Total Asset turnover
plus
No-current assets $ Balance sheet Current liabilities $
divided by
Total assets $
multiplied by
Total Liabilities $
Total liabilities & shareholders’ equity = total liabilities Financial leverage multiplier
Return on Equity % (ROE)
plus
plus
Interest expense $ Shareholders’ equity $
divided by
Ordinary shareholders’ equity $
Source: Adapted from Gitman (2009, p.66)
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Appendix 5: Results of CS1 Financial Statements Analysis
Current Ratio = Current Assets Current Liabilities
Quick ratio = Current assets – Inventory Current Liabilities
Liquidity Ratios:
Current Ratio Quick Ratio Short fall %
2006
1.04:1 1.04:1 0
2007
0.98:1 0.98:1 2%
2008
1.11:1 1.11:1 0
2009
0.75:1 0.75:1 25%
2010
0.77:1 0.77:1 23%
Liquidity Ratios of CS1 (2006-2010)
1.20 1.00 0.80 Ratios 0.60 0.40 0.20 0.00 2006 2007 2008 Years Figure 4.2-1: Current and Quick Ratios of CS1 ACP = Account Receivable Ave Sales per day 2009 2010 1.04 1.11 0.98 0.75 0.77
Current Ratio: Quick Ratio
Account Payment Period =Account Payable Ave purchase per day
Inventory turnover = Cost of Goods Sold Inventory
Activity Ratios:
Inventory Turnover Total Asset Turnover Average Collection Period (ACP) Average Period Payment (APP)
2006
NA 3.07 42 179
2007
NA 2.35 20 165
2008
NA 3.48 26 152
2009
NA 7.50 40 256
2010
NA 6.94 31 50
Activity Ratios of CS1 (2006-2010).
300 Number of Days 250 200 150 100 50 0 2006 2007 2008 Years Figure 4.2-2: Activity Ratios of CS1 2009 2010 42 20 26 40 31 50 179 165 152 Average Collection Period Average Payment Period 256
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Total Asset Turnover = Sales Total Assets Activity Ratios: Inventory Turnover Total Asset Turnover 2006 NA 3.07 2007 NA 2.35 2008 NA 3.48 2009 NA 7.50 2010 NA 6.94
Activity Ratios of CS1 (2006-2010)
8.00 7.00 Ratios in times per year 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2006 2007 2008 Years Figure 4.2-3: Total Asset Turnover and Inventory Turnover Ratios Debt Ratio = Total Debt Total Assets 2009 2010 3.48 3.07 2.35 Total Asset Turnover Inventory Turnover 7.50 6.94
Leverage Ratios:
Total Assets Total Liabilities Debt Ratio
2006
$ 254,948 $ 248,539 97% $ $
2007
237,776 271,238 114% $ $
2008
206,825 235,126 114% $ $
2009
132,227 210,272 159% $ $
2010
102,525 154,636 151%
Debt Ratio of CS1 (2006-2010).
160% 151% 140% Percentage of Debt (%) 120% 100% 80% 60% 40% 20% 0% 2006 2007 2008 Years 2009 2010 Debt Ratio 114% 97% 114% 115%
Figure 4.2-4: Leverage Ratios of CS1
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Time Interest Earned = Operating Income Interest Expense Leverage Ratios: Net Profit/Loss after Dep Interest Interest -Other Total Interest Expenses Time Interest Earned (%) Time Interest Earned -$ $ $ $ 2006 4,729 5,833 471 6,304 $ $ $ $ 2007 4,680 549 9,284 9,833 47.59% 0.48 $ $ $ $ 2008 19 700 26,904 27,604 0.07% 0.001 $ $ $ $ 2009 6,263 607 37,276 37,883 16.53% 0.17 2010 -$ 17,159 $ $ $ 2,987 2,681 5,668
-75.02% -0.75
-302.73% -3.03
Time Interest Earnedof CS1 (2006-2010)
1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50 -3.00 -3.50 0.48 2006 -0.75 2007 0.00 2008
0.17 2009 2010 Time Interest Earned
Percentage (%)
-3.03 Years
Figure 4.2-5: Time Interest Earned of CS1 Net Profit Margin = Net Income Sales
Profitability Ratio
Net Profit Margin (NPM) Net Profit Margin (NPM) Net Profit (Loss) After Tax Sales
2006
-0.60% -0.006 -$ 4,729
2007
0.84% 0.0084 $ $ 4,680 559,564
2008
0.003% 0.00003 $ $ 19 720,410
2009
0.44% 0.0044 $ $ 4,384 991,222
2010
-2.41% -0.0241 -$ $ 17,159 711,588
$ 782,376
Net Profit Margin (%) of CS1
1.00% Percentage (%) 0.00% 2006-0.60% 2007 -1.00% -2.00% -2.41% -3.00% Years 0.84% 0.44% 0.00% 2008 2009 2010 Net Profit Margin (%)
Figure 4.2-6: Net Profit Margin Ratio of CS1
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ROA = net profits after taxes total Assets Profitability Ratio Total Assets Net Profit (Loss) After Tax Total Equity Return on Assets (ROA or ROI) Return on Equity (ROE) 2006 $ 254,948 -$ 4,729 $ $ 2007 295,943 4,680
ROE = Net Profit After Tax Owner’s Equity 2008 $ $ 248,971 19 $ $ 2009 184,993 4,384 $ -$ 2010 132,115 17,159
$
6,409
-1.85% -13%
$
24,705
1.58% 19%
$
13,845
0.01% 0.14%
-$
25,279
2.37% -17%
$
22,521
-12.99% 76%
Profitability Ratios of CS1
40.00% 19% 20.00% 0.60% Percentage (%) 0.00% -20.00% -40.00% -60.00% -80.00% -100.00% Years -76% 2006 -13% 2007 2008 2009 -17% 0.84% 0.14% 0.00% 0.44% -2.41% 2010 Return on Assets Return on Equity
Figure 4.2-7: Profitability Ratios of CS1
Key Financial Ratios
Liquidity Ratios
(Working Capital ratio) or Current Ratio = Current Assets Current Liabilities Inventory Turnover = Cost of Goods Sold Inventory Total Asset turnover = Sales Total Assets Debt Ratio = Total Liabilities Total Assets Net Profit Margin = Net Profit Margin Sales Quick Ratio = (Current Asset – Inventory) Current Liabilities ACP = Account Receivable Ave Sales per day APP =AP /Ave purchase per day Time Interest Earned = Operating Income Interest Expense Return on Asset = Net Profit After Tax Total Assets Return On Equity = Net Profit After Tax Ordinary Shareholder Equity
Activity Ratios (efficiency) Leverage Ratios Profitability Ratios
Key: CA = current asset, CL = current liabilities, COGS = Cost of goods sold, I = Inventory, AP = Account Payable, AR = Account Receivable, TA = Total Assets, TL = Total Liabilities, NPAT = Net Profit After Tax, OSHE = Ordinary shareholders’ equity, ACP = Account collection period, APP = Account payment period, GPM = Gross profit margin, NPM = Net profit Margin,
Table 6.5-1 Key ratios for Working capital and performance utilisation
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Sales Other Income Overseas Work Total Income Opening Stock Purchases (Materials Cost) Media Bookings Labour Costs (Direct Wages) Direct Costs Hireage Subcontracts Total Costs (COGS) Closing Inventory Gross Profit Margin Other Income Interest Received TOTAL INCOME OPERATING EXPENSES: Selling & Distribution Expenses General Administration Expenses Financial Expenses Total Operating Expenses Net Earnings before Depreciation Depreciation Adjustments Net Profit/Loss after Dep Income Tax Expenses Net Profit (Loss) After Tax
Name of Communication Co. (CS1) Statement of Financial Performance for the year ended 31 March __________ 2006 2007 2008 2009 $ 782,376 $ 559,564 $ 720,410 $ 991,222 $ 26,561 $ 13,744 $ 1,854 $ 294,335 $ $ $ $ $ 808,937 $ 573,308 $ 722,264 $ 1,285,557 $ $ 1,075 $ $ $ 274,410 $ 144,906 $ 155,221 $ 121,368 $ $ $ $ 239,821 $ 322,512 $ 172,820 $ 170,480 $ 191,176 $ 21,764 $ 95,665 $ 115,233 $ 57,819 $ $ 400 $ $ 1,050 $ 12,881 $ 20,080 $ 227,297 $ 618,686 $ 427,747 $ 461,014 $ 838,531 $ $ $ $ $ 190,251 $ 145,561 $ 261,250 $ 447,026 $ 579 $ 190,830 $ $ $ $ $ $ -$ $ -$ 12,016 157,881 7,361 177,258 13,572 18,301 4,729 4,729 $ 17,386.00 $ 162,947 $ 15,221 $ 91,024 $ 20,525 $ 126,770 $ 36,177 $ 31,497 $ 4,680 $ $ 4,680
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$ $ $ $ $ $ $ $ $ $ $ $ $ $
2010 711,588 11,944 700 724,232 145,630 144,756 131,816 35,656 224 94,039 552,121 172,112
$ 14,202.00 $ 275,452 $ 15,570 $ 208,333 $ 35,369 $ 259,272 $ 16,180 $ 16,161 $ 19 $ $ 19
$ 431.00 $ 447,457 $ 49,641 $ 330,487 $ 45,131 $ 425,259 $ 22,198 $ 15,935 $ 6,263 $ 1,879 $ 4,384
$ 3,201 $ 175,313 $ 36,459 $ 118,896 $ 25,409 $ 180,764 -$ 5,451 $ 11,708 -$ 17,159 $ -$ 17,159
Name of Communication Co. (CS1) Statement of Financial Position for the year ended 31 March __________ 2006 CURRENT ASSETS: ASB Accelerator Account ASB Business Saver Account RWT Paid Loan to Staff Account Receivables Other Debtors CS1 shareholder advances Deferred Interest Total Current Assets NON-CURRENT ASSETS: Fixed Assets as per Schedule Investments ASB Term Investment Total Non-Current Assets TOTAL ASSETS EQUITY: Share Capital Shareholder Contributions Retained Earnings TOTAL EQUITY $ $ $ $ 100 3,700 2,609 6,409
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2007 $ $ $ $ $ $ $ $ $ 14,112 31,418 192,246 237,776 $ $ $ $ $ $ $ $ $
2008 1 22,512 51,542 132,770 206,825 $ $ $ $ $ $ $ $ $
2009 1,303 72 22,512 108,340 132,227 $ $ $ $ $ $ $ $ $
2010 2 22,512 60,544 19,467 102,525
$ $ $ $ $ $ $ $
66 113 90,813 14,112 87,832 550
$ 193,486
$
50,781
$
47,108
$
30,947
$
41,298
$
29,590
$ $
10,681 61,462
$ $ $
11,059 58,167 295,943
$ $ $
11,199 42,146 248,971
$ $ $
11,468 52,766 184,993
$ $ $
29,590 132,115
$ 254,948
$ $ $ $
100 24,605 24,705
$ $ $ $
100 13,745 13,845
$ $ -$ -$
100 25,379 25,279
$ $ -$ -$
100 22,621 22,521
2006 CURRENT LIABILITIES ASB Cheque Account GST Owing Account Payable Provision for Income Tax (Taxation Payable) FBT Payable PAYE Payable Current portion of term Loans Total Current Liabilities NON-CURRENT LIABILITIES: Loan - Pacific Business Trust Hire Purchase- Fuji Xerox Limited Hire Purchase - Power Book HP -CW2000 HP -Laptop 2 MTF Leasing Limited Prepaid Interest - MTF Leasing Prepaid Interest Hire Purchase - CW2000 LTD (Server) Prepaid Interest - HP (Server) Less Current Portion Loan - Lt Total Non Current Liabilities TOTAL LIABILITIES TOTAL EQUITY & LIABILITIES $ $ $ $ $ $ $ $ $ $ $ $ 39,280 16,462 7,543 63,285 $ $ $ $ $ -$ $ $ -$ -$ $ $ $ $ $ $ 7,594 24,929 $ $ $ $ $ $ $ $
2007 7,052 28,050 65,452 3,876 18,549 76,257 44,023 243,259 $ $ $ $ $ $ $ $
2008 6,631 42,430 64,731 4,176 19,949 49,068 23,848 210,833 $ $ $ $ $ $ $ $
2009 35,883 84,998 6,585 22,615 26,981 177,062 $ $ $ $ $ $ $ $
2010 53,090 19,448 20,115 1,552 24,013 14,192 132,410
$ 134,945 $ $ $ $ 4,025 13,761 -
$ 185,254
43,827 5,032 2,532 16 21,618 991 44,023 27,979 271,238 295,943
$ $ $ $ $ $ $ $ -$ -$ $ $ $ $
30,864 10,888 11 23,848 6,400 24,293 235,126 248,971
$ $ $ $
22,094 3,513 1,620
$ $ $ $ $
15,334 501 9 6,400 22,226 154,636 132,115
-$ -$
310 107
$ -$ $
$ $ $ $ $ $
6,400 33,210 210,272 184,993
$ $ $ $ $ $
$ 248,539 $ 254,948
110
Financial Ratios Analysis of CS1 (2006 -2010) 2006 Liquidity Ratios: Current Ratio Quick Ratio Activity Ratios: Average Collection Period (ACP) Average Period Payment (APP) Average Purchase per day Total Asset Turnover Leverage Ratios: Debt Ratio Total Assets Total Liabilities Interest Interest -Other Total Interest Expenses Time Interest Earned (%) Profitability Ratio Return on Assets (ROA or ROI) Return on Equity (ROE) Net Profit Margin (NPM) Ordinary Shareholders' Equity Average Sales per day $ 97% $ 254,948 $ 248,539 $ $ $ 5,833 471 6,304 -75.02% -1.85% -74% -0.60% -$ 22,521 1,950 -$ $ $ $ $ $ $ 114% 237,776 271,238 549 9,284 9,833 47.59% 1.58% 19% 0.84% 25,279 2,716 $ $ $ $ $ $ $ 114% 206,825 235,126 700 26,904 27,604 0.07% 0.01% 0.14% 0.003% 13,844 1,974 $ $ $ $ $ $ $ 159% 132,227 210,272 607 37,276 37,883 16.53% 2.37% -17% 0.44% 24,705 1,533 $ $ $ $ $ $ $ 151% 102,525 154,636 2,987 2,681 5,668 -302.73% -12.99% 76% -2.41% 37,476 2,143 $ 1.04 1.04 days 42 179 751.81 3.07 $ 2007 0.98 0.98 days 20 165 397.00 2.35 $ 2008 0.98 0.98 days 26 152 425.26 3.48 $ 2009 0.75 0.75 days 40 256 332.52 7.50 $ 2010 0.77 0.77 days 31 50 398.99 6.94
111
Appendix 6: Summary of Talanoa Session with Observation of CS1
Main Themes Sub-Themes • • Financial Management Working Capital Management Policy • • • • Liquidity Ratios of CS1 Current Ratio of CS1 • • Quick Ratio of CS1 Activity Ratio of CS1 Average Collection Period (ACP) of CS1 Average Payment Period (APP) of CS1 Total Assets Turnover Debt Ratio of CS1 Time Interest earned ROA, NPAT, ROE Description of Views and Ideas No Business Plan in Place No WCM Policy system for this CS1 Financial and Management accounting are challenge for CS1 No CASH Budget No operating and Capital Budget Investing in Short-term current assets such as account receivables with no credit management policy Low working capital ratio No Closing Inventory in Balance sheet • Evidences from Talanoa session Financial and Management accounting system are not properly utilised (Accounting software – Money works (not fully understand)) The aggressive, conservative and defensive policies are not recognised by the business owner/manager No cash flow forecast or operating budget Owing huge amount to creditors (account payables) Cash flow problem arises CS1 cannot meet its obligations Average collection period (ACP) is a huge challenge Poor Inventory (stock) control (No stock take) No Account Receivables collection policy in place Flexible system , Own your own boss No Account Payable Management system in place No Account Payables policy in place Dependable on Cash at Bank Balances Used assets more efficiently to generate Sales Investing in short-term assets Huge Cash flow Problem occurred throughout 2009 and 2010, Liquidation process Drawings of Cash for personal use Reference from Talanoa session Literatures
•
NVivo9 -CS1
• • • • • • • • • • • • • •
Abel (2008), Afza (2007), Baig. V (2009), Chandra P (2008), Dhiraj (2009) Prescott (2009), McInnes (2000)
NVivo9 -CS1
Gitman (2009), Hatten (2008), Brealey et al, (2006), Oliver & English (2007) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008) Prescott (2009), McInnes (2000) Hatten (2008) Prescott (2009), McInnes (2000)
NVivo9 -CS1
• • • •
No Account Collection Policy Unstructured system No WCM Policy system Flexible system
NVivo9 -CS1
NVivo9 -CS1
• • • • • •
High assets turnover ratio Cash flow problem Inability to service debts More financial leverage Return on Investment or Assets Return on owner’s Equity
NVivo9 -CS1
Leverage Ratios of CS1
NVivo9 -CS1
Profitability Ratio of CS1
•
NVivo9 -CS1
112
Appendix 7: Recommended WCM for CS1’s Business Performance
Cash Management Inventory Management Account Receivables Management Improving of credit and collection process in terms of three elements such as Credit Policy, Sales and Collections Credit: setting credit policy, evaluating customer credit and setting credit limit Account Payables Management Business Performance Risk Management Using key Financial ratios such as ROA or ROI, ROE and others to analyse the business performance Liquidity ratios, Activity ratios, Leverage ratios and profitability ratios to be used for analysis DuPont Analysis system is suitable for CS1
Forecast short-term cash flows (cash receipts & cash disbursements) Preparing of cash flows forecast on timely basis Follow-up variances between actual and forecast or actual results and budget results (Cash Flow statements to be introduced using indirect method) Owner-manager should change actions which affect cash flows and cash balances Analysing cash flows and identifying variances
Optimising inventory levels and production efficiency (reducing inventory level without impairing customer service) Increasing inventory turnover by focus on inventory levels. Considering the Gross Margin as % of sales Contracts and purchase ordersclear typical terms to be considered Costing and analysis using traditional inventory costing (direct labour, direct materials and overheads) Just In Time Inventory order system (JIT) Stock take process and inventory control system Deals with returns and complaints promptly System in place for monitoring & controlling overheads costs Business Plan with Inventory Forecasting and Budgeting
Payables and payments for suppliers and creditors, Invoice promptly and up-to-date. Paying the Account Payables on the last date
Reconciled suppliers statements Ageing reports of account payables Understanding of policies for suppliers, utilities, credit cards etc Account Payables Control Account to be reconciled against the general ledger regularly Account for related accounts such as GST, Freight & Shipping, extra charges, discount for prompt payments, return and defects For every purchase must have purchase order (PO) and approved by management. Maintaining an approved vendor list Maintaining of suppliers files with copies of correspondence, contracts, purchase orders, and others Business Plan with Account Payables Forecast and Budgeting
Sales: Prompt fulfilment and invoicing, accurate and up-todate customer records Collections: Prompt follow-up of accounts, payment using cheque, credit card, electronic funds transfer etc Controlling of account receivables - clear “Payment Terms”. Account Receivable Control A/C (reconciliation) Late payments are not acceptable Business Plan with Account Receivables Forecast and Budgeting
Internal Control and policies system to be in place for cash (i.e. preventative and detective controls). Written policies Financial and Management Accounting software to be used (Information and Technology) e.g. MYOB, XERO etc Business Plan with complete Financial Forecasts and budgeting
Avoid, mitigate, transfer and accept RISK in the business (RISK associates RETURN) Business Plan with Financial Measurement
113
Appendix 8: Evidences from Interview Talanoa sessions and NVvivo9 Codes:
Tongan SMEs Category Accounting Firm (AF) Evidences from Interview Talanoa sessions and NVvivo9 -Codes Code
First and fore mostly, finally, which I think is really important is your business is your priority. Your Constant Comparison and Classical Content Analysis (NVIvo9)
Working Capital Management
T1
business has to survive. It has to work. Your business has to support itself and support you, before you worry about supporting anybody else. And it grows across our culture. Basically you need to learn to be selfish (NVivo9-T1-214) The Tongan business we need to plan. You need to budget. You need to get very good at what you do. It
Business is a Separate Entity
Accounting Entity
AF
T1
is competitive out there. And where possible you need to try and grow your business. Because the moment you stand still you go backwards (NVivo9-T1-213)
Business Plan Budget
Accounting Entity
“................... whilst we’re chartered accountants, right, it’s just a business like no other business. What do we do? We sell services to people. We don’t sell products. We sell services. AF T1 And it’s a wide range of services. How do we charge for those services? We charge based on time engaged. So if you bring a job to me it would take me 5 hours to complete. You’ll get charged for 5 hours. This is breaking it down to its simplest thing” (P4 NVivo9-T1-53).
A lot of what we do though is generally end of year compliance. A lot of my clients I don’t see until once a year. Where we can we try and teach them to do their own accounting. We are using MYOB a lot. Install it for them. Teach them how to use it. (NVivo9-T1-149) ................. I had an electrician. He makes a lot of money. But I taught him how to do his own accounting.
Selling Time & Services Costing basis MYOB- Accounting system Accounting Practices MYOB- Accounting Practice Budgeting Budgeting (Operating)
Inventory & Cost Management
AF
T1
Management Accounting
AF
T1
He brings the most perfect records to me on MYOB. He does his own budgets. He’s an electrician and he’s got 2 premises (NVivo9-T1-152)
Management Accounting
.......... Right like I told you, we sell time. There’s 260 working days in a year, right. The AF T1 government says you’ve got to give 4 weeks holiday. So the government says I think every year there’s 11 statutory holidays. Some year’s bosses get lucky coz Anzac Day falls over Easter, so I don’t have to give 2 days off work. But I budget on 10, that’s annual leave, that’s statutory
114
Management Accounting Cash Flow
holidays. (NVivo9-T1-64 T1-64) “.... I then go the law requires that you give everybody 5 days sick leave. And guess what the palangis take none, the Indians take none and the Tongans take 10 so. But I allow 5 days for AF T1 sick. Everybody has to get special days. Hey that’s what you budget for in a Tongan business. We have more funerals than anybody else. So 2 days special leave. Palangis take nothing, the Tongans take 4. So it doesn’t bother me. I say it in jest. (NVivo9-T1-65)
“............... But this is the process I go through when I set my budgets. And then the Society of Accountants says that all members have to have 20 hours structured learning a year. Right. So 20 hours is half a week. But there’s also 20 hours unstructured. So basically 40 hours a year. 5 working days your staff are off at courses or something like that so. Mine’s 5 days for study. (NVivo9-T1-66) 260, 240, 230, 225, 223, 218. So to use a bit of a term, I know that I have 218 bums on seats days here. So my factory is, I have 218, for every staff member I have, I’ve got them here for 218 days. Right. But
Budgeting (operating)
Management Accounting Cash Flow
Budgeting (Operating)
Management Accounting Cash Flow
AF
T1
Budgeting (Operating)
Management Accounting Cash Flow
AF
T1
there’s 8 hours in a day, not counting lunch. We start work at 8 and finish at 5. An hour for lunch, that still gives them 8 hours a day. It’s impossible to keep. It is physically not possible to be productive for that whole 8 hours all of the time. So I allow. (NVivo9-T1-67) So I basically start with 218 days. And as I said we charge out at 6 minute units. 10 units to the hour. 80 units to the day. So I say, I’ve got 218, I have 80 units a day and we have time sheets. Unless you account
Budgeting (Operating)
Management Accounting Cash Flow
AF
T1
for all 8 hours your can’t log out. But realistically you have to give them morning tea, afternoon tea, sitting around waiting for partners to supervise. So I take off 5 units a day, so basically I say, if you work for me I can sell 7 and a half hours of your day every day for 218 days a year (NVivo9-T1-68) And I think we see it everywhere with our Tongan businesses. Putting it on the other side. One of the things that I see as an outsider looking into Tonga is remittances has a negative effect. Because I think Remittances - has become Tonga’s default social welfare.
Cash Management
AF
that remittances has in many respect has become Tonga’s default social welfare. Because there are many T1 families now who can survive on the $300 a week that they’re getting from the 3 sons working in New Zealand. You’ve got 3 sons working in New Zealand will send you 100 bucks a week. $300 New Zealand is $500 Tongan. Easy to live (NVivo9-T1-182)
115
A lot of it is bank statements. Old fashioned ways. Although K..... out there, he’s slowly teaching these guys to do their own bookkeeping. Helping them out. Where I see a lot of Tongan businesses fall down.
AF
I’ve looked after businesses in the past, the Tongan guys. I had a couple of guys who were very good T1 painters. And I did their books for them and their plan and all that. But then all of a sudden some priorities come up in the Islands and they will take all the money from the business. Sort out what’s the problem in the Islands. But then they just kill their own business (NVivo9-T1-154) Because what happens then is that they can’t pay the PAYE, can’t pay the GST coz they’ve sent all the
Remittances has a negative effect on business financial performance
Cash Management
Cash Flow Problem Motive of Holding Cash Cash Flow (Good)
Cash Management
AF
T1
money home. And ultimately the tax department will chase you and all this and you get behind and it’s just impossible to recover (NVivo9-T1-155) Now what you find is that you have a core of clients who are very good at running their own businesses. Have good cash flows. They will always pay you on time. You do their work and you send them a bill at the
Cash Management
AF
T1
end of the month. By the 20th they’ve paid you. And it’s beautiful to have clients like that. (NVivo9-T1105) You drive it. And there’s a lot that you have to factor in. You’ve got cash payments on loan, that’s Cash Flow Cash Management
AF
T1
principal and interest. You break out the interest. You break out the principal. So that’s a very sensible cash flow forecast. And that’s our guide for the year (NVivo9-T1-101) Yeah. Now in reality when you look at the cost of an accounting practice. Our biggest single cost is wages. You can’t defer paying the wages and say I’ll pay you on the 20th of the month. Wages have to go
Costs (operating Expenses)
Cash Management
AF
T1
out every fortnight. So you’ve got no choice. So then your next biggest cost is probably your premises rent. That goes out by automatic payment on the 1st of the month. (NVivo9-T1-119) Productivity. My performance is when I set the budget, I look at the budget monthly, units. I get a
Productivity
Performance
AF
T1
summary every month. And I measure your productivity. And if we’re good and I try to hit my monthly budgets for billing. I am always excited when I’m over budget (NVivo9-T1-138)
.... you need to be able to be profitable. Because every time you go into business its risky. Because you
Risk associates Returns
Performance
AF
T1
take on a lot of risk. I guarantee the rent. I guarantee the bank overdraft. I guarantee the bank borrowings. That’s a huge risk. So you need to make good profit. (NVivo9-T1-193)
116
Profitability Return on Investment
(Assets)
There has to be reward for risk. So you need to make the return over and above what you could ordinarily. Risk associates Returns
Performance
AF
T1
In my business I just say I’ve got to make money well over and above what I could get working for somebody else. (NVivo9-T1-196)
AF AF AF AF AF AF AF AF AF AF
T1 T1 T1 T1 T1 T1 T1 T1 T1 T1
“..receiving prompt payment from clients here in NZ and Tonga....” (P4 NVivo9-T1-53). “Quickly convert of payments into cash...............” (P4 NVivo9-T1-53). “Decentralising of cash collections from customers (debtors)” (P4 NVivo9-T1-53). “..........Collecting centres here in NZ and in Tonga........” (P4 NVivo9-T1-53). “......... holding payments until the last date of the payment to creditors.. “(P4 NVivo9-T1-53). “...... payments made by cheques and drafts...............” (P4 NVivo9-T1-53). “...... minimising the number of payments............ Batched payments..............” (P4 NVivo9-T153). “........... centralising all payments to the main head office........ payroll” (P4 NVivo9-T1-53). “.......... using online banking payments........... and inter-bank transfer funds...........” (P4 NVivo9-T1-53). ....... Floating Funds............. arises from bank reconciliation .... P4 NVivo9-T1-53
Because one of the worst things about the accounting industry is that people pay, they’re notoriously slow. You know we talk about having an average age of debtors of 30, 60 and 90 day. Well accountants are over 60 days. People are just slow to pay their accountants. I don’t know why. I talk to all my accounting
Accelerating cash inflows Accelerating cash inflows Accelerating cash inflows Accelerating cash inflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows
Ageing of Debtors Deciding on an appropriate collection policy
Cash Management Cash Management Cash Management Cash Management Cash Management Cash Management Cash Management
Cash Management Cash Management
Cash Management
Account Receivables Management
AF
T1
friends and we’re always ringing debtors. Chasing it. (NVivo9-T1-92) You know and that’s just New Zealanders just live on debt. Businesses always manage debt out. So if you were to look at my aged debtors there would be quite a loading in the 60 to 90 days. (NVivo9-T1-93)
117
The only way you can manage that really is you have somebody out there, and I have a guy that’s almost
AF
T1
full time. He’s kind of like an admin man. He does office accounting and things like that. Who is on the phone ringing? (NVivo9-T1-107) All that accumulates on a time and cost ledger and when the job is finished, we pull that time and cost
Policy of collecting Debtors
Account Receivables Management Account Receivables Management Account Receivables
AF
T1
ledger and we bill the customer, right. And we give the customers 21 days to pay with a 5% discount. And that’s the theory (NVivo9-T1-57) And then I analyse it. So I then have to convert this to cash flow. Right. But the cash flow, because your sales are not cash. Right. So I then do what I call my debtors driver. Right. That’s what I started the year
Credit Policy, (setting credit Terms) Cash Discount (5%) Account Collection Policy Allowed Bad Debts Improving Cash Flows Incentives System
AF
T1
with – oh these dates should’ve been changed but it doesn’t matter. This is what I started the year with. Right. Opening balance. That’s what I bill. Allow for some write offs. That’s what I should collect each month based on my debtors. (NVivo9-T1-95) We try and incentivise people. Like we say if you pay within 21 days you can take a 5% discount. And I’ve
AF
T1
factored that discount into it. When you work out overdraft interest rates and all that. 5%. Plus it’s a good little incentive to get people to pay earlier. Sometimes for you, you know, your business might be hard to find just $3,000 in one month. But you can
Account Receivables Management Account Receivables Management
AF
T1
find 250 every month. A little bit every month. It builds up and when you come to see the accountant, you’re in credit. And that’s the theory, that’s the model we’re working towards (NVivo9-T1-136)
Receivables in Advance
Well we’ve got a system. We’ve got MYOB to look after the accounting. We’ve got our own management........ And then we do reconciliation at the end of the day of what money was received. What
MYOB- Accounting system Accounting Practices
Management Accounting
Financial Services (FS)
money for the day and if there was any shortage. But we have got other control mechanism in place. And
T2
then we process it to the MYOB and every, the next day. So today’s transactions will be processed tomorrow. And everything is through the bank. So most of our transactions goes through the bank. A lot of people direct credit the money straight to our account. So we have to reconcile those entries every day as well. To make sure that we receive the money before we issue the transfer overseas. (NVivo9-T2-15) Yeah from past years I know which months is our peak months, which is Christmas, January is slow. It’s
FS
T2
Budgeting Cash Flow Forecast
alright. February is slow. Because its obviously school, beginning of the school term here in New Zealand
118
Cash Flow Management
so people don’t have much money to send overseas. But March is okay. April is okay. We start picking up in May. May and June because of the conference in Tonga. The church conferences. So June is really good. July is alright. August we will just, August is slightly steady. October. And then November it picks up again. December. December is our (NVivo9-T2-29) They need the remittance man. They do. Because that’s income and income for Tonga, you know. And they need it because there’s so much outgoing and not much income to Tonga. That’s why they started that Remittances has a negative effect on business financial performance Cash Management
FS
T2
project because, you know how they don’t have much exports at the moment. They started, the government started the work scheme program between New Zealand and Australia. And they are using the people, that’s the sell, they’re selling the people, the labour. To bring back money to the government, to the country (.NVivo9-T2-127)
FS
T2
Reconciliation at the end of the day. Control Mechanism in place for controlling purpose. Using of MYOB for records keeping. All cash transactions is going through the bank. (NVivo9-T2-23) Well obviously, the main problem is you’ve got to have someone in Tonga that is very trustworthy for receiving the money. A trustworthy company in Tonga. Because I know for certain that some company, money transfer company they started, and they disappear. Because the people in Tonga misuse the
Reconciliation of Cash Transactions Misused of Funds
Cash Management Cash Management
FS
T2
money. Instead of paying out to the customers, they misuse the money. So I know, I know a couple for sure that that’s the problem. (NVivo9-T2-141)
Yeah I think, I notice in Tonga, a key factor is loan. If you take out a loan to run a business, you have to service that loan and its quite expensive especially if the interest rate is high. And the reason why we are
Debt Financing
Financing of Business
FS
T2
surviving is that we don’t have a loan. You know, we have cash surplus everyday. So, but it will depend on the economy mate. Like last year we felt that the economy was down and we were suffering quite a bit and we were just getting to the edge. And it picked up towards of last year, and its been good. We’ve been doing alright since then (NVivo9-T2-113) Well first of all you got to, you got to have a basic knowledge of how a business operates. Yeah. Because
Debt Financing
FS
T2
not only that you have got tax matters that you have to, you’ve got tax obligations to the inland revenue department. And like I said if you’ve got some cash, it would be good if you start out with some cash. If
Financing of Business
119
you start out with a huge loan it is going to affect you, you know. (NVivo9-T2-117) .”............. But we already send the 3 grand over to Tonga from our, because we’ve got some money since we first started, been generating the profit. Little profit, but the owner invested a bit of money into the
Capital Investment
Equity Financing
FS
T2
business, a couple of hundred grand. So that’s the money we’ve been loaning off. And little bits and pieces we chip it in and we just keep it there. There’s no major capital investment, apart from the computers and the office equipment. But there’s no other. (NVivo9-T2-25)”
GST. And you’re paying your normal stuff for the IRD. You’re paying your power, your phone. Those things they’re monthly. And your part of the rent that you have is a percentage of it, is actually paid by the
GST and other costs
Business obligations
Business Consultancy (BC)
T3
business. The cost of your vehicle, running your vehicle is part of the business. So those things like that when you’re in business for a while are basic. But I try not to have too much commitment in terms of putting pressure on the business. Because as I said, especially in the current climate. So you just got to have to live within your means ( NVivo9-T29) No, no separate. Because I have my own personal account and the business account. The business account is still business. And the personal account your personal account. So you have to separate it because as I
Business is a Separate entity
Accounting Entity
BC
T3
say part of the rent is paid by the business. You work out a percentage of the area that you use for business. Not only for this room here but the kitchen, the sitting room, sometimes we have people we meet in the sitting room, and sometimes we have it in the kitchen. So all of those costs are part of the business (NVivo9-T31)
BC
“.......... Not only has the old professional way of having a fixed office and you gone there. Because technology has changed, enable you to do a lot of things. When I travel I check my e-mail on my phone.
T3
Most of my communication is mainly controlled by my Blackberry. So its, the space on my Blackberry can have the same as what my desktop. So it suited the type of business that I’m in. But not every business person will have that type of flexibility. So it allows me to do, get away from a lot of unnecessary cost. So it enabled me to survive and also call it a business (NVivo9-T33)
Advantages of using Technology in Business Minimising Costs
Social media and Technology
BC
“............. There was a very quite high rate of failure and some of them they’re Tongan businesses. And I
T3
think that because I used to try to advocate and trying to ask the board that yes we can lend money, but we
120
Managing of near Cash and cash equivalent
Cash Management
have to manage it in a way. Because sometimes we come from the Tonga, from the Pacific, and then we try to actually do the business in a Palangi way that’s fine. But most of the people that we send money to still have the Island way, they have the Tongan way. Because when they have a lump sum of money right in front on them, other priorities over ride the interest of the business. And I actually saw that. And we used to write off loans that was bad loans, that was sent to, that was 7 years ago now. And I used to, and I have a very lively debate at the board room because I saw the trend is not getting any better (NVivo9-T39)
Managing in Tongan style
BC
It is just the cash flow. As I said its not consistent, it spikes you know. All of a sudden you have got a huge spike of money arriving. But people who don’t understand the nature of the business that’s not, yes, it’s a big bulk of money but you’re going to have to manage it you know. And that’s a weakness of the business
Cash Flow Problem
Cash Management
T3
because the inconsistency of the flow of cash. So that also hold you from further development in the other area of the business that you want to expend to. So it focus you on what you’re doing now and how can I build on that (NVivo9-T49)
BC
I think
that all those things that you mentioned are critically important. It is just driving the road, you’ve
Managing WC
WCM
got to make sure you stay on the road. If you slightly get on the road you might get a bit of loose metal
T3
and then you might go off the road and then you might get an accident. I just see that running a business is like driving on a road. Make sure you stay on the road and sometimes you speed up and you might get fined by the traffic officer. But that’s the idea of running a business, stay on the road, you know (NVivo9T59)
BC T3
I don’t have it apart from just the Western model. But just to be clear to our Tongan business people don’t forget that commerce and business is quite a foreign thing to us. Some of those other cultures commerce has always been part of their culture, part of their life. But commerce for us is only less than 200 years. So we’ve got a lot to catch up. And I think that the only thing you can learn from it is learn from others mistakes and avoid getting into the wrong side of the road (NVivo9-T65)
Western and Tongan Business Models
Business Models
BC T3
I think that’s only excuses. Our social, there’s nothing wrong with our culture. There’s only people who actually poorly manage their business and blame the culture for the failure of their business. There’s nothing wrong with that. (NVivo9-T67)
Poor management skills is the problem
Social &Cultural Factors
121
Over 50% of that funding is for staff wages. The majority of the funding that we receive from grants and
Cash Flow (Funding) from the government
Cash Management
Coffee Bar
T5
from school contracts go directly to staff wages. And the balance of it, the rest is to pay our creditors. To pay for our rental, the overheads, the running of the vehicles, running camps for the school etc.( NVivo9T5-18) Yes at the beginning of the year. From the 1st of July we have to provide a budget for the Ministry of Social Development. That is required before a new agreement is signed. And also in February prior to March board members meet and a budget is presented to them for the whole year. So yeah, the government require a budget and a cash flow to be produced for their financial year, beginning 1st July.
Cash Flow Budgeting
Cash Management
CB
T5
And we work on a budget for our financial year, which begins in 1st April. And sometimes we look specifically at schools, where we have a separate budget for the calendar year start from the 1st of January to December to fit in with the school year. So yeah we do have, we do require to be regularly produce a budget when they ask for it. (NVivo9-T5-22)
CB
........ 100% of any money generated from the selling of the coffee goes directly to the ........ for the delivery
T5
of the programs. (NVivo9-T5-28) No. We are currently working with the Charities Commission. We have had somebody assisting us with drawing up the necessary documentation to be presented to the Charities Commission. That has crossed;
Extra Financing of the Business Activity Legalised Business activity
Cash Management
CB T5
Business Activity
we have visited the idea of perhaps treating the selling of the coffee as a separate entity from Family Works. But now it is written into our constitution that we need to present that to the Charities Commission to ensure that we are not doing anything illegally ( NVivo9-T5-32)
122
Well we have to show that we do have something to sell. Like for instance we do have the coffee to sell. We created a separate bank account which accounted for all the transactions for coffee. The cost of the sale of coffee. And the money made from the sale. The sale of coffee. And the cost of the sale of coffee. And so one account, one account that we’ve created to ensure that all transactions as far as coffee is concerned is made through that account. And the money transferred can only be transferred from that account to our
Cash Sale Transactions Inventory
Cash Management
Inventory Management
CB
T5
main operating account for FW Ltd. So we are keeping track on what we expense, all the expenses we have to make as far as coffee is concerned. We are keeping track of any funds that are being made from the sale of the coffee by keeping it separate from our operating account. Operating account for FW Ltd. We cannot access funds from the sale of coffee unless it is transferred from that account to our operating account.(NVivo9-T5-60)
Cash Control
CB CB
T5 T5
Bank Reconciliation
............... I try to do it at least once or twice a week....................(NVivo9-T5-76) ........We use Zero accounting software (NVivo9-T5-64) No we have got no issue with Zero. Yeah it fits in well with, directly your bank statements from the bank.
Cash Management Management Accounting Management Accounting
CB
T5
It’s there and you’ve got immediate access to your reconciliations etc and any other reports you want.
Zero Accounting Software Zero Accounting Software
(NVivo9-T5-74)
Yes. Every year. All our accounts are audited. Like I said earlier we need to finish, we need to have a draft by the end of this week so that could be sent to our auditor and have to be audited. When we are applying for funding whether it is from the government or from other agencies, we need to produce a set of financial, audited accounts.(NVivo9-T5-88) I’m required to give our general manager..........., at the end of the month a, something like a trial balance or profit and loss, monthly profit and loss. And he can view of what has happened and what has been taking place during the month. And sometimes I have to put these in a list of all the creditors, the accounts
CB
T5
Audit is needed for T4’s financial statements
Management Accounting
Financial Statements Records keeping
Financial Accounting
CB
T5
that are due at the end of the month. Especially when I realised that we don’t have enough money. Like for instance today I had to give him a list of what I needed to pay today. These were overdue accounts.
(NVivo9-T5-90)
123
Yeah. Because we are not getting enough funding from the government we seem to watch our cash flow
Cash Flow
Cash Management
CB
T5
and what we spend every month. And because our staff are also needing to be paid on time we are extra vigilant of what we are spending (NVivo9-T5-92)
Yeah I think the fact that people want to have businesses is really good. And I think that passion and energy they need to focus it in on finding something to make the business successful. So if they don’t have experience in financial management then to go and seek help. And finding someone they trust is really important. If you’re getting advice from someone that you don’t trust. I find that a lot of people in the Pacific communities they don’t necessarily trust who they’re getting advice from then it won’t work. So
Financial Advice and planning E.g. PBT
Financial Management Cash Management
Retail –Beverage and Food
T4
finding someone that you trust and have confidence is very important. I know the Pacific Business Trust do a lot of workshops on how to set up businesses, and business planning and even cash management. But yeah if you can find an accountant like K....... He’s very trustworthy, very ethical. And he will, if he’s saying I don’t think this is going to work. You will potentially lose money. That’s the advice that you want to get. But if they’re saying look if you do these things right then this should go well. Then that’s good as well so then you know what you need to focus on. So it’s about planning and getting that financial advice up front before you commit your time and energy (NVivo9=T4-78) Yeah so what we did, we actually both the businesses we bought, we purchased them as going concerns. So they already existed. So what we did is we did a financial model. And basically an evaluation based on a forecast, discount and cash flows to see if the numbers stacked up based on the price. Then we went through and thought what we could do better and if we could actually improve it. And could we actually
Business Strategy, Vision and Mission
Business Starts
RBF
T4
increase the value of the business. So we didn’t actually try and, we didn’t change the names of anything. But what we did is we took the existing business model and we thought, one, is the purchase price justified. And then two, do we think we could do it better. Especially with “TTW” because we had some experience from in town. So we knew that we can, if we do these things we should be able to save some costs and maybe increase margin. Those are the kind of things we were looking at. (NVivo9=T4-80) I think that working capital is important. But the other important side is sales. The sales are what drive
RBF
T4
Cash Sales
your business. So if you have, if your sales are at a level above break even or at a level where you’re
Working Capital Management
124
targeting to make the return you’re after then that’s good. But then managing your working capital is going to make sure that the cash is in the right place at the right time to facilitate those sales. And you know making a profit is the goal at the end of the day (NVivo9=T4-76) Yeah I mean if you don’t pay your creditors then you are going to risk not getting supply. If you don’t manage your inventory you can, one, you’re going to have too much stock and its going to be bad for cash flow and put pressure on you there. Cost for cash, you know your interest costs will go up. And you, you know, when you go through a hard time then you need to just run a very lean ship. And that’s
Break Even Point
Management Accounting
Inventory, creditors, cash flow, Sales volume and suppliers
Working Capital Management
RBF
T4
why we monitor everything like a hawk. Cash on a daily basis. And we’re finding that this year things are going better. Even though sales are still flat. The cash situation has relaxed and things are a bit happier just looking after our working capital. So the next bit to grow sales is through a bit of a renovation and for that we are going to our suppliers and asking them for help. Because that’s what they do. They will give us contributions for that to help grow their sales. But yeah it’s all part of running a good business. You’re managing your working capital very closely(.NVivo9=T4-74) Yeah I mean we, we, there’s very, there are strict regulations around the sale of liquor and alcohol and we take our responsibility very seriously. We have had problems in the past. But we are learning from them and moving away from them. But yeah this area of business, we act ethically as best that we can. We don't want trouble. It’s not good, the long term success of your business is to have happy customers and a happy community that supports your business. And if you’re causing problems then all you’re going to do is
Bottlenecks in the Operating Cycle
Long-term GoalHappy Customers and Happy Community
Business Risk
RBF
T4
make your business, put your business at risk. So that’s not our goal at all. And yeah, I mean, I know that the Tongan, you can get problems with certain elements of the Tongan community when they drink. Yeah we’ve had that and we no longer, we have come up with systems to stop that. So, and to be honest with this space here most of the problems have happened outside in the car park. Where they don’t even come in, they stay outside and drink in the car park. (NVivo9=T4-71) That’s where you need to get specific financial advice. You need to be comfortable with the risks. To me its, you have the risk that if anything goes wrong you potentially lose your house. And if you’re willing to
Control System for RISK Management
Financial Advice
Business Risk
RBF
T4
take that risk because you think the business is safe and good then go for it. But you need, there’s always pros and cons, two sides to every story. (NVivo9=T4-92)
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RBF
T4
We follow the right procedures to get rid of them. (NVivo9=T4-102) Yeah. There are certain processes under the employment relations act but yes, the goal is to get rid of the bad staff. You don’t give them a second chance. Even family. (NVivo9=T4-104)
Cash management Employment Relations Act Ethical Responsibility Employee Relationship Cash Flow
Financial Management Human Resources
RBF
T4
Yes integrity is important in business. (NVivo9=T4-106) Yeah you’ve got to try and get good staff and keep them happy. Yeah, spend time with them, but you know, if you get the right staff hopefully they make your life easier ( NVivo9=T4-100)
RBF
T4
Cash is king. (NVivo9=T4-96)
Cash Management
And it was just me and my wife. We employed up to 5 people at one point. And did a lot of sign writing. Again it’s designing it and sending it here to print. But the more jobs I got. I went to the Ministry, the government Ministry. I went to the Civil Aviation. Ministry of Agriculture. And got, and asked them to give
Creative and natural skills Family business
Formation and Starting of Business
Graphic Design & Communication
me their annual reports to format and print. So we did that as well. But again I have never been trained. I
T6
have never been, but when I left................. I went to the New Zealand High Commissioners office and said I wanted to start a publication and I want a computer. They gave me the latest computer at that time and all the programs that you need for desktop publishing. And that’s how, and then I just learned as I went.
(NVivo9-T6-18)
That’s a really difficult part of the business is the management side of it, particularly the financial. I hate it. I wish somebody would take it off me. I didn’t have a business plan. I would rather not invoice. Although last year we turned over 1.5. I despise it. I hate it. I would (laughter) I mean one of our
Financial Management is a challenge for T6
Financial Management
GDC
T6
contracts is a $750,000, is a $300,000 contract. I am managing to do it but it is part of the business that I wish at the beginning I had a partner with it. I did partner with somebody in the beginning, and it didn’t work out. And that was for that reason. When I started off I didn’t want to be perceived as a one man band. I didn’t want to be perceived as a garage jobby. I wanted to be fully accredited, professional. When I go and present I present like any other agency. When I go and tender for work I tender like any other
126
agency. And that’s why I partnered with somebody who was high in finance, skilled in finance as well as on line technology. It was fairly new at the time and I wanted to have that edge. It didn’t work out because his business went off really well. And mine did as well. So we couldn’t contribute to each other’s business and so we decided to go our separate ways. (NVivo9-T6-34) But the key. I am really struggling with financial management. I wish I could do it better but I don’t know how. We produce incredible work that I am really proud of. And I love this to bits. I love what I do totally.
GDC
T6
And very passionate about it. I think personally, I think there is no other designer like me in terms of weaving in Pacific concepts and being, the ability to resonate with the target group. And that’s one of our tag line, is that we know the market because we are the market. Did that answer your question? (NVivo9-T6-36) I am worried about it. I am terribly worried about it. I mean it is at a stage now that I am stressing over it. You know coz since last year, towards the end of the last year, work has just died. Cash flow is a big problem for me now. There were no reserves. But the thing is when it gets to this time of the year, May, June. April, May, June. It is the end of the financial year for government departments and there’s under spend. And when there’s under spend money is thrown away. And that’s going to prop us up and we’ve got a lot of work, there’s enough work coming in now. But the thing is that it won’t be invoiced until next month. And cash flow is a huge problem. (NVivo9-T6-68) Cash flow. In this down period. Which really started from about October last year? We are just getting out
Financial Management is a challenge for T6
Financial Management
Cash Flow Problem
Cash Management
GDC
T6
Cash Flow Problem
Cash Management
GDC
T6
of it. And I mean they’re suppliers I have used for a long time and they’re very patient with us. The bank also is giving us some leeway. (NVivo9-T6-92) It’s the b..... Tongan way. We are just so generous. We look after so many people. My sister when she was
GDC
T6
here, my sister has since moved to Australia with her son, she’s got a contract with her rates. But when she was here, my mum is still here though; she lives in the rest home. My wife’s family is in Tonga we always –(NVivo9-T6-104)
Sharing- Cultural Factor
Business and Owner are combined
Art Gallery AG
T7 T7
..........No need for Cash Flow forecast.................... ................... Accountant looks after the records keeping................ using MYOB Accounting
127
Cash Flow Cash Flow
Cash Management Cash Management
software................... cash transactions are recorded.....................(NVivo9-T7-61) Because the more you know and buy will come later. It is not about trying to buy and selling it. It is more because people’s minds think about it. But I’m not saying, I’m thing. Tonga is pretty good. I think Tongan people they are not business. I am not saying they are not business because we are AG T7 physical but we are production only if we really wanted to do that. Because for us business, you need to live with the Palangi (laughter). And you know I am not putting that down. But just the way that our structure, you know (NVivo9-T7-237) Socio-Cultural Embeddedness of Cultural and Identity
Yeah. And that’s what, because technology, I mean business now, business people have to think in a different way about things, because it is no longer what business we are thinking of. And I AG T7 think business now its about communication. And when you have the communication that is the best business ever. Because networking, networking before wasn’t, networking has become number one because its –(NVivo9-T7-235)
Advantages of using Technology in Business Minimising Costs
Social media and Technology
Pacific Business Consulting Services
........... financial plans are used for budgeting and quantifying the marketing and operation T8 plans in dollar amounts........... planning assists the owners-managers of Tongan businesses to avoid viewing the future in a negative aspect..... ( NVivo9-T8-10)
Focus Group Professionals Business Advisory (Consultants)
Evidences form Focus Group Talanoa session Code
From my perspective I think one of the biggest challenges that they face is actually learning how to manage what we look at as an income and expenses. And its something that’s so alien to them and I am
Constant Comparison and Classical Content Analysis (NVIvo9)
Working Capital Management Management Accounting
FT1
not just talking Tongan here. It’s from a Pacific point of view. And I think it’s just about going back to basics, and advising them. I think that would be a big help. If you actually know what your income is, what
Income and Expenses are challenge for Tongan Business (Pacific Businesses) Budgeting
128
are your expenses and then transferring that into the business world. That’s the biggest challenge for them. Because a lot of them walk in the door and they have no idea what their own personal budgets are. (NVivo9-FT1-25) I don’t know if I can, most of the people who I am working with are start-ups. So they’re at the very seed, I suppose, they’re at start up. And a lot of them don’t have any processes in place. I can tell you that now.
No System or Flexible System
Unstructured Business System
BAC1
FT1
A lot of them do not have a lot of processes in place. Those people that I have been dealing with who are currently trading, are wanting to say the least. They appear to have no processes. (NVivo9-FT1-3) Again it is lack of accountability and processes. Honestly, I don’t know how some of them do it. They buy things and they don’t keep records. So its, from my point of view, it’s a real challenge. And it goes back to
No System for Records Keeping
Management Accounting
BAC1
FT1
the first question that was asked what systems are in place and I am sorry to say none, in most cases.
(NVivo9-FT1-68)
It is just it is very difficult idea for having the business and the owner is two different entities. But looking from a cultural perspective it seems to be, either you live in the community as a “fie Business Advisory (Consultants) Palangi”. No but that’s the way. ............ if you love your business you have to do it in the FT2 Palangi way. And we still fulfil our obligations to our Tongan roots and our Tongan families. But at the same time we do it from your own pocket and not the, as another payment of the business (NVivo9-FT2-23)
That’s the main fuel of the business. Because you can’t do a lot if you’re relatives and you live like a Palangi. Because sometimes they’re oh we’ll pay you tomorrow. We will pay you the next day or whatever.
Palangi or Western Business Model Separate the owner’s expenses from the business
Business Model
Business Entity
Cash Flow
Cash Management
BAC2
FT2
But when the services are done then I pay. You ask for them to come back, oh they go and do another service. And that’s the biggest. If you want a Tongan definition I will say that’s he [22.33] (laughter). (NVivo9-FT2-33) Taking a Tongan business forward, for example, like a garage or workshop or whatever ... whatever. Once
Cash Flow ProblemRelatives and cousins
Cash Management
BAC2
FT2
you allow it, they will have thoughts that they owe you and they don’t turn up because they know you’re a Tongan, you’re a relative, you’re a cousin. (NVivo9-FT2-35)
129
Look at the Tongan newspapers on a weekly basis and see how many pages full of people who are owing
BAC2
FT2
money to Tongan businesses. They publish the names in there and try to put them into this disappointment and shame them. (NVivo9-FT2-37) Well doing the thing here is to, but going back to the other slides that we talk about, knowing the strengths and weaknesses of the business then you can sale that they deal in credit or cash. From ..................
Methods of Collection of Outstanding Accounts- Publish on local News paper Identifying Strengths, weaknesses etc
Cash Management
SWOT Analysis
BAC2
FT2
perspective his projects are usually medium to large projects and you can’t deal in cash with those ones. Because like any other project they give you parts of payments from the cabinet. (NVivo9-FT2-51) But from this type of business you can’t really deal with Tongans and that, I mean, they will take you the
BAC2
FT2
whole year to run around after them to get the money. It’s either cash or no drink. (NVivo9-FT2-54) Just going back to the previous, you have to adopt the management and techniques that is most appropriate for the survival of your business. Because if you know the right stock your ordering very much
Collection of Cash from Tongan Customers Ordering of stock
Cash Management
Inventory Management
BAC2
FT2
depends on any functions tonight or functions tomorrow, the season, if it is in the peak of summer. So stock for the summer and stock for the winter will be completely different. (NVivo9-FT2-66) Yeah I agree with what they say but I want to add to it. One o the main thing that is missed by our Tongan, about 90% of our Tongan in New Zealand, in Auckland, they don’t care about customers coming back tomorrow. They only serve them or the day. They really, it is the model of doing things. They do a service and let them go. If you look at other businesses, their main thing is to make the customer happy, they always come
Customers Retention
Account Receivables Management
BAC2
FT2
back. For most of our Tongan friends in business, they don’t really, look at those people doing the stone fences. They don’t really care. That’s how much, they don’t really care that their customer will last for the previous job, they remember them. They just don’t care, they get half of the money and go. They don’t care about it. They still the Tongan model is getting our people to come back. (NVivo9-FT2-92)
I will say that the Tongan entrepreneurs to understand that they are not going to get any immediate profit, the
Understanding the business concepts
Entrepreneurship
BAC2
FT2
very best money. Because you can’t be a millionaire overnight. You have obligations to be fulfilled. They are business, government and legal things to be done before they ever see a single cent free of everything. I guess we have to do this in our Sunday services, rather than talking about Luke and John. Talk about businesses
130
(laughter). The businesses feed the church.( NVivo9-FT2-102)
If you want to run a business you’re immediately remove yourself from the Tongan mentality. And to be able to run a business successfully you’ve got to totally remove yourself from being a Tongan. But a
Social –Cultural Tongan mentality Western Commercial Paradigm (Palangi)
Business Owner/Manager
FT3
business person, the characteristic of how you run the business will be influenced by how Tongan you are, well not how Tongan you are, we are just talking about Tongans here. But there are certain things about being a Tongan is a huge asset in running a business. But it’s the ability to separate that from, you are entering a whole Palangi world and you should be running things that way.(NVivo9-FT3-21)
Embeddedness of Cultural and Identity
BOM BOM BOM
FT3
Cash flow, what’s in the bank? Yeah cash flow is your ability to meet your obligations. For me that’s cash flow. (NVivo9-FT3-27)
Cash Flow measures
Cash Management
FT3 FT3
Credit. Mainly. 20th of the following......................( NVivo9-FT3-42) 20th of the month. Well we receive it on the 20th and we pay out on the 26th. (NVivo9-FT3-72)
Credit Sales collect on 20th Month Paying Creditors & Creditors Control
Account Receivables Account Payables
Cash Flow Forecast
Our business is very cash, there’s always a lot of cash going over the bar and on the premises, so we have to have very good systems. We have shifts changing and if you're not careful you’ll wake up in the morning there’s 2 grand missing and no one knows what’s happened. So you have to have very good systems. Its just
Cash Management
Chartered Accountant
FT4
ono the facts of our industry. And in terms of cash management. We need forecasts because we need to know that we’ve got 20th of the month payments, you’ve got tax payments, and you’ve got GST. And then you’ve got your seasonality. And you need to know. You don’t know how much you can take out unless you know what’s coming up. Like at the moment we are looking at doing a bit of renovation, so your CAPEX expenditure and we need to know can we afford this. So if we put this money in, will we be able to pay the bills if we shut down for a week or so. So you’ve got to do the cash flow (NVivo9-FT4-100)
CA
FT4
Well inventory is pretty important. It’s how we keep our sales. We have to make sure that we don’t lose
131
Inventory Control
Inventory
sales because we don’t have the right stock. But you don’t want to have too much. And then it’s also a balance of discounts.(NVivo9-FT4-56) We do. We do it. But it is more order form and its managed by us, probably my father, he does the
Management Inventory Control Ordering system Just In Time (JIT) Inventory Control & Method Inventory Management Inventory Management
CA
FT4
ordering. And he knows what he needs, we have a bit of forecasting of what’s coming up. And especially with it being a bit tough on cash flow and you don’t hold too much stock because you can order quickly. (NVivo9-FT4-58) Yeah but then you got to have controls, stock takes and procedures for receipting and controls over,
CA
FT4
furniture and forecasting (NVivo9-FT4-62) ..........Weighted averaged.........( NVivo9-FT4-64) I don’t know if it’s Tongan perspective. Its industry specific, it depends on the industry. And again ideally
Inventory Control
CA
FT4
you are doing industry best practice relative to the size of your business. But I mean if you had bad stock control it can be cause of business failure, so it’s very important. (NVivo9-FT4-119) Me, personally I think we need to somehow separate the business from the individual family. So if the
Inventory Management
CA
FT4
business is burdened with other obligations then that is the start, when things can go wrong. So the business, keep it separate, keep it professional. And then you got to run pretty good disciplined systems because otherwise you are setting it up for possible failure (NVivo9-FT4-17)
Business is a separate entity
Business Entity
CA CA
FT4 FT4
............. We’re cash, cash business.......... (NVivo9-FT4-46) We don’t have many but we do. There are certain things that my dad can’t say no too. It’s not business related. I try to, especially outside the business. (NVivo9-FT4-111) I am pretty straightforward. Bottom line is profits for me. But in terms of family, I know that there are
Cash Accounting NO Account Receivables for FT4 Profit (Bottom Line)
Management accounting Account Receivables Profitability
CA
FT4
other aspects of it. We employ like so many families and that’s a good thing. I know that it means a lot to us. But we can do it and make the profit.( NVivo9-FT4-157) Yeah we pay 20th of the month. It is very important for my parents to pay on time. So and you know like if you are going to have a long term business you need to keep your suppliers happy. And if you pay them on
Relationship with Suppliers (Creditors)
Account Payables
CA
FT4
time and have a good relationship you can ask them for support, discounts, markets, systems. (NVivo9FT4-76)
132
Our business is very cash, there’s always a lot of cash going over the bar and on the premises, so we have to have very good systems. We have shifts changing and if you're not careful you’ll wake up in the morning there’s 2 grand missing and no one knows what’s happened. So you have to have very good systems. Its just ono the facts of our industry. And in terms of cash management. We need forecasts because we need to
Cash Flow forecast is important for T5
Cash Management
CA
FT4
know that we’ve got 20th of the month payments, you’ve got tax payments, you’ve got GST. And then you’ve got your seasonality. And you need to know. You don’t know how much you can take out unless you know what’s coming up. Like at the moment we are looking at doing a bit of renovation, so your CAPEX expenditure and we need to know can we afford this. So if we put this money in, will we be able to pay the bills if we shut down for a week or so. So you’ve got to do the cash flow. (NVivo9-FT4-100)
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Appendix 9: Conceptual Model of Financial Management
Financial Management
Financial planning and control
Financial accounting & Information andTechnology systems Statement of Financial Performance (Income Statement)
Analysis & Interpretation of financial reports
Cost and Management Accounting
Capital Budgeting
Working Capital Management
Financial Budgeting
Current ratio and Quick ratio
Standard costing &Activity Based Costing (ABC)
Average rate of return (ARR)
Cash management
Operational Budgeting
Statement of Financial Position (Balance Sheet)
Return on Assets (ROA) & Return on Equity (ROE)
Just in time (JIT)
Payback period & Net Present Value
Account receivable management
Statement of Cash Flow
Balanced Scorecard
Profitability Index & Internal rate of return (IRR)
Inventory management
Computerised Accounting systems eg MYOB
Cost-volumeanalysis (Break-even analysis)
Account Payable management
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Appendix 10: Constant Comparison and Classical Content Analysis
Source: Adopted from (Leech & Onwuegbuzie, 2011)
Using NVivo9 to Conduct “Constant Comparison” and “Classical Content Analysis” If a node exists that you would like to • Highlight selected text and right click to open a list of choices. reuse • Select Code Selection. Select At Existing Nodes. • The Select Project Items window will appear. Check the box next to the node you would like to reuse. Click on OK. Your selected text is now code If there is not an existing node to reuse • • • • Once your text is coded, you can create Tree Nodes • • • • • • • • Once your “Tree Nodes” are organized To see the frequency of used codes in one source • • • • Highlight selected text. Right click to open a list of choices. Select Code Selection. Select At New Node. The New Node window will appear. Type the name of the new node in the box next to Name. You can also include a description of the node under Description. Click on OK. Your selected text is now coded. These are groupings of your Free Nodes. First, click on Nodes (located in the bottom left hand corner). Your Free Nodes will be displayed. Look through your free nodes and identify nodes that are similar. If you are unsure, you can double click on the node to bring up the data that have been coded with the node. Highlight and drag your free nodes that are similar over to Tree Node (located in the upper left hand corner). Once you have moved all the similar free nodes, click on Tree Nodes. The Tree Nodes will now be displayed. Right click and select New Tree Node. Type in the name of your new Tree Node. Then, click on the nodes that are included in this Tree Node and drag them into the new category. Each Tree Node can then be written as a theme (perform this step outside of the NVivo program). Click on View = Coding Stripes. Select with type of strips you would like to view (None, Selected Items, Nodes Most Coding, Nodes Least Coding, Nodes Recently Coding). The coding stripes will appear to the right of the data window.
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Appendix 11: Process of Building Theory from Case Study
Process of Building Theory from Case Study Research Step Getting Started Selecting Cases Activity Definition of research question Possibly a priori constructs Neither theory nor hypotheses Specified population Theoretical, not random, sampling Multiple data collection methods Qualitative and quantitative data combined Multiple investigators Overlap data collection and analysis, Including field notes Flexible and opportunistic data collection methods Analyzing Data Within-case analysis Cross-case pattern search using divergent techniques Shaping Hypotheses Iterative tabulation of evidence for each construct Replication, not sampling, logic across cases Search evidence for "why" behind relationships Comparison with conflicting literature Comparison with similar literature Reaching Closure Theoretical saturation when possible Reason Focuses efforts Provides better grounding of construct measures Retains theoretical flexibility Constrains extraneous variation and sharpens external validity Focuses efforts on theoretically useful cases-i.e., those that replicate or extend theory by filling conceptual categories Strengthens grounding of theory by triangulation of evidence Synergistic view of evidence Fosters divergent perspectives and strengthens grounding Speeds analyses and reveals helpful adjustments to data collection Allows investigators to take advantage of emergent themes and unique case features Gains familiarity with data and preliminary theory generation Forces investigators to look beyond initial impressions and see evidence thru multiple lenses Sharpens construct definition, validity, and measurability Confirms, extends, and sharpens theory Builds internal validity, raises theoretical level, and sharpens construct definitions Sharpens generalizability, improves construct definition, and raises theoretical level Ends process when marginal Improvement becomes small
Crafting Instruments and Protocols Entering the Field
Enfolding Literature
Source: (Eisenhardt, 1989a, p. 533)
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Appendix 12; Options for Overcoming a Cash Flow Crisis
1. Shorten the operating cycleIncrease the efficiency of Operating Cycle’s components and reduce the cash committed to them. Increase the stockturnover and reduce the average age of trade debtors (account receivables), while maintaining the same level of sales. This requires more aggressive collection of account receivables and tighter control of inventory level 2. Increase the net profit margin 3. Reduce the sales volume This can be done by increasing price, reducing cost of sales, reducing operating expenses. Reduction in sales volume decreases the investment in the working capital components of the operating cycle. One way to slow down sales while increasing both Net Profit Margin and cash flow, is to selectively increase prices 4. Increase the trade payables 5. Short-term borrowing 6. Look for ‘Equity Capital’ 7. Maintain a minimum cash reserve Stretch payments to suppliers beyond the selling terms. This may risk business reputation Short-term borrowing of cash is used to finance temporary increases in working capital. Inserting owner’s equity capital in to the business or taking in new owners in the form of partners or shareholders Cash is an idle asset and it is better to consider some minimum cash reserve to pay the bills of the business as they come due
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Appendix 13: Conceptual Models of WCM for Tongan SMEs
Inventory Management
Accounts Payable Bank Overdrafts
Accounts Payable (Borrow cash shortfall) Accounts Payable Cash disbursements Business Risk Financial Risk “WC Flexible system Liquidit y Risk
Accounts Payable Borrow cash shortfall WCM (Cash )
Accounts Payable Cash disbursements
Inventory, WCM Account Receivables, Cash Receipts (Cash )
Remittances (relatives, community) Drawings as shares (Dividends)
Account Receivable Cash Receipts Distribute profits Invest excess cash
Retained Earnings
Distribute profits
Source; adapted from Jeffrey D. Sherman, 2010, p. 4
Source: Develops by the researcher from the findings received in the research project
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Appendix 14: Talanoa analysis on Liquidity of CS1
Main Themes Sub-Themes • • • • • • Current Ratio of CS1 Liquidity Ratios of CS1 Quick Ratio of CS1 Average Collection Period (ACP) of CS1 Activity Ratio of CS1 Average Payment Period (APP) of CS1 Total Assets Turnover Debt Ratio of CS1 Time Interest earned ROA, NPAT, ROE • • Description of Views and Ideas No Business Plan in Place No WCM Policy system for this CS1 Financial and Management accounting are challenge for CS1 No CASH Budget No operating and Capital Budget Investing in Short-term current assets such as account receivables with no credit management policy Low working capital ratio No Closing Inventory in Balance sheet • Evidences from Talanoa session Financial and Management accounting system are not properly utilised (Accounting software – Money works (not fully understand)) The aggressive, conservative and defensive policies are not recognised by the business owner/manager No cash flow forecast or operating budget Owing huge amount to creditors (account payables) Cash flow problem arises CS1 cannot meet its obligations Average collection period (ACP) is a huge challenge Poor Inventory (stock) control (No stock take) No Account Receivables collection policy in place Flexible system , Own your own boss No Account Payable Management system in place No Account Payables policy in place Dependable on Cash at Bank Balances Used assets more efficiently to generate Sales Investing in short-term assets Huge Cash flow Problem occurred throughout 2009 and 2010, Liquidation process Drawings of Cash for personal use NVivo9 -CS1 Reference from Talanoa session Literatures
Financial Management
Working Capital Management Policy
• •
NVivo9 -CS1
Abel (2008), Afza (2007), Baig. V (2009), Chandra P (2008), Dhiraj (2009) McInnes (2000)
• • • • • • • • • • • • •
NVivo9 -CS1
Gitman (2009), Hatten (2008), Brealey et al, (2006), Oliver & English (2007) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008), Brealey et al, (2006) Gitman (2009), Hatten (2008), Brealey et al, (2006) Gitman (2009), Hatten (2008) McInnes (2000) Hatten (2008) Oliver & English (2007) McInnes (2000) Hatten (2008) Oliver & English (2007)
NVivo9 -CS1
• • • •
No Account Collection Policy Unstructured system No WCM Policy system Flexible system
NVivo9 -CS1
NVivo9 -CS1
• • • • • •
High assets turnover ratio Cash flow problem Inability to service debts More financial leverage Return on Investment or Assets Return on owner’s Equity
NVivo9 -CS1
Leverage Ratios of CS1
NVivo9 -CS1
Profitability Ratio of CS1
•
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Appendix 15: Combined Findings from Talanoa sessions (Group W, T & CS1)
WORKING CAPITAL MANAGEMENT 1 Cash Flow Management Findings from Group T and CS1 No business plan in place, No Cash Budget (Forecast) No Operational budgeting,, Drawings of Cash and Remittances Cash flow problem arises, Cash and Credit transactions Flexible management system of cash No Perpetual Inventory Control Flexible system for stock control in T6 and T7 of Group-T, Selling time and services, Informal Costing System No Credit trade policy, No account collection policy in place, more than 12 months, No Account Receivables Control Accounts Bad debts Flexible accounting system for controlling of account payables Flexible accounting policy or procedures 5 Operating Cycle Flexible System of Operating Cycle (i.e. Mixed and Confused) Unstructured and Incomplete Cash conversion cycle is a challenge No business plan, using accounting software with limited skills, Combination of owner and business, Flexible and Unstructured system Measures Business performance by Cash at Bank balances No auditing, No analysis and interpretations of financial performance and position. Retained Earnings is not consistent Cash Flow statement is not prepared Outstanding taxes, GST and FBT are paid irregularly Findings from Group W Cash Flow Budget, Cash Receipts and Cash Disbursements, Borrow Cash Shortfall, Distribute Profits Proper system in place for reconciliation and controlling. Motives of holding cash for the reinvestment (Invest excess cash) References Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W
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Inventory Management
Inventory Control system, LIFO, FIFO and Weighted Average. Just In Time (JIT) Selling time and services, Costing and analysis Control Accounts, system in place, aging of debtors and credit terms policies in place (30, 60 an 90 days)- Aggressive, conservative and defensive policies Control System in place, Motives of holding cash Maintaining good relationship with suppliers Negotiating discounts or other terms to improve cash flows Good processes reduce likelihood of error Interrelationship of WC components such Cash, Raw Materials, Debtors, Finished Goods in a complete ‘Operating Cycle’(Purchasing, Services, Collections, Sales) Cash conversion cycle – (AAI, ACP, APP) Register with Company office. Separate entity, Utilisation of Financial and Management Accounting. Proper business plan implemented and using MYOB for accounting
3
Account Receivables Management
Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T Group-W
4
Account Payables Management
6
Business structure & Business Financial Performance
Preparing of Financial Statements , Accounting Entity or Business is a Separate Entity, Measuring of Profitability using Financial Ratios etc Performing Audit program Reinvesting of retained earning Paying taxes based on IRD system
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Appendix 16: Recommendations for WCM of CS1 & Tongan SMEs
Cash Management Forecast short-term cash flows (cash receipts & cash disbursements) Preparing of cash flows forecast on timely basis Follow-up variances between actual and forecast or actual results and budget results (Cash Flow statements to be introduced using indirect method) Owner-manager should change actions which affect cash flows and cash balances Analysing cash flows and identifying variances Inventory Management Optimising inventory levels and production efficiency (reducing inventory level without impairing customer service) Increasing inventory turnover by focus on inventory levels. Considering the Gross Margin as % of sales Contracts and purchase ordersclear typical terms to be considered Costing and analysis using traditional inventory costing (direct labour, direct materials and overheads) Just In Time Inventory order system (JIT) Stock take process and inventory control system Deals with returns and complaints promptly System in place for monitoring & controlling overheads costs Business Plan with Inventory Forecasting and Budgeting Account Receivables Management Improving of credit and collection process in terms of three elements such as Credit Policy, Sales and Collections Credit: setting credit policy, evaluating customer credit and setting credit limit Account Payables Management Payables and payments for suppliers and creditors, Invoice promptly and up-to-date. Paying the Account Payables on the last date Business Performance Risk Management Using key Financial ratios such as ROA or ROI, ROE and others to analyse the business performance Liquidity ratios, Activity ratios, Leverage ratios and profitability ratios to be used for analysis DuPont Analysis system is suitable for CS1
Reconciled suppliers statements Ageing reports of account payables Understanding of policies for suppliers, utilities, credit cards etc Account Payables Control Account to be reconciled against the general ledger regularly Account for related accounts such as GST, Freight & Shipping, extra charges, discount for prompt payments, return and defects For every purchase must have purchase order (PO) and approved by management. Maintaining an approved vendor list Maintaining of suppliers files with copies of correspondence, contracts, purchase orders, and others Business Plan with Account Payables Forecast and Budgeting
Sales: Prompt fulfilment and invoicing, accurate and up-todate customer records Collections: Prompt follow-up of accounts, payment using cheque, credit card, electronic funds transfer etc Controlling of account receivables - clear “Payment Terms”. Account Receivable Control A/C (reconciliation) Late payments are not acceptable
Internal Control and policies system to be in place for cash (i.e. preventative and detective controls). Written policies Financial and Management Accounting software to be used (Information and Technology) e.g. MYOB, XERO etc Business Plan with complete Financial Forecasts and budgeting
Avoid, mitigate, transfer and accept RISK in the business (RISK associates RETURN) Business Plan with Financial Measurement
Business Plan with Account Receivables Forecast and Budgeting
Source: Develop from findings emerged from Interviews Talanoa sessions with Tongan SMEs of Group-W, CS1case study and Focus Group of Professionals
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doc_868105975.pdf
working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
THE IMPACT OF WORKING CAPITAL MANAGEMENT DYNAMICS ON PERFORMANCE OF TONGAN ENTERPRISES IN NEW ZEALAND
By Feletiliki Kefu Manisela Finau
A thesis submitted in partial fulfilment of the requirements for the degree of Master in Business (MBus)
UNITEC INSTITUTE OF TECHONOLOGY, NEW ZEALAND 2011
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Declaration
Name of candidate: Feletiliki Kefu Manisela Finau
This thesis entitled: “The Impact of Working Capital Management Dynamics on Performance of Tongan Enterprises in New Zealand” is submitted in partial fulfilment for the requirement for the Unitec degree of Master in Business.
Candidate’s declaration I confirm that:
• • This Thesis/Dissertation/Research Project represents my own work; The contribution of supervisors and others to this work was consistent with Unitec Regulations and Policies. • Research for this work has been conducted in accordance with the Unitec Research Ethics Committee Policy and Procedures, and has fulfilled any requirements set for this project by the Unitec Research Ethics Committee.
Research Ethic Committee Approval Number: 2011-1151
Candidate signature: ........................................................ Date: ...............................
Student number: 1026071
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Acknowledgement
Any major challenging work such as a thesis takes a great deal of time and effort. While the researcher and also writer takes ownership and credit for the final outcome of this piece of work, many professionals and talented people contributed their time, experiences, knowledge and energy. Therefore I would like to acknowledge the following people for their support and guidance during this challenging time of my research journey. Deepest thanks go to Rachel Afeaki chairperson of New Zealand Tonga Business Council (NZTBC) for her willingness to organise and encourage the Tongan SMEs owners-managers to participate in this research journey. A special gratitude to Dr Ken Simpson, head of the Master Programme and senior lecturer who helped me shape up the original business direction in which I was interested, to conduct research that focused on the financial management of Tongan SMEs. Particular thanks to Dr Helen Mitchell, my primary supervisor who was instrumental in the formation of the thesis and her guidance on methodology and writings. Without her guidance I would not have completed this research journey. I am indebted to my secondary supervisor Andrew Slessor (CA) for his supporting role in order to guide me theoretically in this research. My indebtedness and a special thanks to Shelley Eden (senior associate solicitor), Diana Sharma (project coordinator) and Anne Fowke (information librarian), for all their inspiration and guidance during the research journey. My sincere thanks go to Dr Simon Peel, the chairperson of the UNITEC Research Ethics Committee and his colleagues, for their assistance in the application process and finally granting me, approval on 28th March 2011 to conduct this particular research. To Dr Robert Davis, head of the DoMM, Dr Kodicara Asoka Guranatne, the senior lecturer, Dr Nonthipoth Buranavityawut and Dr Alvin Cheng for their contribution and great support during the research project.
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Also a special gratitude goes to Dr Fotu Fisi’iahi and Malia Talakai from the Pacific Student Centre for their encouragement, inspiration and motivation in supporting me during this research journey. A full gratitude goes to all Tongan owners-managers who participated in this research and for their willingness and friendship during the research process. Most profound thanks to my wife Pisila Finau and my two loving children, Lavinia Telisa Finau and ‘Atunaisa Fepale Manisela Finau for their steadfast encouragement and support of me throughout this research. I would also like to dedicate this thesis to my parents, Lavinia Telisa Lama and ‘Atunaisa Fepale Lama for their comprehensive tolerance, emotional and support in order to accomplish this special milestone in tertiary education. Finally, I would like to thank my Heavenly Father for the wisdom, time and knowledge that he gave me in order to complete this challenging and time consuming research. To whom I would like to return all the glory and thanks to be upon his name forever lasting and to whom I would have never completed this thesis without his guidance and tolerance.
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Abstract
Several Tongan businesses operate in different business sectors of Small and Medium Enterprises (SMEs) and contribute wealth to New Zealand economy in terms of value creation. For the success of any Tongan enterprise in New Zealand, the financial management of assets is so crucial. Thus, this research focuses only on the Working Capital Management (WCM) of Tongan SMEs in New Zealand and its direct impact on performance that is vital for business survival and sustainability. WCM deals with the administration of the businesses’ short-term current assets and liabilities that is an important issue for Tongan SMEs’ financial decision making. The business financial performance is measured using working capital ratios, profitability ratios via Du Pont financial analysis.
The purpose of this study is to explore and analyse the impact of working capital management dynamics on financial performance of Tongan SMEs in New Zealand. It also aims to explore how Tongan SMEs manage their various working capital components such as cash, inventory, account receivables, account payables, operating cycle, and credit policy management. Consequently, this develops an appropriate conceptual framework model to illustrate the impact of WCM dynamics on performance and providing some key recommendations that will improve Tongan SMEs use of working capital management.
The primary data was collected from 8 Tongan enterprises and 4 business consultants in Auckland using a qualitative Pacific research method known as “Talanoa Approach (TA)” in the form of semi-structure interviews and a focus-group. The secondary data was captured from a consecutive five years of financial statements of a selected enterprise as a case study. Furthermore the introduction of a Computer Analysis and Qualitative Data Analysis Software (CAQDAS) of NVivo9 articulates and enhances the thematic coding, analysing and conceptualising model in the light of Talanoa Theory (TT) from the collective data. This study concluded by extending the exploratory Pacific research methodology of Talanoa (T) as a default of qualitative research in financial management context. The Talanoa approach was used for data collection and analysis simultaneously. The Tongan SMEs operating in Auckland have been divided into two groups according to the business models they use. Some of them follow the ‘Western Conventional Model’ and some follow the ‘WC Flexible System’ model of managing their ‘working capital’ which impacts on financial performance.
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Table of Contents
Declaration .....................................................................................................................ii Acknowledgement ....................................................................................................... iii Abstract .......................................................................................................................... v Table of Contents .......................................................................................................... vi List of Abbreviations ................................................................................................. viii List of Tables ................................................................................................................ ix List of Figures ............................................................................................................... ix Chapter 1: Introduction – Background, Research Aim and Key Question .................... 1
1.1 1.2 1.2.1 1.3 1.4 1.5 1.6 1.7 2.1 2.2 2.3 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 2.5 2.5.1 2.5.2 2.6 2.6.1 2.6.2 3.1 3.2 3.2.1 3.2.2 3.2.3 3.3 3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.4 3.4.1 3.4.2 3.4.3 Introduction ................................................................................................................ 1 Background - Tonga in the South Pacific Region...................................................... 1 Tongans in New Zealand, 1961–2001 ....................................................................... 2 Significance of SMEs in New Zealand ...................................................................... 3 Problem statement - Tongan SMEs in New Zealand ................................................. 4 Aims and Objectives of the Research ........................................................................ 5 The Key Research Question ....................................................................................... 5 Rationale of the Research Topic ................................................................................ 6 Introduction ................................................................................................................ 7 Overview of Financial Management .......................................................................... 7 Objective of Working Capital Management (WCM)................................................. 8 Significance of Working Capital Components Management ..................................... 9 Inventory Management ............................................................................................ 11 Account Receivables Management .......................................................................... 12 Cash Management .................................................................................................... 13 Account Payable Management................................................................................. 14 Operating Cycle ....................................................................................................... 15 Cash Conversion Cycle ............................................................................................ 15 Working Capital Policy............................................................................................ 16 Investing in Working Capital ................................................................................... 16 Short-term Financing ............................................................................................... 17 Business Performance Analysis ............................................................................... 17 DuPont system of analysis and Time-series Analysis.............................................. 18 Key Financial Ratios ................................................................................................ 19 Introduction .............................................................................................................. 20 Research Paradigms or Worldviews: ....................................................................... 20 Quantitative Approach (i.e. Positivist):.................................................................... 21 Qualitative Approach (Phenomenological):............................................................. 21 Quantitative (Positivist) versus Qualitative (Phenomenological): ........................... 22 Research Methodology – Qualitative Inquiry Approach ......................................... 22 What is the nature of reality? (Ontological assumption) ......................................... 23 What is the relationship of the researcher and that being researched?..................... 23 What is the role of values? (Axiological assumption) ............................................. 24 What is the language of research? (Rhetorical assumptions)................................... 24 What is the process of research? (Methodological assumption) .............................. 25 What is the possibility of generalisation? (Generalizability) ................................... 25 What is the possibility of causal linkages (mutual simultaneous shaping)? ............ 26 Research Methods –Using Traditional Pacific Talanoa Approach .......................... 26 Methodological Structure of Research- Talanoa Approach ..................................... 26 Data Collection ........................................................................................................ 28 Data Analysis ........................................................................................................... 34
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Chapter 2: Literatures Review – Working Capital Management................................... 7
Chapter 3: Research Design and Methodology ........................................................... 20
Chapter 4: Results and Discussion of CS1’s WCM (Case Study) ....................................... 40 4.1 Introduction .............................................................................................................. 40 4.2 Case Study – CS1’s Financial Statements Analysis - Financial Ratios ................... 40 4.2.1 Liquidity Ratios analysis of CS1: ............................................................................ 40 4.2.2 Activity Ratios (i.e. Asset Management Ratios) of CS1:......................................... 43 4.2.3 Leverage Ratios of CS1: .......................................................................................... 46 4.2.4 Profitability Ratios of CS1: ...................................................................................... 48 4.2.5 Summary of Talanoa Session with Observation of CS1 (NVivo9-CS1) ................. 53
Chapter 5: Results and Discussion – WCM of Tongan SMEs in NZ .......................... 54
5.1 5.2 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 6.1 6.2 6.2.1 6.2.2 6.2.3 6.3 6.4 6.5 Introduction .............................................................................................................. 54 Research Objective .................................................................................................. 54 Managing of Working Capital ................................................................................. 55 Cash Management .................................................................................................... 58 Inventory Management ............................................................................................ 68 Account Receivables Management .......................................................................... 71 Account Payable Management................................................................................. 74 Summary and Conceptual Models of WCM impacts on Performance .................... 77 Introduction .............................................................................................................. 82 Research Conclusions .............................................................................................. 82 Combination of Talanoa and NVivo9 as Qualitative Approach for SMEs .............. 83 Conceptual Model of WC Flexible System of Tongan SMEs on Performance ....... 84 Empirical Contributions (Group-W, CS1 Case Study and Group-T) ...................... 84 Limitations of the Study........................................................................................... 89 Future Research Opportunities................................................................................. 90 Closing Statement .................................................................................................... 90
Chapter 6: Research Conclusion and Recommendations ............................................ 82
References .................................................................................................................... 92 Appendix 1A: Information for participants ................................................................. 97 Appendix 1B: Participant consent ............................................................................... 99 Appendix 1C: Approval letter from Unitec Ethics Research Committee .................. 100 Appendix 2: Assumptions of the main paradigms ..................................................... 101 Appendix 3: Philosophical Assumptions for Qualitative Inquiry .............................. 102 Appendix 4: DuPont System ...................................................................................... 103 Appendix 5: Results of CS1 Financial Statements Analysis ..................................... 104 Appendix 6: Summary of Talanoa Session with Observation of CS1 ....................... 112 Appendix 7: Recommended WCM for CS1’s Business Performance....................... 113 Appendix 8: Evidences from Interview Talanoa sessions and NVvivo9 Codes: ...... 114 Appendix 9: Conceptual Model of Financial Management ....................................... 134 Appendix 10: Constant Comparison and Classical Content Analysis ....................... 135 Appendix 11: Process of Building Theory from Case Study..................................... 136 Appendix 12; Options for Overcoming a Cash Flow Crisis ...................................... 137 Appendix 13: Conceptual Models of WCM for Tongan SMEs ................................ 138 Appendix 14: Talanoa analysis on Liquidity of CS1 ................................................. 139 Appendix 15: Combined Findings from Talanoa sessions (Group W, T & CS1) ..... 140 Appendix 16: Recommendations for WCM of CS1 & Tongan SMEs ...................... 141
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List of Abbreviations
AAI ACP APM APP ARM BFP BPA CM CAQDAS CCC CS EVA FM FT GAAP JIT NZTBC OC PBT QC RI ROA ROI TA SMEs WA WCCM WCFS WCM WIP Average age of inventory Average collection period Account Payable Management Average payment period Account Receivable Management Business Financial Performance Business Performance Analysis Cash Management Computer Analysis and Qualitative Data Analysis Software Cash Conversion Cycle Case Study Economic Value Added Financial Management Focus Talanoa Generally Accepted Accounting Principles Just-In-Time New Zealand Tonga Business Council Operating Cycle Pacific Business Trust Quality Control Residual Income Return on Asset Return on Investment Talanoa Approach Small and Medium Enterprises Weighted Average Working Capital Components Management Working Capital Flexible System Working Capital Management Working in Progress
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List of Tables
Table 1.3-1: Percentage of Small and Medium Enterprises in New Zealand ......................................................... 4 Table 3.4.2-1: Tongan SMEs Participants for Interviews, Focus Group and Case Study .................................... 29 Table 3.4.3-1: NVivo9 Themes Code for Findings and Discussion ..................................................................... 38 Table 5.2-1: List of Tongan SMEs and Professionals for Talanoa Interviews session and Focus Group ............ 55 Table 5.3-1: Characteristics of Tongan and Western models followed by Tongan businesses in New Zealand .. 57 Table 5.3.3-1: Credit Selection and Standards...................................................................................................... 73 Table 5.3.5-1: Combined Findings from Talanoa sessions ................................................................................... 81 Table 6.5-1 Key ratios for Working capital and performance utilisation ........................................................... 107
List of Figures
Figure 1.2-2: New Zealand Census 1961-2001 ...................................................................................................... 2 Figure 1.2-1: Tonga in the South Pacific Ocean ..................................................................................................... 2 Figure 2.2-1 Conceptual Model of short-term Liquidity of Working Capital Management ................................... 8 Figure 2.4-1 A typical working capital cycle and other cash flows ...................................................................... 10 Figure 2.4.5-1 Operating Cycle; ........................................................................................................................... 15 Figure 2.4.6-1: Cash Conversion Cycle; ............................................................................................................... 16 Figure 3.4.1-1: Structure of Research on the WCM of TONGAN SMEs in Auckland, NZ ................................. 27 Figure 3.4.3-1: Constant comparison analysis: Coding in NVivo9 qualitative software ...................................... 37 Figure 4.2.1-1: Current and Quick Ratios of CS1 ................................................................................................. 42 Figure 4.2.2-1: Activity Ratios of CS1 ................................................................................................................. 43 Figure 4.2.2-2: Total Asset Turnover and Inventory Turnover Ratios ................................................................. 45 Figure 4.2.3-1: Leverage Ratios of CS1 ............................................................................................................... 46 Figure 4.2.3-2: Time Interest Earned of CS1 ........................................................................................................ 47 Figure 4.2.4-1 Net Profit Margin Ratio of CS1 .................................................................................................... 49 Figure 4.2.4-2 Profitability Ratios of CS1 ............................................................................................................ 50 Figure 4.2.4-3 Business performance model overview......................................................................................... 52 Figure 5.3-1: Group -W and Group -T of Tongan businesses .............................................................................. 56 Figure 5.3.1-1: Group - W (Western- Conventional management system of Cash) ............................................. 60 Figure 5.3.1-2: Group- T (Tongan WC Flexible System of Cash management) .................................................. 64 Figure 5.3.2-1: Production cycle adapted from Sherman 2010, p.73 ................................................................... 68 Figure 5.3.3-1: Credit and Collection Techniques for SMEs................................................................................ 71 Figure5.3.4-1: Operating Cycle of Working Capital Components ....................................................................... 75 Figure 5.3.5-1: Tongan WC Flexible System ....................................................................................................... 80
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Chapter 1: Introduction – Background, Research Aim and Key Question
1.1 Introduction
The objective of this research study is to explore and also analyse the impact of working capital management components’ dynamics on business performance of Tongan enterprises in New Zealand. This particular study conveys the knowledge of how significant it is to have a proper management system for WCM in Tongan enterprises in New Zealand. It also discusses the impact of poor management control of WC on enterprises’ financial performance and current practices employed by the Tongan enterprises in New Zealand. Chapter one briefly focuses on the background of Tongan people in the Pacific region and their migration to New Zealand since 1961. It discusses the overview of Financial Management capability and visualises the concept of WCM that is the subject for this research. Chapter two considers the literature that focuses on Working Capital Management and important related components. Articulation of the research methodology using the Traditional Pacific Talanoa Approach and NVivo9 as the default qualitative approaches for this study is given in Chapter three. Chapter four is mainly focused on the case study of a selective Tongan SME in order to verify the impact of WCM on financial performance using the financial ratios analysis called DuPont Analysis System. Similarly Chapter five analyses and discusses the results of Talanoa sessions from the semi-interviews with owners-managers and focus group with the professionals involved in the research. Consequently Chapter six summarises the outcome of the study in terms of WCM impact on financial performance of Tongan businesses in Auckland. The conceptual models have been developed to visualise the dual views from Western and Tongan commercial paradigms.
1.2 Background - Tonga in the South Pacific Region
Tonga is a constitutional monarchy in the South Pacific region. Tonga is located in the South Pacific Ocean within the Polynesian group to the northern-east of New Zealand as shown on the map below (Crocombe, 2001) It was the only Pacific nation never colonised and is independent. There is a democracy movement attempting to change the kingdom into a constitutional democracy. Despite the grim situation in Tonga as statistics have suggested recently, many Tongan
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people perceive their movement and migration to New Zealand as a significant accomplishment (Taumoefolau, 2009).
THE PACIFIC REGION
Source Adapted: Ministry of Pacific Islands Affairs
Figure 1.2-1: Tonga in the South Pacific Ocean
1.2.1
Tongans in New Zealand, 1961–2001
The Tongan immigrants and entrepreneurs started migrating to New Zealand during the 1960s. They migrated with their own values and traditional custom of cultural aspects to a different dynamic commercial paradigm in New Zealand. Migration to New Zealand provided opportunities to learn trades and study professions in various tertiary institutions, such as teaching, nursing and medicine. Some Tongans migrated to New Zealand via the 1970s short-term contractual agreements between the two nations and brought an influx of unskilled workers (Taumoefolau, 2009; Tu’inukuafe, 1990).
Source: Adapted from New Zealand census, 1961–2001(Statistics New Zealand, 2007)
Figure 1.2-2: New Zealand Census 1961-2001
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The above graph shows the increase in New Zealand’s Tongan-born population as immigrants entering in the 1970s and 1980s. By contrast, in the 1990s the community’s major growth was through the New Zealand-born children of those earlier arrivals. In 2001 the New Zealand-born children formed the majority of the Tongan community. Figures for ethnicity are only available from 1991. They are rapidly growing in population with the annual growth rate of 7.5% proportionally within the general population of the Pacific people in New Zealand (Statistics New Zealand, 2007). According to the New Zealand census of 2006 the Tongan population reached almost 19% of the total 266,000 Pacific island people who reside in New Zealand and the third largest by ethnicity.
1.3 Significance of SMEs in New Zealand
Small and Medium-sized Enterprises (SMEs) play an important role in the New Zealand economy (Cameron & Massey, 1999; Frederick & Chittock, 2006; Knuckey, Johnston, & Campbell-Hunt, 2002). Overseas Studies also claim that SMEs play a fundamental role in the global economy (Hasan & Khor, 2009). SMEs are the lifeblood of the New Zealand economy and the government recognises their important contribution to the economy (Ministry of Economic Development, 2010).
The Statistic of New Zealand Business Operations Survey report of 2009 shows that 97% of enterprises employ 19 or fewer people, 89% of enterprises employ 5 or fewer people. This statistical report also shows that SMEs account for 31% of all employees and self-employed people comprise 11% of the labour force. Thus, SMEs are defined in New Zealand as businesses with fewer than twenty employees and are the most common business size in every industry (Ministry of Economic Development, 2010).
The section, Structure and Dynamics in the report of 2010 also confirms that SMEs accounted for 30.6% of all employees and firms with 5 or fewer employees for 12% of all employees. The selfemployed in this 2010 report shows that SMEs accounted for 41.9% of the economy’s total output and firms with 5 or fewer employees had the highest average real profits per employee (Ministry of Economic Development, 2010).The Ministry of Economic Development’s 2010 report on SMEs in New Zealand identified that in 2009 97.2% of firms were found to be small businesses with less than 20 employees as shown in the Table 1.3-1 below.
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Years New Series SMEs as a proportion of all enterprises
2002
2003
2004
2005
2006
2007
2008
2009
96.8%
96.8%
96.9%
97.0%
97.1%
97.1%
97.1%
97.2%
Source: Adapted from Ministry of Economic Development 2010 (SMEs with 19 or fewer employees compared to total population of New Zealand Enterprises 2002-2009)
Table 1.3-1: Percentage of Small and Medium Enterprises in New Zealand
Most articles define SMEs only in terms of the number of employees, but the definitions vary widely between countries. The researcher addressed these inconsistencies by defining SMEs within their national context because it is pointed out that firms with 250 staff (using the EU definition) would be large firms in New Zealand (Collins, Lawrence, Pavlovich, & Ryan, 2007). • European studies mainly use the European Union (EU) definition of SMEs “fewer than 250 staff” • • • Australian studies use less than 200 staff USA and South Korean studies use less than 500 staff, and New Zealand studies use less than 20 staff.
From the above mentioned definitions, the following definition is proposed for the purpose of this study: A small and medium-sized enterprise is defined as any enterprise (business) that is personally owned and managed by the owner-manager and that consists of less than 20 employees. It does not form part of a larger enterprise (business) or group of companies that have access to managerial expertise (Ministry of Economic Development, 2010).
1.4 Problem statement - Tongan SMEs in New Zealand
The typical Tongan enterprise has limited resources, limited cash flows, few customers, is often engaged in management ‘fire-fighting’, concentrates on current performance rather than taking a strategic focus, often has a flat organizational structure and possibly high staff turnover (Hudson, Lean, & Smart, 2001). The motivation to start a business for the Tongan people who are currently residing here in Auckland, New Zealand is varied. They tend to start-ups a business as an alternative for employment but not for long investment. Nowadays Tongan people are able to start business when they get financial assistance from the government or other source. Several Tongan businesses have limited access to any capital funds to start-up. Most of them have to seek debt financing through mainstream banks and other business incubators such as Pacific Business Trust
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(PBT). Many Tongan SMEs have difficulty preparing a business plan, and a financial budget. The business finance, cost and management accounting is a challenge for many Tongan SMEs (S. Prescott, 2009).
A study by McInnes (2000) in New Zealand showed that 94% of the companies did not integrate their working capital management components as proposed by theory. The completed exploratory research of Pacific island business ventures and sustainability established recently in New Zealand, identified several factors associated with both success and failure (McDonald, 2008; J. Prescott, 2004). The studies recognised the problems and critical factors that impact on Pacific Islands Enterprises in New Zealand, e.g. mixed purpose of financial reporting, challenges of managing business finance, challenges of management accounting practices, lack of access to capital funds, lack of community support, fear of failure, taxation issues, records keeping and performance measurement (McDonald, 2008; S. Prescott, 2009).
1.5 Aims and Objectives of the Research
The primary aim for this study is to explore and analyse the Impact of Working Capital Management Components Dynamics on financial performance of Tongan enterprises in New Zealand. The following specific objectives have been developed in order to pursue the main aim of this study. • To investigate the various WCM policies, practices and techniques currently employed by Tongan enterprises in New Zealand • To explore how Tongan enterprises manage cash, inventory, account receivables, account payables and credit policy • To develop a conceptual framework model and provide some key recommendations that will improve Tongan SMEs use of working capital management
1.6 The Key Research Question
The title of this study is “The Impact of Working Capital Management Dynamics on performance of Tongan enterprises in New Zealand”. The primary research question of this study is to find out how Tongan enterprises in New Zealand manage their Working Capital Components in terms of performance? The following sub-questions are designed to answer the primary research question: • What liquidity policies, practices and techniques are employed by the Tongan enterprises to manage Working Capital?
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•
What possible factors impact on the Tongan SMEs’ Working Capital Management performance?
•
How efficient is the working capital management for the Tonga SMEs in New Zealand?
1.7 Rationale of the Research Topic
This study helps to develop an understanding of the advantages and disadvantages of financial practices and techniques of managing Working Capital Components in different commercial paradigms. The study will reveal how critical Working Capital Management Strategies (i.e. policies, practice and techniques) is for the Tongan enterprises in New Zealand in terms of performance. A general conceptual framework model will provide basic guidelines for researchers, accountants and professionals, financial managers, and policy makers in the dynamic business environment of New Zealand. The study will suggest various financial management techniques Tongan enterprises can use to measure their performance in terms of profitability. For example, the Dynamics Current Ratio to assess the firms liquidity status, Activity Ratios, Leverage ratios, Cash Conversion Cycle (CCC), Return on Investment (ROI), and Return on Equity (ROE) (Birt, Chalmers, Brooks, Byrne, & Oliver, 2011; Gitman, 2009).
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Chapter 2: Literatures Review – Working Capital Management
2.1 Introduction
This chapter focuses on extant literatures relating to the working capital management components of the enterprises, and how its components impact on business performance. The researcher critiques the relevant literatures for this study in terms of accounting and financial concepts such as overview of financial management, conceptual model of WCM, objective of WCM and its significance in small and medium enterprises. The review of WCM is importantly revised in terms of the Operating Cycle model that reflects the interested components of WC policy and their shortterm investing and financing concepts. The review of business performance analysis in relation to WCM in SMEs is also briefly discussed.
2.2 Overview of Financial Management
The traditional definition of Finance is the study of funds management and the directing of these funds in order to achieve its particular objectives. The unique objective of a good financial management is to maximise returns that associate with minimising of financial risks simultaneously. In Financial management it is critical to understand the business objectives and financial functions before recognising the major component that is the short-term financial management or the Working Capital Management relative to the day-to-day operations (Brigham & Ehrhardt, 2010; Chandra, 2008; Keown, Martin, Petty, & Scott, 2002; D. Sharma, 2009).
Financial management is also concerned with the creation of economic wealth, maximising the share price for shareholders’ equity, planning and controlling of the business’s financial resources, increasing its profitability and maximising the rate of returns on Equity. It is in the corporate environment that most of the finance literatures have been literately focused on the study of the long-term financial decisions making process (Chandra, 2008; Zietlow, Hankin, & Seidner, 2007). Financial management in firms operate according to problems and opportunities. The owner/manager of a firm is primary relying on its trade credit policy, bank financing, personal financial contributions, operating financing and lease financing. The firms financing options are limited, but also have the same financial problems as those faced by large companies (Arnold, 2008; Gitman, 2009; Sagner, 2010; D. Sharma, 2009). One of the major financial issues facing firms is the deployment of current assets and current liabilities that are the critical elements of Net
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Working Capital Management (NWCM). The primary cause of an enterprise’s failure is the poor control management of Working Capital internally amongst its components. Thus, the finance manager of an enterprise must be alert to the level of working capital changes.
The conceptual model shown in Figure 2.2-1 illustrates the critical portion of the financial management components for this study. The focus is on the operating cycle and the four main components of WC that are cash, debtors (accounts receivable), inventory, and accounts payable.
Financial Management
Working Capital Management
Operating Cycle
Inventory management
Cash management
Account Receivable management
Account Payable Management
Impact on performance
Impact on performance
Impact on performance
Impact on performance
Impact on performance
Figure 2.2-1 Conceptual Model of short-term Liquidity of Working Capital Management
2.3
Objective of Working Capital Management (WCM)
According to Gitman (2009) the objective of Working Capital Management (WCM) is to minimise the Cash Conversion Cycle (CCC) the amount of capital tied up in the firm’s current assets. It focuses on controlling account receivables and their collection process, and managing the investment in inventory. WCM is vital for all business survival, sustainability and its direct impact on performance.
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WCM is an important area of financial management in every business function. WCM deals with the administration of the liquidity components of firms’ short-term current assets and current liabilities (Baker & Powell, 2005; Brigham & Ehrhardt, 2005; Gitman, 2009). The most important current assets are cash, debtors or account receivables, stock or inventory and current liabilities consisting of creditors or account payables, accrued expenses, taxation liabilities, short-term debt such as commercial bills, and provisions for current liabilities such as dividends declared but not yet paid (Birt et al., 2011; Gitman, 2009; D. Sharma, 2009). 2.4
Significance of Working Capital Components Management
Working capital is so important for business day-to-day operations. A decision made on one of the Working Capital components has an impact on the other components. In order to maximise the performance of a business, the Working Capital Management should be integrated into the shortterm financial decision making process (Crum, Klingman, & Tavis, 1983) . Working Capital or Net Working Capital is “the difference between current assets less current liabilities” (Arnold, 2008). In financial annual reports, working capital is defined in an algebraic expression as follows; Net Working Capital (NWC) = Current Assets (CA) – Current Liabilities (CL). The investment in NWC is so vital and helps the capital budgeting analysis of a given firm. Working Capital (WC) can be invested in short-term sources of finance, such as cash, inventories, account receivables, and notes receivables. WC is minimised in terms of payments made to account payables (creditors), account notes payable and other accrued liabilities. In order to balance out the optimal levels of costs and benefits, then the liquidity components of working capital must be managed with appropriate techniques through raising or lowering the stocks, cash, account receivables and account payables (Arnold, 2008; Gitman, 2009).. The model of the working capital cycle is given in Figure 2.4-1, articulates the basic components of WCM interrelationship and their dynamics with the liquidity phase of a given enterprise. The working capital policy must be taken into consideration in order to manage the liquidity elements for a smooth flow of the day-to-day operations in the business (Arnold, 2008). The working capital cycle starts at the purchasing of raw materials from potential suppliers for the production process, through work in progress and ending with finished products. The finished
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goods are kept as inventories, ready to be sold for customers for cash or credit transactions if the accrual accounting system is implemented. If the finished goods (i.e. inventory) are sold on credit to customers then the cash would be tightening in the form of account receivables. These amounts would be collected in accordance with the trade credit policy being given to customers (Arnold, 2008; Maness, 1994).
Trade Debtors Sales Operation Costs Labour, overheads, marketing, distributio ns, etc
Taxation
Fixed Assets Finished Goods Working in Progress (WIP) Raw Materials Trade Creditors Shareholders
CASH
Medium-term finance
Long-term debt
(Source; Adapted from Arnolds. 2008:530)
Figure 2.4-1 A typical working capital cycle and other cash flows
Other Cash Flows Working Capital Cycle
There are related costs influencing every flow of the cycle in terms of opportunity cost for working capital. The two main concepts of Working Capital are known as gross working capital and net working capital. The term Gross Working Capital, is also referred to as working capital that is defined as the funds invested in current assets that are expected to convert into cash in the normal course of business within an accounting period (i.e. 12 months). The total current assets and total current liabilities of a given business are critical for the short-term financial decision making process in terms of working capital management dynamics, leading to the day-to-day operation and performance of the business (Sagner, 2010; D. Sharma, 2009; Vataliya, 2008).
Time and Money embedded in Working Capital Cycle
Every component of working capital namely inventory, account receivables and account payables has two dimensions that are Time and Money when it comes to managing working capital. In fact, the term money (cash) can be moving faster around the operating cycle, or tied up in the operating cycle that can reduce the amount of cash (money) in the business, and depends on the operational policy and dynamics of these components (Arnold, 2008).
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TIME Collecting of account receivables faster Collecting of account receivables slower Better credit trade policy from suppliers Selling of inventory (stocks) faster Slow moving of inventory (stocks)
MONEY (Cash) Cash releases from the operating cycle Cash soaks up in the operating cycle Cash resources increase Free up cash Consuming more cash
2.4.1 Inventory Management
The first component of cash conversion cycle is the average age of inventory. The objective of Inventory management is to turn over inventory as quickly as possible without losing sales from stock-outs. It is an important aspect of working capital management because inventories themselves do not earn any revenue. Holding either too little or too much inventory incurs costs. Inventory is generally made up of three elements such as raw materials, work-in-progress (WIP) and finished goods (Arnold, 2008; Cinnamon, Helweg-Larsen, & Cinnamon, 2010; Gitman, 2009).
Raw Materials
Raw materials are concerned with the goods that have been delivered by the supplier to purchaser’s warehouse but have not yet been taken into the production area for conversion process (Cinnamon et al., 2010). The minimising of the raw materials is ideal in this particular part of working capital. However, this must be offset by the economic order quantities available from suppliers.
Work In Progress (WIP):
Work in progress concerns are when the product has left the raw material storage area, until it is declared for sale and delivery to customers. In this process the working capital must be considered in terms of reducing the buffer stocks, eliminating the production process, reducing the overall production cycle time. The raw materials and finished goods must be minimised in the production area. WIP must be carefully examined to justify how long it takes for products to be cleared for sale. This stage is normally done by the quality control (QC) procedures (Birt et al., 2011; Cinnamon et al., 2010).
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Finished Goods:
Finished goods refer to the stock sitting in the warehouse waiting for sale and delivery to customers. They could be sitting in the warehouse or on the shelf for quite sometime. The owner/manager of the business should find what options are available to dispose of the slow moving items. Should the stock be repacked or reprocessed, and sold at lower discount prices. Sales and operations planning can reduce or eliminate the need for finished goods. The best example of stock management is car manufacturing. The manufacturers normally used the JIT system to deliver finished products. In this way they minimise or eliminate both raw material stock and work in progress, as the stock is now in finished goods (Brealey, Myers, & Allen, 2006; Cinnamon et al., 2010; Van Horne & Wachowicz, 2008).
Common techniques for managing Inventory:
The costs of carrying too much inventory are opportunity cost of foregone interest, warehousing costs, damage and pilferage, obsolescence and insurance. The costs of carrying too little inventory are stock out (i.e. lost sales, delayed service), and ordering costs (i.e. freight, order administration and loss of quantity discounts). The following ordinary techniques are available for effectively managing the firm’s inventory (Birt et al., 2011; Gitman, 2009).
•
Just-in-time (JIT) System:
Just-In-time approach (JIT) is concerned with the delivering of raw materials. When using the JIT system, goods can be delivered directly to the production area, eliminating raw material storage areas. The purpose of using just-in-time approach is to have the supplier carrying the goods rather it being carried by the purchaser (Cinnamon et al., 2010; Zietlow et al., 2007).
2.4.2 Account Receivables Management
Account Receivables (Debtors) are customers who have not yet made payment for goods or services that the firm has provided. The main objective of Account receivables management is to minimise the time-lapse between completion of sales and receipt of payment. In order to significantly increase sales for a business, the customers should be given credit transaction policy. At the same time, the cash budget must show that credit sales create trenched cash flow otherwise it would create cash flow problems if they delay the receipt of cash to meet its financial obligations (Kelly & McGowen, 2010; Lo, Yeung, & Cheng, 2009; Zietlow et al., 2007)
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Kelly & McGowen (2010) suggest that credit customers who pay late or don’t pay at all only aggravate the problem. Thus, it is important for the financial manager or account receivables manager to establish a good policy that controls the advantages of offering credit with the associated costs. Kelly & McGowen (2010) promote the notion of credit policy offered to the credit customers should include the following;
Setting Credit Terms – This portion of the credit policy is concerned with how long should the business extend credit? It also considers what type of discount should business offer to convince credit customers for early payments? Establish Credit Standards – These standards deal with how should the business decide which customers qualify for credit? What type of credit data should it require? How strict should standards be? Design Appropriate Collection Policy – This part of collection policy deals with how aggressive should the business be at collecting overdue accounts? At what point of time does it make sense to take legal action against credit customers who are having late paying accounts, or to turn over the outstanding accounts to collection agencies? It also deals with when it makes sense to work out compromises?
Average Collection Period (ACP):
The Average Collection Period (ACP) is the second component of the cash conversion cycle. This period is the average length of time from a sale on credit until the payment becomes usable funds for the firm (SME) (Megginson, Smart, & Gitman, 2007).
2.4.3 Cash Management
Abel (2008) argues cash is crucial in every business in terms of enhancing its survival and prosperity. The term cash refers to the most liquid of assets, including demand deposits, money market accounts and currency holdings. The key elements of cash management are cash forecasting, balances management, administration of cash receipts and disbursements, and internal control (i.e. bank reconciliation) (Gitman, 2009). Good cash management can have a major impact on overall working capital management. It is objectively used to manage and determine the optimal level of cash required for the business operation and invested in marketable securities, which is suitable for the nature of the business operation cycle (Gitman, 2009). Zietlow et al., (2007) and Gitman (2009) explain that “cash
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management” involves planning for cash inflows and outflows, and determining the optimal balances of cash and near-cash accounts such as marketable securities. Marketable securities are short-term interest-earning financial claims that can be quickly converted to cash without any significant loss of value.
Cash Budget or Cash Flow Forecast
Birt et al., (2011) and Hamilton (1995) explain the preparation of the cash budget in a given business requires a detailed forecast of cash receipts and cash disbursements. It firstly starts from obtaining the monthly forecast of sales revenues, which may normally come out from the assistance of the sales and marketing department of a given business. This forecast gives the relevant information on the collection aspects for all credit sales transactions, and monthly cash receipts from sales can be predicted. The other cash receipts transactions to the business are then added to cash receipts from sales revenues to articulate the total cash receipts. Cash disbursements transactions must then be forecast and summed up for operating, financing and investment needs. In addition the “Net cash flow” is then calculated as total cash receipts deduct total cash disbursements. The opening cash balance is next added to net cash flow in order to arrive at the closing cash balance. Conventionally, if the closing cash balance is positive, then excess cash may be invested in marketable securities. If the closing cash balance is negative, then additional financing may be required (Oliver & English, 2007)
2.4.4 Account Payable Management
Gitman (2009) and Birt et al., (2011) state that Accounts Payable Management objective is to pay creditors as slowly as possible without damaging its credit rating. Accounts Payable and accruals are the two major spontaneous liability sources of short-term financing for a typical firm. Accounts Payables are the major unsecured short-term financing for businesses. They result from transactions in which merchandise (inventory) is purchased. The suppliers might give credit terms together with allowing discount to the purchasers.
Average Payment Period (APP):
The Average Payment Period (APP) is the final component of the cash conversion cycle (CCC), which has two parts in it. Firstly, the time from the purchase of the raw materials until the
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payments is mailed to the suppliers. Secondly, the payment float time (Birt et al., 2011; Cinnamon et al., 2010; Gitman, 2009).
2.4.5 Operating Cycle
Operating Cycle (OC) is the time from the beginning of the production process to collection of cash from the sale of the finished product in a typical business (Gitman, 2009). The OC consists of two major short-term asset categories such ‘inventory’ and ‘account receivable’. It is calculated by adding the average age of inventory (AAI) and the average collection period (ACP). The operating cycle can be algebraically denoted as: OC = AAI + ACP. The flow time line below shows the interrelationship of WC components in the operating and cash conversion cycle.
Time
Operating Cycle (OC)
Purchase raw Sell finished goods Collect accounts Materials on account on account receivables Average age of inventory (AAI) Average collection period (ACP) Average Payment period (APP) Pay account Payable Cash conversion cycle (CCC) Cash Inflow
Cash Outflow Time Source: Adapted from Gitman, (2009, p.602)
Figure 2.4.5-1 Operating Cycle;
2.4.6 Cash Conversion Cycle
Gitman (2009) explains that a cash budget is a forecast of the future cash inflows and outflows of the business and how cash has been used for business operational activities. But the “cash conversion cycle” is the duration of time that cash is tied up in accounts receivables and inventory. In fact, the Cash Conversion Cycle (CCC) is concerned with the amount of time a firm’s resources are tied up. It is mathematically represented by the equation below (Dong & Su, 2010; Gill, Biger, & Mathur, 2010; Gitman, 2009). CCC = Account receivables * 365 + Sales Inventories * 365 Purchases
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- Account Payable * 365 Purchases
CCC = OC – APP
CCC = AAI + ACP – APP
Source: Adapted from Gitman, (2009, p.602)
Figure 2.4.6-1: Cash Conversion Cycle;
When the inventory is purchasing and granting credit to customers ties up cash within the business. Despite cash is transformed into stock and services by purchasing, but the impact is delayed by supplier credit (i.e. purchase on credit). However, the inventory (stock) is transformed into debtors (i.e. Account Receivables) by selling on credit and then cash is collected at a later stage. Gitman (2009) echoes the significance of the average collection period (ACP) that represents the length of time to collect the receipt of cash from customers. Likewise, cash remaining tied up in inventory between purchase and sale represents the average age of inventory (AAI) in the cash conversion cycle.
When the cash conversion cycle (CCC) increases, it will lead to the declining of profitability of a typical business. Thus the owner-managers can create a positive value for the business owners by handling the adequate cash conversion cycle (CCC) and keeping each different component to an optimal level (Gitman, 2009; Oliver & English, 2007; Uyar, 2009). Prior empirical studies summarise a mixed outcome, claiming that there is a strong negative relationship between profitability, measured through gross operating profit, and the cash conversion cycle (T. Afza & Nazir, 2007; Deloof, 2003; Dong & Su, 2010; A. Sharma & Kumar, 2011). 2.5 Working Capital Policy
The effective working capital management policy of enterprises is essential in order to ensure the optimal levels of growth, profitability, and long-term sustainability. Owners/managers of enterprises need to spend more time to manage the current assets and current liabilities effectively, in order to maximising the firm’s value in a way that balances profitability (Baker & Powell, 2005; Preve & Sarria-Allende, 2010; D. Sharma, 2009).
2.5.1 Investing in Working Capital
Van Horne and Wachowicz (2008) state that excessive investment in current assets (cash and marketable securities, accounts receivable and inventory), may lower the value of an enterprise and also diminish profitability. Consequently a sufficient level of current assets needs to satisfy the payments and obligations of current liabilities. If the short-term assets are poorly managed then the
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opportunity costs could be high, e.g., the holding of a large amount of inventory that provides a small amount of return. This means that return on investment on current assets must be greater than the required rate of return in order to cover all the business obligations (Gitman, 2009). The stock-outs of inventory levels can cause a loss in sales leading to diminishing profits. Hence, the determination of investment optimal level in working capital is to the trade-off between liquidity and profitability. However, the financial manager should manage the associated costs with working capital at the minimal level without jeopardising the liquidity required for its ongoing business operations (Arnold, 2008; Baker & Powell, 2005).
2.5.2 Short-term Financing
Every business has several options when it decides to aggregate short-term financing. According to Gitman (2009) the financing of WC enhances the composition and the structure of the business financing in terms of short-term and long-term aspects. Afzar & Nazir (2008) investigated the traditional relationship between working capital management policies and a firm’s profitability in their quantitative study for a sample of 204 non-financial firms listed on Karachi Stock Exchange (KSE) for the period 1998-2005.The study found significant difference among their working capital requirements and financing policies across different industries. Moreover, regression result found a negative relationship between the profitability of firms and degree of aggressiveness of working capital investment and financing policies. They suggested that managers could increase value if they adopt a conservative approach towards working capital investment and working capital financing policies (Shah & Sana, 2006). 2.6 Business Performance Analysis
According to Oliver & English (2007) business performance analysis is dealing with the ‘return on investment (ROI)’ and ‘return on equity (ROE)’. ‘Business Performance Analysis (BPA)’ gives the owners-managers of SMEs the means to look at every possible strategy for improving the return on assets. The SMEs owners would firstly consider the increasing of ‘Net Profit Margin’ in various ways such as increasing the selling price on the same unit sales volume and decreasing cost of sales. The decreasing of cost of sales can be processed by earning more efficient purchasing, efficient management of quality, eliminating waste and reworks, identifying short delivery by suppliers, maximising security of inventory and cash, eliminating undercharging errors and omissions.
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The alternative ways of improving return on assets is by increasing the assets turnover. Under increasing the assets turnover, the SMEs owners would do this by increasing the unit selling price on the same unit sales volume with the same operating expenses, and reducing the assets. When the business assets are reduced, the liabilities and equity would have reduced by the same extent. In maintaining the ‘Net Profit Margin’ while the assets are reducing then it helps to produce a higher return on assets. Birt et al., (2011) argues that business financial performance must be measured to verify achievement of business goals as expressed in a mission statement of the entities. In general all entities have to set their business goals, and evaluate their success by using performance measurement processes. The measure is normally compared with a benchmark such as previous achievement, expectation or competitor achievement, in order to decide whether the performance is good or bad. Performance measurement systems in a typical entity could include measures to evaluate the performance of the entity as a whole, divisions or segments, individual managers and employees, customers, products/services, suppliers or processes (Birt et al., 2011; Kimmel, 2010).
2.6.1 DuPont system of analysis and Time-series Analysis
The DuPont system of analysis (refer Appendix 4) is used in this study to analyse the measurement of financial performance of the selected enterprise’s financial statements as a case study. The DuPont system merges the income statement and balance sheet into two summary measures of profitability in terms of performance such as ROA and ROE.
The DuPont system links the net profit margin with its total asset turnover. The net profit margin measures the business’s profitability on sales while total asset turnover indicates how efficiently the business has used its assets to generate sales. The net profit margin and total asset turnover are multiplied to get the business’s ROA. The return on assets (ROA) is multiplied by the financial leverage multiplier (FLM) to get the ROE (Brigham & Ehrhardt, 2005; Gitman, 2009). For this particular study, the Time-series Analysis (i.e. Trend Analysis) is employed via the DuPont system to analyse the selected company as a case study that involves comparing financial figures through the trends from the 2006 to 2010 financial statements. Time-series analysis evaluates the business’s financial performance over time, utilising financial ratios analysis. It can illustrate to the business owner (CS1) where changes need to happen in order to assist the business profitability. For example, if the trend analysis shows that the business’s liquidity is diminishing,
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the manager will have to take this into consideration and act immediately to enhance the business’s ability to meet its obligation (Hatten, 2008; Raheman & Nasr, 2007).
2.6.2 Key Financial Ratios
Working Capital, can measure how efficiently an enterprise’s management is able to monitor the enterprise’s operation. It is crucial for success to manage short-term assets and liabilities well in accordance with its operating cycle or cash conversion cycle (Sagner, 2010; D. Sharma, 2009). Gitman (2009) and Brigham & Ehrhardt (2010) describe how working capital should be managed and illustrates the benefits in various terms of liquidity, activity (i.e. efficiency), leverage, and profitability ratios. The key financial ratios assist in working capital and performance calculation for the case study of CS1 in this research is presented on the Appendix 5 (refer Table 6.5-1) .
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Chapter 3: Research Design and Methodology
3.1 Introduction
This Chapter is focused on the research design and applicable methodology for this research. The main purpose of this study is to explore and analyse, in terms of profitability the Impact of Working Capital Management Components on business performance of Tongan Enterprises currently operating in Auckland, New Zealand. Chapter 3 consists of 4 sections. Section 3.2 briefly discusses the research paradigms, philosophy and methodology, mentioned in the research paradigms, quantitative versus qualitative approaches. Section 3.3 discusses the research methodology explaining the qualitative inquiry approach (naturalistic) in terms of ontology, epistemology, axiology, rhetoric, methodology, generalizability and causal linkages. Section 3.4 discusses the research methods and techniques used in this study. The study used the method of semi-structured interview, focus group, using the Talanoa approach for collecting of the data. Section 3.4 discusses the combination of Talanoa and NVivo9 for analysing and coding of collective data for this research. 3.2 Research Paradigms or Worldviews:
This section discusses the rationale of the appropriateness of methodology to be used for the research. It also discusses the adapted approach, the method and techniques used to assemble data for the particular study. It considers the methodology and method of qualitative approach or naturalistic paradigm (i.e. Talanoa approach) to thoroughly investigate, analyse and explore the impact of working capital management components dynamic on performance of the Tongan SMEs operating in Auckland, New Zealand. A few extant literatures emphasise the essentials of understanding the philosophical approach that is critical to clarify and identify the research designs suitable for a particular research (Cohen, Manion, Morrison, & Morrison, 2007; Easterby-Smith, Thorpe, Jackson, & Lowe, 2008). Before the researcher progresses to design the appropriate methodology and decide the method and techniques for collecting of data it is necessary to understand the two paradigms or worldviews applicable to the study. Collis & Hussey (2003) state that; “the term paradigm refers to the progress of scientific practice based on people’s philosophies and assumptions about the world and the nature of knowledge” (p. 55). Lincoln & Guba (1985) argues that paradigm holds a worldview that defines for its holder, the nature of the world, the individual’s place in it, and the range of
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possible relationships to that world and its parts. Positivist (quantitative) and phenomenological (i.e. qualitative or naturalistic paradigm) are two methodological paradigms suggested by (Cohen et al., 2007; Collis & Hussey, 2003; Lincoln & Guba, 1985; Patton, 2002). They provide differing views on how research should be conducted. 3.2.1 Quantitative Approach (i.e. Positivist):
Quantitative approach requires the measurement of opinions of many SMEs owner-managers, in order to decide the differences or similarities that may exist from their perceptions and to construct comparisons (Patton, 1990). The nature of the reality (ontology) in quantitative research paradigm is more objective (i.e. purpose) and definitely separate from the researcher (Creswell, Hanson, Clark Plano, & Morales, 2007).
The quantitative approach requires a large sample size of participants to answer pre-written questionnaires and to test hypotheses. The advantage of the quantitative approach is the speed of assembly of the survey and the outcome is fast and gains a large sample of valid information from the interested survey population. The concept of generalisation is applicable due to a large quantity of valid information being gathered from use of written questionnaires (Patton, 1990). A disadvantage of the quantitative approach is its failure to consider people behaviour. 3.2.2 Qualitative Approach (Phenomenological):
The interpretivist paradigm or inductive research is on qualitative data collection that essentially reverses the process found in the destructive research. It focuses on developing theories with a view to explaining empirical observations of the real world. These empirical observations can be based on many factors, for example, they can simply be based on personal experience (Collis & Hussey, 2003; Creswell, 2006; Graziano & Rawlin, 2004; Lancaster, 2005).
Qualitative research does not require the establishment of previous theories or hypotheses. The study can build up new theories based on the actual observations thereby allowing a problem or issue to be studied or approached in several possible different ways with alternative explanations of what is going on (Lancaster, 2005). The qualitative approach will be used to explain the characteristics of the naturalistic inquiry (Lincoln & Guba, 1985).
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This qualitative approach will entail a small number of participants between eight and thirteen of the Tongan SMEs in Auckland metropolitan region. There would be semi-structure interviews with Tongan SMEs owners-managers and other key stakeholders, including business advisors, consultants, banks who cooperate with these Tongan SMEs. Thus, this research outline is consistently applying the qualitative inquiry phenomenon raised by different authors (Chetty, 1996; Eisenhardt, 1989a, 1989b; Hartley, 2004; Yin, 2003). 3.2.3 Quantitative (Positivist) versus Qualitative (Phenomenological):
There are two dominant research paradigms in social science research context known as positivist and interpretivist. Positivist refers to quantitative research while interpretivist refers to qualitative research (Collis & Hussey, 2003; Creswell, 2006). The table on Appendix 2 shows the differences in terms of assumptions between the two main paradigms as per (Creswell, 1997). Miles and Huberman (1994) state that the debate between quantitative and qualitative research has appropriately occurred at the level of paradigmatic and methodological levels. According to (Collis & Hussey, 2003; Jupp, 2006; Saunders, Lewis, & Thornhill, 2007), qualitative and quantitative approaches do not function in isolation. They complement each other and when combined offer a broader view that has found advocacy within business research. According to Voges (2005) quantitative (Positivist) approaches are concerned with measurement of definable constructs while qualitative (Phenomenological) approaches are concerned with uncovering meaning. Some of the extant literatures argue that both approaches can be combined (Eisenhardt, 1989a; Miles & Huberman, 1994). Despite this combination of the two approaches, the researcher is very concerned with mixed-methods and makes the decision to use the qualitative approach only in this study. The quantitative approach is not suitable in this research due to the small number of Tongan SMEs operating in Auckland, New Zealand at present. Thus the researcher considers the qualitative approach is the appropriate methodology for conducting this research. 3.3 Research Methodology – Qualitative Inquiry Approach
The qualitative inquiry approach in this study follows the philosophical assumptions of the qualitative inquiry paradigm, adapted by Creswell (2006) from the “axiomatic” issues advanced by (Guba & Lincoln, 1988). Creswell (2006) argues that the qualitative inquiry research is legitimate
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in its own rights and does not need to be compared with the naturalistic inquiry or quantitative inquiry to achieve respectability in today’s social science research. Creswell (2006) adds to Guba & Lincoln (1988) concerns, the rhetorical assumption that recognises the need to attend to the language and terms of qualitative inquiry. Thus, this study has to adapt and follow the philosophical assumption of qualitative inquiry being appropriate for this research, as shown on the table of Appendix 3. 3.3.1 What is the nature of reality? (Ontological assumption)
Ontological assumption is the first characteristic of qualitative inquiry approach or naturalistic inquiry approach. According to Creswell (2006) ontological issues are related to the nature of reality and its characteristics. In conducting a qualitative research, the researcher has to embrace the idea of multiple realities. The researcher reports the outcome of the study regarding the participants’ (individuals) multiple realities. The report of these multiple realities includes the use of multiple quotes based on the actual words of different individuals and presenting different perspectives from individuals. With regard to this study, it firstly seeks the impact of the WCM on Tongan SMEs business performance that is the reality to be investigated. The experiences of the Tongan SMEs ownermanager in operating business in Auckland, pinpoint the multiple perspectives on managing WCM in the business. The socio-cultural factors of the Tongan SMEs owner-manager impact on WCM would count as one of the perspectives and realities to be inquired. 3.3.2 What is the relationship of the researcher and that being researched? (Epistemological)
In general epistemological assumption is the relationship built by the researcher and the participant. When conducting a qualitative study, the researcher attempts to get as close as possible to the participants being researched. The researcher attempts to collaborate and spend longer time in the field with participants getting to know them and becomes an insider (Creswell, 2006; Guba & Lincoln, 1988). This notion is supported by Wolcott (1999) who indicates good ethnography requires a prolonged stay at the research site. According to Guba & Lincoln (1988) the researcher attempts to reduce the distance or objective separateness between the researcher and the participant being researched. In the positivist inquiry approach the researcher is independent from that being researched Guba & Lincoln (1988) which is in contrast to the phenomenological approach. In
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short, there is no previous relationship between the researcher and the participant being researched in the positivist paradigm.
From the Tongan cultural perspective a “closed relationship” is the fundamental core element within the society. Thus, the epistemological assumption of qualitative inquiry approach is well suited to the Tongan Culture and also other Pacific ethnicities, in terms of values, beliefs, perceptions, humble feelings, languages and ideologies of individuals. These aspects are always imposed on Pacific islands’ identity as the normality of their cultures. Despite there being no preexisting relationship between the researcher and the participants in the study, it is easy for the two parties to formulate the closeness of their relationship during the process. The study is started by building the relationship between the researcher and the Tongan business advisory providers such as New Zealand and Tongan Business Council via the Auckland Chamber of Commerce. 3.3.3 What is the role of values? (Axiological assumption)
In conducting the qualitative inquiry approach, there is a need to consider values. The researcher then has to make explicit those values in the qualitative study. According to Creswell (2006), it is the axiological assumption that can characterise the qualitative research. The researcher can implement this assumption in the qualitative study by admitting the value-laden nature of the research and positively report those values and biases as well as the value of information gathered from the participants.
Only the values that may be relevant to characterise the narrative of the study may be discussed. The researcher can stimulate any kind of interpretation in conjunction with the interpretation of the participant in qualitative inquiry paradigm. In this study, the researcher consequently has the potential of values to facilitate the research in a freely and friendly manner with respect of the values of participants. 3.3.4 What is the language of research? (Rhetorical assumptions)
According to Creswell (2006) the qualitative researcher writes in a literary, informal style using the personal voice, using qualitative terms and limited definitions in the qualitative inquiry method. Over time Greckhamer & Koro Ljungberg (2005) state that the researcher is notorious for using the labels and names of aspects in qualitative study.
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However the researcher in the qualitative paradigm tends to use the rhetorical assumption in writing of the research informally and literary manner. Instead of using quantitative terminologies such as internal validity, external validity, generalizability and objectivity, the qualitative researcher may use terms such as credibility, transferability, dependability, conformability, or validation (Guba & Lincoln, 1988) 3.3.5 What is the process of research? (Methodological assumption)
According to Creswell (2006) methodological assumption is the procedure of qualitative research are characterised as inductive, emerging, and shaped by the researcher’s experience in assembling the data. It follows the inductive process logically, from the ground level up to the stage of generating a theory. The researcher works with details before generations, describes in detail the context of the study, and continually revises questions from experiences in the field. This study follows the similar methodology of inductive logic, studies the topic within its context and uses an emerging design to develop theoretical SMEs business model.
This study constructs its own research structure model as shown on Figure 3.4.1-1.The method used for data collection in this study is known as Talanoa approach. The semi- interviews, focusgroup and case study are scheduled to use in the form of Talanoa for collecting data of the research. Each stage of the research has its own techniques of collecting, coding and analysing of the data from participants. The researcher focuses on the path to analyse the data more carefully aiming to develop an increasingly detailed knowledge of the research topic. 3.3.6 What is the possibility of generalisation? (Generalizability)
The aim of qualitative inquiry under the canopy of generalizability is to develop a unique body of knowledge in the form of working out hypotheses that describe the individual case (Creswell, 2006; Lincoln & Guba, 1985). In positivist inquiry it is aimed to develop a body of knowledge in the form of generalization, which can apply to anywhere in the same control statistical manner. In this study, the researcher attempts to assemble together all the participants’ views, comments and experiences in managing of working capital components in their own businesses.
In the sample selection of Tongan participants for this study, the participants are selected only from the Auckland region. This study follows the theoretical concept founded by Eisenhardt (1989a) of conceptualisation of a model from multiple case studies. The researcher attempts to
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conceptualise a theoretical generalized model for the Tongan enterprises in New Zealand as shown in the sub-section of Theoretical discovery. 3.3.7 What is the possibility of causal linkages (mutual simultaneous shaping)?
Creswell (2006) and Lincoln & Guba (1985) indicate that all entities (researcher and participants) are in a state of “mutual simultaneous shaping” so that it is impossible to distinguish causes from effects. This means that everything influences everything else in all aspects. All elements in the research field simultaneously interact with each other in different ways and there is no need to produce a particular outcome. The end-product accidentally happens as outcome (effect) of the interaction and is known as mutual shaping.
This study analyses and explores the impact of Working Capital dynamics on the performance of Tongan SMEs operating in Auckland. Previous studies, suggested that poor management of working capital may cause the failure of SMEs performance in terms of profitability. The allowance of socio-cultural factors into the business equation of the Tongan SMEs, may influence (impact) on business performance. The mixture of the inappropriate accounting system, accounting practice, and lack of skills may also cause poor performance of Tongan SMEs (J. Prescott, 2004; S. Prescott, 2009). Thus the qualitative (naturalistic) inquiry approach is adapted in this particular research 3.4 Research Methods –Using Traditional Pacific Talanoa Approach
3.4.1 Methodological Structure of Research- Talanoa Approach This section illustrates the unique research approach of qualitative (naturalistic) research (i.e. exploratory approach) that is the traditional research philosophy framework for this particular study. The method uses the Pacific Talanoa approach in semi-structure interview, focus group, and a case study in collecting and analysing of data for this particular study. The Talanoa methodology was adapted from the original work of (Halapua, 2000, 2003, 2007) and its conceptual consistency remains applicable to the research data collection, data analysis, focus group and other theoretical analysis. The theoretical discovery stage focuses on development models using Talanoa theory approach.
In the Pacific way of societal talking, mainly in the Tongan society there is a spectacular kind of oral communication Pacifically known as Talanoa Approach. According to S. Prescott (2009, p.
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60) states Talanoa means to talk, story-telling, expose or disclose the reality of a thought or to unveil the ‘unknown’ of an existing concept. Talanoa concept has the idea of dialogical process in the Pacific (i.e. Tongan) manner. It has always involved two participants in the process of talking and listening, and they must be simultaneously going together (Halapua, 2000; Otsuka, 2005; Vaioleti, 2006; Vaka'uta, 2009). Talanoa is arguably recognised as a traditional methodology of communication as a default in the Pacific research paradigm (S. M. Prescott, 2008). Talanoa is a special methodology of exposing and disclosing processes used by the Pacific academic researchers to collect, analyse and discuss important scenarios in real-life (Goundar, 2005; Halapua, 2007).
1. Pre-study of Tongan Enterprises in Auckland
Literature Review of WCM & Invitation of Participants
P A C
2. -
Sample Selection Criteria sampling- Tongan Enterprises in Auckland Theoretical Sampling - to achieve saturation
I
Next interview TALANOA
F I C
Focus Group and Talanoa (CAQDAS)
3. -
Data Collection Semi-structure interviews, Using Talanoa Recording of interviews using digital recorder (CAQDAS)
Case Study using Talanoa (CAQDAS)
T A L A N
Follow up interviews & Talanoa
4. -
Data Analysis & Coding Using Financial Ratios, NVivo9 and (CAQDAS) Talanoa Approach Discussion and Findings Professional Talanoa and commentary
O A
A P
5. -
Theoretical Discovery & Conceptualised Models Constant Comparison Analyses Discussion and Findings Development of Theory using Talanoa Theory and Case Study
P R O A C H
Figure 3.4.1-1: Structure of Research on the WCM of TONGAN SMEs in Auckland, NZ
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3.4.2
Data Collection
According to Yin (2008, 2009) the qualitative inquiry approach usually belongs to the phenomenological paradigm and is an in-depth study of a particular setting such as an organisation. Thus, there are five stages of data collection and data analysis conducted in this study to be followed when conducting this exploratory research as follows;
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Pre-study of Tongan SMEs in Auckland Sample selection process of Tongan enterprises participants Data Collection (i.e. Semi- structure interviews, Focus Group, and Case study all using Talanoa approach) Data Analysis and Coding –Using financial ratios, Talanoa and NVivo9 Theoretical Discovery and conceptualised Models.
Stage One:- Pre-study of Tongan SMEs in Auckland Stage one is the Pre-study of Tongan enterprises operating in New Zealand. Following is the review of extant literatures, in order to recognise the gap and issue to be investigated. The delivery of invitation letters to the selective group of Tongan enterprises is conducted at this stage. The letter, including information from the Ethical Committee of Unitec Institute of Technology explains the purpose of the study. Finally the researcher sets up the Gantt Timeline, scheduling the semi-structure interviews with the participants according to the agreed time.
Stage Two: Sample Selection Process of Tongan SMEs Participants At this stage the researcher selects participants from the Tongan enterprises who are operating in Auckland metropolitan only. The selection process for this research is based in terms of criteria and theoretical sampling and was guided by the research question shown in chapter one. The point of contacts for the selection sampling heavily depends on the New Zealand and Tongan Business Advisory Council along with the assistance of a selective consultant from the Pacific Business Trust.
The Tongan enterprises participants require to agree and sign the official organisation consent form from the Ethical Committee of the institute, in order to show their willingness to involve in this particular study. The total number of potential Tongan SMEs participants involved in the semi28
structure interviews was 8. They were given with unique codes in the sequence of T1, T2, T3, T4, T5, T6, T7 and T8. Four professionals agreed to have their Talanoa session together in a focusgroup as shown by their unique codes FT1, FT2, FT3 and FT4. There was one company selected amongst the eight participants as a case study (CS1). The communication enterprise was selected for case study due to the availability of financial information for this study. Thus, the total number of participants involved in the semi-structure interview, focus-group and case study was total Talanoa sessions of 13.
Table 3.4.2-1: Tongan SMEs Participants for Interviews, Focus Group and Case Study
Tongan SMEs Category Accounting Firm Financial Services Business Consultancy Retail Coffee Bar Graphic Design & Communication Art Gallery Pacific Business Consulting Services
Code T1 T2 T3 T4 T5 T6 T7 T8
Number of Employees 6-10 10-20 1 4 3 3 1 12
Number of Tongan SMEs Participants 1 1 1 1 1 1 1 1
Total
Focus Group Professionals Business Advisory (Consultants) Business Advisory (Consultants) Business Owner/Manager Chartered Accountant Codes FT1 FT2 FT3 FT4 Number Participants 1 1 1 1
8
Number of Professionals 1 1 1 1
Total
CASE STUDY Graphic Design & Communication Total CODES CS1 Number of Participants 1
4
Number of Case Study 1 1
Overall
13
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Participants are likely to fall in the category of small accounting firm (T1), financial services (T2), business consultancy (T3 & T8), retailing (T4 & T5), graphic design & communication (T6), and art gallery (T7). All these Tongan enterprises are currently operating more than five years. The participants for Focus-Group were voluntarily captured from business advisory (FT1 & FT2), business owners/managers (FT3), and chartered accountant (FT4). All the collecting data, name of participants, audios and videos from these Talanoa sessions are kept in a very safe and locked place. Thus only the unique code is used in this study instead of the participant’s name.
Stage Three: Data Collection- Using Interviews, Focus Group and Talanoa
The data collection process was conducted at stage 3 as per research structure model shown in Figure 3.4.1-1 of the research structure model. The researcher has visualised the data collection process as interrelated activities aiming to gathering good information to answer the emerging research question as explained in chapter one of this study. This qualitative research engaged a series of activities in the data collection process as shown below: • Semi-structure interviews (one-to-one) using Talanoa approach-recording of interviews using digital recorder • Focus Group using Talanoa approach - Discussion and Findings (Four Professionals using Talanoa approach to analyse the Data) • Case Study using Talanoa approach - Only one Selected Tongan SME being observed focusing on liquidity short-term assets and current liabilities of its financial statements
Semi-Structure Interview with Talanoa:
The purpose of using the semi-structure interview with Talanoa is to explore the important elements of WCM in each SME in a more detailed manner, and find the financial practice and techniques employed by the Tongan SMEs. Semi-structure interviews with Talanoa establish new themes leading to a conceptualised theoretical model for WCM in SME. According to Miles & Huberman (1994) the sampling for qualitative research should be purposive rather than random. The semi-structure interview with Talanoa session was only targeted the Tongan enterprises owner-managers in Auckland. Only eight Tongan SMEs were available for semi-structure interviews. The semi-structure interview with Talanoa was carried at the participants’ premises, except one (T6) that was done at the Unitec venue. Each semi-structure interview was a one-to-one correspondent between the researcher as the interviewer and the Tongan SME owner-manager as the interviewee. The duration of each interview was arranged from between 45 to 60 minutes. Each
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interview was followed by the Talanoa session for another 30 minutes, in order to analyse the reality, validity and reliability of the data being announced during the semi-structure interview session. The digital recorders, personal laptop, were pre-tested devices for the recording modes of Talanoa sessions.
All participants signed the organisation consent form and also a participant consent form, prior to the semi-structure interview session, in order to confirm their willingness to participate in this study. These signed consent forms spell out the purpose and the method of how the semi-structure interview and Talanoa would be conducted. The process of the semi-structure interview was conducted in an informal manner, using the direct and indirect questions, aiming to achieve the reality and validity of data regarding the impact of working capital management on business performance.
All participants agreed to conduct the interview and Talanoa sessions in bilingual manner, English and Tongan. Because of the complexity of financial and management accounting terminologies, the participants preferred to use the English version throughout the sessions. The researcher had no previous relationship and collaboration at any time with the participants. Therefore it was critical for the researcher to justify all aspects before conducting the interview and Talanoa sessions. The participants have different attitudes towards the interview and Talanoa sessions with the researcher. Only the professionals for the Focus Group were known to the researcher through the channel of Unitec networking. During the conducting of the semi-structure interview and Talanoa sessions, that participant and the researcher came to understand each other. They built up an overwhelming relationship of bonding in terms of knowing the nature of reality (ontological) and significance of this study.
The data collected from the semi-structure interviews was analysed using the well-known Pacific Research methodology of Talanoa approach. It was used in this particular study to unveil the reliability and validity of the data being collected. Talanoa approach also enhanced the essence of the various suggested ideas assembled from the data collection process being conducted. Talanoa approach provides a highly rate of chance to achieve a greater understanding of the Tongan SMEs, operating in Auckland. It also assists to conceptualise and construct a relevant model for any recommendations and potential suggestions from the collecting data (Manu‘atu, Foliaki, Tu‘itahi, & Prescott, 2008; Vaioleti, 2006).
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Therefore the Talanoa approach is vital for the collecting and analysing of data for the impact of working capital management on business performance of the Tongan SMEs. There are recognised issues in using the Talanoa approach in any Pacific research. The nuances (issues) are included, the entire Pacific traditional attributes such as ethnicity values, business perceptions, passion, talent, experiences, skills and academic knowledge, native language, relationships and interactions with the researcher (Vaioleti, 2006). These issues are importantly considered in order to reach the saturation point of any Pacific study.
Focus Group using Talanoa approach:
A focus group is defined by Collis & Hussey (2009) as a method for collecting data where by selected participants discuss their reactions and feelings about a product, service, situation or concept, under the guidance of a group leader (i.e. researcher in this study). A Focus Group is used in this study and can provide access to forms of data that are not obtained easily during the semistructure interviews or any research methods. The main advantage of using a focus group is the opportunity to observe a large amount of interaction on a topic in a restricted period of time based on the researcher’s ability to collect and facilitate the focus group sessions (Morgan, 1997; Morgan & Bottorff, 2010). However, Morgan (1997) argues that the focus group method also has a disadvantage in the sense of unnatural social settings. A Focus group by itself is limited to verbal behaviour, consists only of interaction in discussion group and is created and managed by the researcher. It is for this reason the Talanoa approach is the appropriate qualitative method to be used in facilitating the focus group in the assembling of qualitative data. Talanoa approach in the focus group would be appropriate as it enables participants to engage and interact actively in a safe and trusted setting.
The focus group in this study is scheduled to cover the duration of 45 to 60 minutes. However the discussion and exchange of relevant ideas regarding the research topic is allowed until it stops when saturating point is reached. Finally the researcher adapts the procedures for focus Group from Collis & Hussey (2009), as follows: 1. Preparing of list of issues to cover during the focus group (this study is using power points presentation) 2. Inviting four professionals with good experience in the Pacific SMEs (Tongan) operations
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3. The researcher creating a relaxed atmosphere when introducing these professionals and explaining the purpose of the focus group, and how it should be done. 4. Starting the session with a broad, open question. This is done on an overhead projector with the prepared visual explanations and examples. 5. Allowing the participants to discuss the issues as the researcher introduces them without any intervention except to ensure that all members have an opportunity to continue to the discussion and all the issues are covered. 6. Talanoa session is gradually applied at the end of the focus group session for analysis the process. 7. The audio and video recording is done by a researcher assistant from the postgraduate students while the researcher focuses on facilitating the session.
Case study using Talanoa approach:
According to Eisenhardt (1989a) states that a case study as a research which focuses on understanding the dynamics present within a single setting. Collis & Hussey (2003) denotes that the case study approach usually uses in phenomenological research (i.e. interpretivist paradigm). It is also an in-depth study of a particular setting such as a business entity. Therefore, the researcher has to conduct the case study using Talanoa approach as the third approach for collecting of data. The purpose of using the case study is to analyse the financial statements as secondary data; to justify and measure the impact of WCM on business performance using various working ratios and profitability measures such as ROA, and ROE.
The Talanoa approach plays an important role in this case study. The researcher and business owner/manager shared the financial issues during the Talanoa session. The combination of observations and exploration throughout the Talanoa session of the case study would have enhanced the validity of the financial information related to the business performance. The calculation of the performance in terms of profitability is done, using the traditional profitability measures as mentioned above. This profitability measurement process validates the level of WCM impacts on business performance of Tongan SME in New Zealand.
The secondary data of financial statements from this case study helps the calculation of working capital ratios and financial performance ratios. This case study has followed the process of building theory suggested by Eisenhardt (1989a). It is getting started with the definition of the research
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question followed by the selecting the case. The selected enterprise was from the communication sector which has the available financial information for this study. The data collection in this case study adopted the Talanoa approach in discussing the process of working capital management internally.
The data analysis is also done through Talanoa session and financial ratios analysis in order to justify the impact of the working capital management on the business financial performance of the Tongan enterprises. The Time-Series approach is adopted for comparison of the financial ratios analysis based on the consecutive five years (from 2006 to 2010) financial statements of the selected communication company (CS1). The DuPont system analysis is also adopted to calculate the measurement of business financial performance in terms of ROA and ROE. The relevant literatures for case study are closely applied in order to build validity, and construct theoretical saturation from the case study. 3.4.3 Data Analysis
Stage Four: Data Analysis using Talanoa session, NVivo9 & Financial Ratios: The first method of data analysis was the using of Talanoa session after each semi-structure interview for more than 45 minutes. The data analysis was scheduled to be conducted in four stages of Talanoa session, transcribing, summarising and thematically coding. The first stage was done during the Talanoa session. The second stage was the transcribing of the videos, audio tapes and translation process. The third stage was the summary of the main concepts from the transcripts using excel worksheet templates. For the final stage of data analysis was the coding of the transcripts into categories and themes.
Step 1: Talanoa approach
During the semi-structure interview session, the researcher has noted down the main concepts to be analysed in the Talanoa session. In this first stage, both researcher and the participant discussed data thoroughly, in order to understand the effects of Working Capital Management dynamics on performance of the business. At the beginning of the Talanoa session, the researcher reaches out with an indirect question encouraging the participant to reason out the important issues of the data. The researcher used a very high quality digital tape recorder to record the Talanoa session for transcription process in the second stage.
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Step 2: Transcribing and Translating
When the Talanoa session is completed then the researcher saves the recording data and prepares for the transcription process, i.e. recording the data into text documents using English as a preferred version for writing the report. Another challenging role is the translating of the texts from Tongan into the English version. This is done intentionally in a careful way in order to keep the validity of the collected information. The next stage involved importing the Talanoa transcripts into the NVivo9 for more coding, analysis and modelling process.
Stage 3: Summarising and Validation
For validation purpose, the researcher uses the “word document and excel spreadsheet” interchangeably for transcribing and coding of the data numerically before importing to NVivo9 for further more coding and analysis process and modelling. The table below shows the category and unique code for professionals involved in the focus group.
Focus Group Professionals Business Advisory (Consultants) Business Owner/Manager Chartered Accountant
Codes FT1, FT2 FT3 FT4
Number of Professionals 2 1 1
Total
4
Step 4: Categorising and Thematic Coding in NVivo9
The data coding process was conducted at stage 4 of the data analysis. The using of NVivo9 software and Talanoa approach are the two methods of analysing the collective data from the semistructure and focus group for this research. The analysis of qualitative data including coding data into categories that organise it and portray it to one or more frameworks, or set of ideas, are carried out (Lofland, Snow, Anderson, & Lofland, 2006). OSR International, the developer of NVivo, advocates providing the researcher with a set of tools to assist the researcher in understanding an analysis of qualitative data (Bazeley, 2007). Thus, there are five main principal ways in which NVivo supports analysis of qualitative data as follows (Bazeley, 2007):
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1) 2) 3) 4) 5)
Managing of data Manage ideas Query data Graphically model Report from the data
In NVivo, conceptual maps, flow charts, or purely exploratory diagrams can be created using the modelling tool, and are generically referred to as models. The NVivo9 software is used to assist the researcher in the concept-building process and also helping with the organising of the conceptual framework development of working capital management for enterprises. The NVivo9 software is used in this study to organise data in a systematic manner and to recognise patterns lying between the data (Bazeley, 2007).
The coding process employed predetermined themes and categories. However, when a different issue emerged it was categorised to illustrate the pattern explaining the dynamic of working capital management practices. One of the advantages of using the coding and analysis approach was an opportunity to view issues from all the participants. Various narratives; dialogues in telling stories and presenting other evidence emerged from their natural settings (Auerbach & Silverstein, 2003). The study has a large amount of qualitative collected data to be analysed. Therefore, this typical study was needed a systematic approach to organize and manage the collected data.
The researcher imported all the collected data from the excel worksheet template into NVivo9. All the importing data should be kept in the source folders, with applicable code names. After importing of data into source folder in NVivo9, the next step was the creating of a Nodes folder for the Coding process. The creation of each Node was vital for coding and thematic process. The importing documents were read and coding started by copying and pasting into the appropriate Node folder and also Tree Nodes (i.e. sub-category). The NVivo9 qualitative software consists of few important folders such as Sources, Nodes, Classifications, Collections, Queries and Reports as shown below.
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Figure 3.4.3-1: Constant comparison analysis: Coding in NVivo9 qualitative software
Seven types of Qualitative data analysis techniques using NVivo9
Leech & Onwuegbuzie (2011) outlined seven types of qualitative data analysis techniques. They presented in their study the step-by-step guidance for conducting these analyses by using computer-assisted qualitative data analysis software (CAQDAS) called NVivo9. Specifically the seven analysis techniques are as follows; 1. Constant comparison analysis 2. Classical content analysis 3. Key-word-in-context analysis 4. Word count analysis 5. Domain analysis 6. Taxonomic analysis 7. Componential analysis. All these seven types of qualitative analysis techniques can be conducted by using the NVivo9 in this study. Only Constant comparison and Classical content analyses are highly used for data analysis within NVivo9. The other five analysis techniques are randomly used, but not much in this study. Constant Comparison Analysis is the most commonly used qualitative data analysis and was developed by Glaser & Strauss (1967). Classic content analysis is almost the same as constant comparison analysis but the themes and codes are counted to identify the concepts were predominantly discussed. Thus, the features of NVivo9 assist to facilitate these two specific analysis techniques in articulating themes from the interviews data contents of Tongan SMEs in
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this study refer Appendix 10. The Table 3.4.3-1 below shows the possible themes created by the researcher in NVivo9 for findings and discussion.
Table 3.4.3-1: NVivo9 Themes Code for Findings and Discussion
Nvivo9 Themes Code WCM
SMEs Unique Code
Nodes- Free Nodes
Tree-Nodes (Sub-themes)
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
CM
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
IM
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
ARM
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1 T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1
APM
Cash Inventory Account Receivables Working Capital Account Payable Management Operating Cycle Performance & Profitability Working Capital Ratios Cash Flow Forecast Cash Budget Cash Management Motives of Holding Cash Cash Conversion Cycle Raw Materials Work-In-Progress Inventory Finished Goods Management Just-In-Time Inventory Control Account Average Collection Period Receivables (ACP) Management Average payment period Account Payable (APP) Management Operating Cycle Cash Conversion Cycle Investing in WC Financing of WC Aggressive policy Conservative policy Defensive policy DuPont System Analysis ROA ROE
OC WCP
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4, CS1 T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4 CS1
Working Capital Policy
BFP
T1, T2, T3, T4, T5, T6, T7, T8 FT1, FT2, FT3, FT4 CS1
Business Financial Performance
Stage Five: Theoretical Discovery using Case Study and Talanoa Approach
Talanoa Approach means to move beyond the description and to generate or discover a theory, an abstract analytical schema of a process (S. M. Prescott, 2008; Vaioleti, 2006). The participants in
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the study would have many more experiences in the process that explain practice and also provides assistance to form a framework for further research. According Prescott (2008) the key idea is that the theory-development does not come off the shelf, but rather it is generated in data from selective participants experienced in the process. Thus, Talanoa approach is a default Pacific qualitative research design in which the inquirer generates a general explanation (i.e. a theory) of a process, action, or interaction shaped by the views of a large number of participants (Otsuka, 2005; Vaioleti, 2006; Vaka'uta, 2009).
The Talanoa Approach is an unstructured system of Pacific oral communication. However in this study the researcher changes the Talanoa Approach to be systematic and a constructive approach depends on the nature of the Talanoa sessions context. The systematic approach states that the researcher investigates to develop a theory systematically, to explain a process, action, or interaction on any interested topic of research. The systematic approach typically involves conducting a few interviews based on several visits to the field for assembling data to saturate the categories, or seeking information to add-on until there is no more to be found. The researcher collects data and analyses observation and produces documents from the data immediately.
The constructive approach of Talanoa, advocates that the constructivist Talanoa approach depends on the researcher’s views, learning about the experience within embedded, hidden networks, situations, and relationships, and making visible hierarchies of power, communication, and opportunity. This constructive approach of Talanoa session places emphasis on the views, values, beliefs, feelings, assumptions, and ideologies of individuals rather than on the methods of research (Halapua, 2007; Otsuka, 2005; Thaman, 2002; Vaka'uta, 2009).
Thus Talanoa approach is used to provide the theoretical framework for this study and also construct a conceptual model for the Tongan SMEs in New Zealand. This provides a means of investigating, exploring, identifying and explaining the actual financial practices and techniques employed by the Tongan SMEs in Auckland.
This study is also adopted the model from Eisenhardt (1989a, p. 533) as shown in the Appendix 11 associate with Talanoa approach in constructing a conceptual working capital management model for the Tongan SMEs in New Zealand.
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Chapter 4: Results and Discussion of CS1’s WCM (Case Study)
4.1 Introduction
This Chapter covers the results of CS1’s financial statements trends analysis, using the key working capital ratios via the DuPont system such as liquidity ratios, leverage ratios, activity ratios, and profitability ratios. The financial ratios analysis justifies the impact of working capital management on CS1’s business financial performance.
The findings from the Talanoa sessions and observation with the CS1’s business owner/manager is analysed and discussed in the context of western commercial financial management in New Zealand. Thus the discussion in this Chapter is only referencing to the CS1’s Talanoa session and observation. The summary of the Talanoa sessions and observation with CS1’s owner/manager is also briefly discussed with reference made to NVvcivo9-CS1. 4.2 Case Study – CS1’s Financial Statements Analysis - Financial Ratios
To make sound financial decisions within CS1’s business, financial ratios play an important role in terms of analysing the financial statements relative to its financial performance. The financial ratios articulate the relationships showing the relative size of some financial quantity to other financial ratios within CS1’s business. According to Hatten (2008) there are four main important categories of financial ratios to be used in financial statements analysis. These are the liquidity, activity, leverage and profitability ratios.
For the purpose of analysis, ratios are useful only when compared to other ratios. Hatten (2008) and Gitman (2009) discuss the three ratio comparisons that can be employed. For example, the benchmarking analysis, which compares industry leaders; industry average analysis is to compare firms’ financial ratios to industry averages; and trend analysis, for comparing a single firm’s present performance with its own past performance, preferably for more than two years. 4.2.1 Liquidity Ratios analysis of CS1:
The term liquidity refers to the ability of a firm to satisfy its short-term obligations as they become due. It also refers to the solvency of the firm’s overall financial positions. Liquidity can assist the shareholders’ wealth maximization, and can enable long-term lenders and creditors to understand the current safety margins of a given firm to pay its loan obligations (Eljelly, 2004; McInnes,
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2000). The two main ratios used to measure the cash flow problem of a firm are known as Current Ratio and Quick Ratio. Working Capital components such as cash, inventory, account receivables and account payables affect the liquidity of a firm in the form of cash flow (Brealey et al., 2006; Maness, 1994). When an enterprise operates with a lack of cash, it has trouble in collecting its accounts receivable. If it is short of inventory, it may face difficulties keeping up with demand for its products and services, and revenues will be affected (Gitman, 2009; Van Horne & Wachowicz, 2008).
Current Ratio and Quick Ratio:
The current ratio is one of the commonly cited financial ratios as it measures the firm’s ability to meet its short-term obligations. This process is done by dividing the business’s current assets by its current liabilities. Current ratio assumes that both account receivables and inventory can be easily converted to cash. A current ratio of 1:1 or less is considered to be low and indicative of financial difficulties. A current ratio of 2:1 is recommended to be a desirable minimum. A current ratio that is more than 2:1 often suggests excessive liquidity that may be adverse to the business’s profitability (Boone & Kurtz, 2010; Gitman, 2009; Hatten, 2008).
The quick-ratio (acid test) is similar to the current ratio except that it excludes inventory, which is the least liquid current asset. It measures the business’s ability to meet its current obligations with the most liquid of its current assets (Boone & Kurtz, 2010; Brealey et al., 2006; Gitman, 2009; Hatten, 2008).
Case of CS1’s Liquidity Ratios Analysis outcome:
According to Hatten (2008) and Gitman (2009) a current ratio of 1.0 or less is considered to be low. It indicates to the financial controller or manager that there is a financial difficulty facing with the business at that point in time. The current ratio of 2.0 or more frequently suggests excessive liquidity that may be adverse to the business’s profitability.
Current Ratio = Current Assets Current Liabilities
Quick ratio = Current assets – Inventory Current Liabilities
Liquidity Ratios:
Current Ratio Quick Ratio Short fall %
2006
1.04:1 1.04:1 0
2007
0.98:1 0.98:1 2%
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2008
1.11:1 1.11:1 0
2009
0.75:1 0.75:1 25%
2010
0.77:1 0.77:1 23%
Liquidity Ratios of CS1 (2006-2010)
1.20 1.00 Ratios 0.80 0.60 0.40 0.20 0.00 2006 2007 2008 Years Figure 4.2.1-1: Current and Quick Ratios of CS1 2009 2010 0.75 1.04 1.11 0.98 0.77 Current Ratio: Quick Ratio
A review of the current and quick ratios (liquidity) of CS1 (per Error! Reference source not found.) shows they are both exactly the same. This indicates that CS1 is mainly focused on selling services to its customers instead of products. Moreover, the closing inventory amount is omitted from the business balance sheet due to incomplete stock take processes. As the graph in Error! Reference source not
found.demonstrates,
CS1 can only cover its current liabilities 1.04 times and 1.11 times with its
current assets in 2006 and 2008 respectively. The current ratios of 1.04 in 2006 and 1.11 of 2008 recognise that CS1 has $1.04 and $1.11 of current assets for each $1.00 of current liabilities. In conducting the Time-series or Trends Analysis comparison with the other current ratios of 2007, 2009 and 2010, it can be seen that CS1 is having difficulty in meeting its obligations within these financial years. However CS1 is doing well in 2006 and 2008, in the area of liquidity, albeit with some room for improvement. CS1 has fallen short of covering its obligations with 2%, 25% and 23% in 2007, 2009 and 2010 respectively (refer Error! Reference source not found.). The Talanoa session with the owner of CS1 reveals the same aspects of concern as demonstrated by the graph in Error! Reference source not found. (refer table in Appendix 6). Thus the management of CS1 is very concerned about the account receivables collection policy that absolutely inconsistently applied. Within the financial years of 2009 and 2010 there were huge cash flow problems for the business that had a negative impact on the business’s financial performance. Moreover, the graph in Error! Reference source not found. illustrates that CS1’s current liabilities were not able to be paid in 2009 and 2010, due to cash flow problems and poor management of current assets within the business.
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The owner/manager of CS1 mainly focuses on completing services for customers and does not consistently focus on the collection of cash inflow from customers (NVivo9-CS1). CS1’s owner/manager confesses that there is no business plan in place in order to manage its current assets and current liabilities. This confirms that the financial forecasting and budgeting are totally out of the business operating cycle of CS1. The external accountant is only focused on preparing CS1’s annual financial reports, without any further assistance in the establishing of cash-flow forecasting with neither operational nor capital budgeting (NVivo9-CS1). 4.2.2 Activity Ratios (i.e. Asset Management Ratios) of CS1:
Activity ratios measure how fast various accounts in a particular business are converted into sales or cash. These ratios are frequently used to measure how efficiently a business uses its assets to generate sales or cash. It also provides a measure of how effectively an organisation is using its assets to generate net income. There are four important Activity ratios in the business context: inventory turnover, average collection period, fixed asset turnover, and total asset turnover (Boone & Kurtz, 2010; Gitman, 2009; Hatten, 2008).
Case of CS1’s Efficiency (Activity) Ratios Analysis Outcome
Account Payment Period =Account Payable Ave purchase per day ACP = Account Receivable Ave Sales per day
Inventory turnover = Cost of Goods Sold Inventory
Activity Ratios:
Inventory Turnover Total Asset Turnover Average Collection Period (ACP) Average Period Payment (APP)
2006
NA 3.07 42 179
2007
NA 2.35 20 165
2008
NA 3.48 26 152
2009
NA 7.50 40 256
2010
NA 6.94 31 50
Activity Ratios of CS1 (2006-2010).
300 Number of Days 250 200 150 100 50 0 2006 2007 2008 Years Figure 4.2.2-1: Activity Ratios of CS1
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256 179 165
152 Average Collection Period
42
20
26
40
31
50
Average Payment Period
2009
2010
Inventory Turnover Ratio
The Inventory Turnover ratio measures the liquidity of the business’s inventory to identify how quickly goods are sold and replenished. When the business turns over its inventory more quickly during selling process has a higher turnover ratio that generally implies efficient inventory management (Birt et al., 2011; Brigham & Ehrhardt, 2005; Hatten, 2008).
It is difficult for the researcher to calculate the Inventory Turnover Ratio for CS1. This is because the balance sheets for five consecutive financial years do not show any inventory figures. Further, activity analysis shows that stock control is an issue. CS1’s manager explained the omission of inventory figures from the current assets section of the balance sheet as being a focus mainly on selling time and services rather than selling products. However the statements of financial performance for all financial years reported the purchase of raw materials, labour costs, and other related overheads. Moreover CS1’s manager confirmed that these costs are related to manufacturing of finished products ordered by relevant customers. Therefore the omission of inventory figures affects the real balance sheet. It also indicates that the Inventory control system is not properly practiced in CS1.
Average Collection Period Ratio:
Average Collection Period is a measure of how long it takes a business to convert a credit sale into a cash form. Gitman (2009) and Hatten (2008) discuss that all businesses extending credit must compute this ratio in order to determine the effectiveness of their credit giving to customers and their collection policies. High average collection periods indicate to the business managers, how many uncollectible account receivables must be managed. Here low average collection periods indicate overly restrictive credit policies have been granted to customers.
Throughout five consecutive financial years CS1 collecting of receivables averaged 31.8 days. By comparison, using Trend Analysis, the collection of credit sales in 2007 and 2008 was 23 days faster than 2006, 2009 and 2010. CS1 seems to have had many uncollectible receivables in 2006, 2009 and 2010, with high average collection ratios of 42, 40, and 31 days respectively. The low average collection period of 20 days and 26 days for the periods of 2007 and 2008; may indicate overly restrictive credit-granting policies in CS1. Thus, this inconsistent method of account collection policy is showing a negative impact on cash flow and financial performance.
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Total Asset Turnover
The Total Asset Turnover Ratio measures how efficiently the business uses all of its assets to generate sales. A high ratio generally reflects good overall management. A low ratio may indicate flaws in a business’s overall strategy, poor marketing efforts, or improper capital expenditures (Gitman, 2009; Hatten, 2008; Oliver & English, 2007).
Using the financial data from CS1’’s statement of financial performance and statement of financial position, the researcher computed the total asset turnover ratio via the DuPont analysis system and established the outcome as shown in the graph below.
Total Asset Turnover = Sales Total Assets Activity Ratios: Inventory Turnover Total Asset Turnover 2006 NA 3.07 2007 NA 2.35 2008 NA 3.48 2009 NA 7.50 2010 NA 6.94
Activity Ratios of CS1 (2006-2010)
8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 7.50 6.94
Ratios in times per year
3.07 2.35
3.48 Total Asset Turnover Inventory Turnover
2006
2007
2008 Years
2009
2010
Figure 4.2.2-2: Total Asset Turnover and Inventory Turnover Ratios
The graph shown above demonstrates how efficiently CS1 uses all of its assets to generate sales for each financial period. Based on the figures given on the graph mentioned above, 2006, 2007 and 2008 all have low ratios of 3.07, 2.35, and 3.48 respectively, which indicate flaws in CS1’s business in those years. This may be caused by poor marketing strategy, lack of overall business strategy (i.e. vision, mission, and plan) and other financial factors such as lack of forecasting and budgeting in all areas. The ratios of 2009 and 2010 both show high turnover ratio overall, indicating the efficient usage of all assets to generate volume of sales revenues.
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4.2.3
Leverage Ratios of CS1:
According to Gitman (2009) Leverage Ratios measure the extent to which a firm uses debt as a source of financing and its ability to service that debt. It refers to the magnification of risk and potential return that come with using other people’s money to generate profits. Hatten (2008) states the two important leverage ratios to be considered are the Debt Ratio and Times-Interest-earned.
Debt Ratios
Debt Ratio measures the proportion of a business’s total assets acquired with borrowed funds. The total debt is the combination of short-term debts, long-term debts and other long-term obligations. A high ratio indicates a more aggressive approach to financing and is evidence of a high-risk, high expected-return strategy. A low ratio indicates a more conservative approach to financing (Gitman, 2009; Hatten, 2008)
Debt Ratio = Total Debt Total Assets
Leverage Ratios:
Total Assets Total Liabilities Debt Ratio
2006
$ 254,948 $ 248,539 97% $ $
2007
237,776 271,238 114% $ $
2008
206,825 235,126 114% $ $
2009
132,227 210,272 159% $ $
2010
102,525 154,636 151%
Debt Ratio of CS1 (2006-2010).
160% 151% 140% Percentage of Debt (%) 120% 100% 80% 60% 40% 20% 0% 2006 2007 2008 Years Figure 4.2.3-1: Leverage Ratios of CS1 2009 2010 Debt Ratio 114% 97% 114% 115%
Trend analysis of CS1’s debt ratio as per the graph shown above, demonstrates the proportion of CS1’s total assets acquired with its borrowed funds. There is a concern facing CS1’s owner/manager with regard to its debt ratios throughout these consecutive financial years. The
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incremental analysis of debt ratios indicates that CS1’s business has a very aggressive approach to financing and is evidence of a financial high-risk, associated with a high-expected-return strategy. CS1’s debt ratio also indicates that CS1 has financed 97% of its assets with borrowed funds in 2006. That is, $0.97 of every $1.00 of funding for CS1 has come from debt financing. Moreover, CS1 assumes to be very aggressive in financing its assets from borrowed funds. Between 2007 and 2010 the trend demonstrates the same aggressive approach of financing option, indicated by incremental debt ratios of 114%, 114%, 115% and 151% consecutively.
Time Interested Ratio
Times interest earned ratio is a leverage ratio that computes the firm’s ability to meet its interest requirement. It shows how far operating income can decline before the business will likely experience financial difficulties in servicing its debt obligations. A high Times interest earned ratio indicates a low-risk situation but may also suggest an insufficient use of leverage. A low ratio indicates that immediate action should be taken to ensure that no debt payments will go into default status (Hatten, 2008)
Time Interest Earned = Operating Income Interest Expense 2006 2007 2008 -$ $ $ $ 4,729 5,833 471 6,304 -0.75 $ $ $ $ 4,680 549 9,284 9,833 47.59% 0.48 $ $ $ $ 19 700 26,904 27,604 0.07% 0.001 $ $ $ $
Leverage Ratios: Net Profit/Loss after Depreciation Interest Interest -Other Total Interest Expenses Time Interest Earned (%) Time Interest Earned
2009 6,263 607 37,276 37,883 16.53% 0.17
2010 -$ 17,159 $ $ $ 2,987 2,681 5,668 -3.03
-75.02%
-302.73%
Time Interest Earnedof CS1 (2006-2010)
1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50 -3.00 -3.50 0.48 2006 -0.75 2007 0.00 2008 0.17 2009 2010 Time Interest Earned
Percentage (%)
-3.03 Years
Figure 4.2.3-2: Time Interest Earned of CS1
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In 2006 CS1’s business had a negative operating income of -0.75 times its interest obligations compared to the adjacent financial periods. The worst scenario of time interest earned occurs in 2010, which shows a negative operating income of -3.03 times its interest obligations. This low ratio indicates that CS1 is facing serious financial problems and must not have been able to meet its debt obligations. CS1’s financial manager needed to have taken immediate action to avoid all debt payments being in default status. However, CS1 could have ended up with having to liquidate, caused by its inability to meet debt repayments given its financial circumstances. In order to prevent this, CS1 should have been restructuring and implementing new financial control practices. 4.2.4 Profitability Ratios of CS1:
Gitman (2009) notes that the profitability of a business is an essential factor to be considered by management when forecasting, and planning the business day-to-day operations. Profitability ratios are important measures of the ability of a business to turn its sales into profits and also to earn profits on assets and owner’s equity commitment. Investors, creditors and shareholders all consider profitability to confirm the returns on their investment (ROI) or return on total assets (ROA). They may also assess the financial risks associated with their investment. In this study the following three profitability ratios are used to measure the business financial performance in terms of profitability: Return on Asset (ROA), Return on Owner Equity (ROE) and Net Profit after Taxes (NPAT).
Net Profit after Tax (NPAT)
Net Profit After Tax (NPAT) measures the percentage of sales dollar that remains as profit after all expenses, including taxes have been paid. The NPAT ratio is widely used as a measure of management efficiency. However, a low net profit margin ratio may indicate that expenses are too high relative to sales revenues. Net Profit Margin is computed by dividing the net profit after tax by total sales (i.e. cash and credits).
Net Profit Margin = Net Income Sales
Profitability Ratio
Net Profit Margin (NPM) Net Profit Margin (NPM) Net Profit (Loss) After Tax Sales
2006
-0.60% -0.006 -$ 4,729 $ 782,376
2007
0.84% 0.0084 $ 4,680 $ 559,564
2008
0.003% 0.00003 $ 19 $ 720,410
2009
0.44% 0.0044 $ 4,384 $ 991,222
2010
-2.41% -0.0241 -$ 17,159 $ 711,588
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Net Profit Margin (%) of CS1
1.00% 0.50% Percentage (%) 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% Years -2.41% 2006 2007 -0.60% 0.84% 0.44% 0.00% 2008 2009 2010 Net Profit Margin (%)
Figure 4.2.4-1 Net Profit Margin Ratio of CS1
CS1’s business generated losses of 0.6 cents and 2.41 cents for each $1.00 of sales in 2006 and 2010 respectively. This means that CS1 could not pay its operating expenses, interest and taxes in these two financial periods. CS1 only managed to generate 0.84 cents and 0.44 cents of after-tax profit for each $1.00 of sales made by CS1 in the financial periods of 2007 and 2009 respectively. The NPAT ratios express the high rate of operating expenses inherent by CS1 relative to revenues gained from sales. Therefore the financial manager of CS1 should look at the variable costs with a view to minimising these in a controllable manner. Management accounting techniques such as breakeven point analysis or Cost Volume Profit Analysis should be implemented in order to guide this issue to an acceptable level.
Return on Asset (ROA) and Return on Equity: Return on Investment or Return on Asset
The return on asset ratio (ROA) or return on investments (ROI) indicates the business’s effectiveness in generating profits from its available assets. Return on Assets is literally used to assess the profit-earning performance of the business’s assets. It relates the net profit after tax in the income statement to the assets in the business’s balance sheet. A high ratio on return on asset shows effective management and good opportunities for future business growth. ROA reflects “Operating Decisions” over buying, selling, expense control and asset management. Thus, this ratio should always be examined in conjunction with the gross profit margin and net profit margins (Brealey et al., 2006; Gitman, 2009; Hatten, 2008; Oliver & English, 2007).
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ROA = net profits after taxes total Assets Profitability Ratio Total Assets Net Profit (Loss) After Tax Total Equity Return on Assets (ROA or ROI) Return on Equity (ROE) 2006 $ 254,948 -$ 4,729 $ $ 2007 295,943 4,680
ROE = Net Profit After Tax Owner’s Equity 2008 $ $ 248,971 19 $ $ 2009 184,993 4,384 $ -$ 2010 132,115 17,159
$
6,409
-1.85% -13%
$
24,705
1.58% 19%
$
13,845
0.01% 0.14%
-$
25,279
2.37% -17%
$
22,521
-12.99% -76%
Profitability Ratios of CS1
40.00% 19% 20.00% 0.60% Percentage (%) 0.00% -20.00% -40.00% -60.00% -80.00% -100.00% Years -76% 2006 -13% 2007 2008 2009 -17% 0.84% 0.14% 0.00% 0.44% -2.41% 2010 Return on Assets Return on Equity
Figure 4.2.4-2 Profitability Ratios of CS1
CS1’s net profit/loss after tax margin from 2006 to 2010 represents the combined effects of pricing, the effectiveness of the marketing mix in creating sales, and the control of costs incurred in the process of doing business. CS1’s net profit margin and asset turnover are disclosed, but it is their combined effect on CS1’s business return on assets or investment that matters the most. Net profit for all years is low which indicates that total assets are significantly increased. This causes a drop in the return on assets (ROA or ROI). In theory CS1’s total sales are having the same effect as being reflected from the graph on Figure 4.2.4-2. Moreover, CS1’s business is operating on a low net profit margin to carefully monitor the rate of asset turnover.
According to CS1’s manager the concept of return on investment is not managing effectively in his business context. This statement reflects on the graph shown above which indicates the ineffective
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management of using assets to generate profits within the business. It seems that the ownermanager of CS1 may use the business assets for his own use instead of the business’s financial and operational purposes. In 2006 CS1 imposed a negative ratio on its return on investment that is poor relative to its net profit and gross profit respectively. In fact, the owner/manager of CS1 admits that all personal assets such as computers, lap-top and photocopier are all in an operating lease and also used for business operational activities.
The graph shows that CS1 will have limited opportunity to grow the business in the future due to ineffective management of assets to generate and reinvest profits back into the business. In terms of profit after tax, CS1’s owner-manager withdrew a huge portion of profits for his own use and left almost zero as retained earnings to fund business activity. It can be seen that owner and business are not separate. CS1’s owner admits that the profit generates from business operations, is not a “return on investment”, it is his own share from his hard work within the business. The concept of ‘Return on Investment” is accordingly totally irrelevant in CS1 business context.
Nevertheless, the CS1’s owner-manager suggests that “Return on Investment” means a lot to him personally in terms of flexibility in time and effort to run the business. He gets flexibility in working hours and is able to assist his relatives and friends in terms of remittance of funds and employment. Thus, these attitudes of the owner-manager towards the business create uncertainty for this business’s survival. From the graph in Figure 4.2.4-2, CS1 achieve a negative ratio of 12.99% in 2010 which demonstrates the impact of poor working capital management on business performance. This is a big threat for CS1 to sustain its profitability for growth and its future survival.
According to CS1’s owner-manager the external accountant only prepares financial statements without helping to analyse and interpret the business performance. The financial statements analysis is never used in CS1 business context. Moreover, CS1 offers the Tongan community nonmonetary services without having a good return on business performance. Consequently, CS1’s owner-manager admits that this kind of approach to the business creates huge pressure on him and the family in terms of not being able to meet his business obligations. CS1’s owner-manager says that the business was almost at the point of liquidation and he was almost bankrupt. In fact, the creditors have a greater financial stake in the business than CS1’s owner.
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Return on Equity (ROE)
“Return on Equity” measures the return the business earned on its owner’s investment in the business. The higher the return of equity ratio, the better off financially the business owner will be. The return on equity is highly affected by the amount of borrowed funds (financial leverage) used by the business and so may not provide an accurate measure of management effectiveness (Hatten, 2008).
Net Profit Margin ROA - Return on Assets
×
Asset Turnover
Operating Decisions
ROE -Return on owner's Equity
÷
Owner's Equity Ownership ratio Financing Decisions
÷
Total Assets
Source: Adapted from Western Conventional Model adapted from Oliver & English, 2007, p.112, figure 7.4
Figure 4.2.4-3 Business performance model overview
According to Oliver & English (2007) the return on owner’s equity is like the interest rate on a bank saving account. It represents the interest rate earned by the owner’s investment in the business. The return on owner’s equity ratio is valuable because it allows the business owner to compare the rate of return from the owner’s investment in the business with the returns earned from other investment opportunities. Thus the ROA ratio is a measure of the owner’s investment in the business. It reflects financing decisions having been made as to how much capital has been borrowed and how highly the business is leveraged. The business performance model overview in Figure 4.2.4-3 indicates that there are two types of decision-making affecting the “Return on Equity” ratio of every business. Operating decisions affect the income-producing capacity of the business and reflect in the business’s return on assets. Financing decisions affect the ownership ratio that amplifies the return on assets to arrive at the rate on the funds the owners have invested in the business (Oliver & English, 2007). Therefore, this business performance model analysis (the DuPont system analysis) is used to calculate the
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return on owner’s equity ratio for CS1’s business performance as reflected graphically on Figure 4.2.4-2.
CS1’s ROE is -13%, -17% and -76% in 2006, 2009 and 2010 respectively. These ratios indicate that CS1’s owner funded the business mainly with borrowed funds. CS1’s owner explained that during 2010 he finally realised there were problems with the business and started to get good financial advice and assistance from professionals. Debt financing was reduced significantly and the volume of sales revenues increased. CS1’s owner started to contribute more capital and retained some of the profits in the business. In fact, CS1’s owner realised that equity financing was more critical to increase return on equity, and reduced the business debts that in turn helped to minimise the risk of business failure. 4.2.5 Summary of Talanoa Session with Observation of CS1 (NVivo9-CS1)
Building on the improvements made in 2010, CS1 has put in place some further improvements for the current financial year. CS1’s owner-manager advised that the business is currently looking to raise the percentage per unit sale volume by controlling to a certain percentage advertising and marketing spending, decrease the cost of sales by improving policies and procedures, and reducing administration expenses, refer Appendix 14. The recommended working capital management guidelines for CS1’s business performance are listed in the tables shown in Appendices 15 and 16.
These possible guidelines are prepared for managing of cash, inventory, accounts receivable, accounts payable and business performance. For cash management, it is recommended the forecast short-term cash flows (cash receipts & cash disbursements), and preparing of the cash flows forecast should be taken on a timely basis. Inventory management focused on the optimising of inventory level and production efficiency, increasing inventory turnover, using Just-In-Time inventory order system and stock take process for inventory controlling purpose. Accounts Receivable management focused on the improving of credit and collection process in terms of three elements such as credit policy, sales and collection. Accounts Payable management focused on reconciling the suppliers’ statements and payments should be made on the last date. Business performance is measured by using the key financial ratios such as ROA or ROI, ROE, in order to measure the liquidity, activity ratios, and leverage and profitability ratios via the DuPont Analysis system.
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Chapter 5: Results and Discussion – WCM of Tongan SMEs in NZ
5.1 Introduction
This Chapter discusses the findings from the qualitative research on the impact of working capital management dynamics on the performance of Tongan enterprises in New Zealand. These findings from the Talanoa interviews session are discussed in the context of the financial management of Tongan enterprises in order to provide answers for the primary research question stated in chapter one. The discussion in this chapter is referenced to a number of Talanoa interview sessions with eight Tongan enterprises and a focus group of four Tongan professionals with respect to CS1as analysed in Chapter 4. The confidentiality of these Tongan enterprises and professionals is secured as per the Unitec Ethics Research Committee policy. The methodological structure research shown in Chapter 3 is used as the unique framework to facilitate the discussion in this chapter. Moreover, the discussion in this Chapter is literally linked to the study of CS1’s financial interpretation in Chapter 4, in order to justify the reality and validity of the findings for this research. The combined summary of findings from CS1, Tongan businesses of Group-W and Group-T are listed in Table 5.3.5-1of this Chapter.
5.2
Research Objective
The primary aim for this study is to explore and analyse the Impact of Working Capital Management Components Dynamics on financial performance of Tongan enterprises in New Zealand. The following specific objectives (propositions) have been developed in order to pursue the main aim of this study.
•
Explore how Tongan enterprises manage inventory, account receivables, cash, , account payables and credit policy
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Investigate the various WCM policies, accounting practices and techniques currently employed by Tongan enterprises in New Zealand
•
Develop a conceptual framework model and provide some key recommendations that will improve Tongan SMEs use of working capital management
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Table 5.2-1: List of Tongan SMEs and Professionals for Talanoa Interviews session and Focus Group
Tongan SMEs Category Accounting Firm Financial Services Business Consultancy Retail Coffee Bar Graphic Design Art Gallery Consulting Services Total
Code T1 T2 T3 T4 T5 T6 T7 T8
Number of Employees 6-10 10-20 1 4 3 3 1 12
Number of Tongan SMEs Participants 1 1 1 1 1 1 1 1 8
Focus Group Professionals Business Advisory Business Advisory Business Owner/Manager Chartered Accountant Total
Codes FT1 FT2 FT3 FT4
Number Participants 1 1 1 1
Number of Professionals 1 1 1 1 4
5.3
Managing of Working Capital
This section seeks to emphasise that the concept of businesses’ net working capital is the difference between its current assets and current liabilities within the financial accounting period as defined in Chapter 2. In some Tongan businesses working capital management involves maintaining the appropriate level of current assets such as cash, inventory, accounts receivables and current liabilities such as account payables, to finance the Tongan businesses (Kelly & McGowen, 2010; Keown et al., 2002; Zietlow et al., 2007). Tongan small and medium enterprises included in this study include a small accounting firm, financial services, retailer, graphic design, art gallery, coffee bar and consulting services. These enterprises operate in two specific models of business framework. Some enterprises
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follow the western model of business operation and some Tongan enterprises operate freely in their own Tongan flexible system of business operation in New Zealand. From the findings of this study, they are categorised in terms of the business model (accounting system) they use for business operation as follows. Group -W
Small accounting firm (T1) Financial Services (T2) Retail- Beverage & Food (T4) Coffee Bar (T5) Consulting Services (T3 &T8) Professionals (FT1, FT2, , FT4)
Follows Western Business Framework
W - business Model
Group – T
Graphic Design (T6) Art Gallery (T7)
Business Owner (FT3) Figure 5.3-1: Group -W and Group -T of Tongan businesses Follows Tongan Business Flexible System
T- business Model
Based on the findings from the Talanoa sessions with T6 and T7, the researcher identified the same financial issues found in the CS1 case study discussed in Chapter 4. T1, T2, T3, T4, T5, and T8 follow the western business model of running their own businesses, while T6, T7 and FT3 follow their Tongan flexible system of business operation dynamics. The discussion in this section mainly focuses on the management of the working capital components of the businesses mentioned. This study also identified the same findings that previous authors spelled out in their empirical studies. Kelly & McGowen (2010) explain that the management of current assets involves trade-offs; either too high a level of current assets or too low a level of current assets can create financial impact on the business performance overall. This statement reflects well on the Tongan businesses that are aggressive in using the current assets in all business performance aspects. Moreover, the effective management of Tongan businesses working capital involves making relevant investment decisions with respect to the nature, type and amount of every current asset within their business. Not only that but it depends on the planning and forecasting of cash flow by considering the internal and external financial factors as the percentage of sales method used by the Tongan businesses in group-W who follow the western business model (refer T1, T2, T3, T4, T5 and T8). The Table 5.3-1 below
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demonstrates the actual characteristics of the two groups’ views and systems (Tongan and Western business models) in terms of current assets and current liabilities associated with other business performance, structure and tax issues.
WORKING CAPITAL MANAGEMENT 1 Cash Flow Management Group T Tongan systems and Views (Flexible system) – (T6, T7, FT3) No Cash Budget (Forecast) No operational budgeting, Remittances issue, Cash flow problem arises Cash and Credit transactions Flexible management system of cash No Perpetual Inventory Control Flexible system for stock control in T6 of Group-T, Selling time and services No Credit trade policy, No account collection policy in place, more than 12 months, Bad debts Flexible accounting system for controlling of account payables Flexible accounting policy or procedures Group W Western system and Views (Conventional) (T1, T2, T3, T4, T5, T8, FT1, FT2, FT4) Cash Flow Budget, Cash Receipts and Cash Disbursements, Borrow Cash Shortfall, Distribute Profits Proper system in place for reconciliation and controlling. Motives of holding cash for the reinvestment (Invest excess cash) Inventory Control system, LIFO, FIFO and Weighted Average. Just In Time (JIT) Selling time and services, Costing and analysis Control Accounts, system in place, aging of debtors and credit terms policies in place (30, 60 an 90 days)Aggressive, conservative and defensive policies Control System in place, Motives of holding cash Maintaining good relationship with suppliers Negotiating discounts or other terms to improve cash flows Good processes reduce likelihood of error Interrelationship of WC components such Cash, Raw Materials, Debtors, Finished Goods in a complete ‘Operating Cycle’(Purchasing, Services, Collections, Sales) Cash conversion cycle – (AAI, ACP, APP) Register with Company office. Separate entity, Utilisation of Financial and Management Accounting. Proper business plan implemented and using MYOB for accounting Preparing of Financial Statements, Accounting Entity or Business is a Separate Entity, Measuring of Profitability using Financial Ratios etc Performing Audit program Reinvesting of retained earning Paying taxes based on IRD system
2
Inventory Management
3
Account Receivables Management
4
Account Payables
5
Flexible System of Operating Cycle (i.e. Mixed and Confused) Operating Cycle Incomplete
6
No business plan, using accounting software with limited skills, Combination of owner and business, Business structure & Business Financial Performance Flexible and Unstructured system Measures Business performance by Cash at Bank balances No auditing, No analysis and interpretations of financial performance and position. Cash Flow statement is not prepared Outstanding taxes, GST and FBT are paid irregularly
Table 5.3-1: Characteristics of Tongan and Western models followed by Tongan businesses in New Zealand
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The subsequent discussion on the cash, account receivables, inventory and account payables management and others is focused on the contrast of Tongan and Western business models of managing of their Working Capital Components. The findings from focus group Talanoa session are so relevant in identifying financial management issues and enhancing the impact of working capital management on business performance of Tongan businesses in New Zealand. 5.3.1 Cash Management
Cash is always in the spotlight of every business in order to pay its employees, potential suppliers, accounts payable and also income taxes to the Inland Revenue Department. Businesses owned by shareholders need cash to pay dividends and other obligations. In fact, most businesses nowadays want to hold enough cash to meet unexpected contingencies. However cash has one serious shortcoming compared to other current assets: it earns little or no return (Brigham & Ehrhardt, 2010; Cinnamon et al., 2010). Group– W: (Western business model) In discussion with T1, T2, T3, T4, T5 and T8 business managers/owners that followed the western business model of operating a business here in New Zealand, they explained that cash management is one of the major challenges for them. T1, T2, T5 and T8 stated that good cash management within the business is the fundamental core element in all aspects of their business sustainability. In order to keep up positive cash inflow, relationships with customers must be kept to a high level through the application of proper policy and procedures (NVivo9-T1-105). T1 thoroughly discussed his cash flow forecast (cash budget) that is the important part of his financial planning and controlling of his business operation. He manages to do his projections for all revenues and expenditures at the beginning of the financial year. TI explains that he takes into consideration the Tongan social and cultural factors in constructing the employees cost budget for the financial year (NVivo9-T1-65). T1, T2, T5 and T8 use MYOB accounting software to manage their cash flow and records keeping of the business. In fact, the owners/managers of T1, T2 and T5 are all professional Tongan accountants and members of the New Zealand Institute of Chartered Accountants
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(i.e. NZICA). They are successful in business because they are well educated people with practical experience in the business arena. T2 indicated that his cash reconciliation is carried out at the end of every business day and is the essential part of his cash control system within the business. He said that there is a welldefined procedure in place for all employees to follow in every branch throughout New Zealand and also in Tonga. Where employees do not follow the control mechanism for cash transfers, they normally misused the funds and ended up stealing bulk of cash from their file within the system (NVivo9-T2-141). T2 and T5 reluctantly prefer to use cash accounting only in operating their businesses. According to the discussion during the Talanoa session with them, they suggested that cash accounting transactions are mainly preferred by them and suit their type of business here in New Zealand. It is simple to operate and also avoids credit transactions that are a preferred way of running business back in Tonga. T5 also mentioned that he managed his working capital by not having any accounts receivable in his ledger. He does not want to bother chasing customers for uncollected debts and so does not have any debtors in his business. This is a good practice.T8 advised that he does the same thing in his business because all the capital funds are provided from the New Zealand Government. The type of business he operates is assisting the unemployed people to gain work experiences and skills to enhance their chance in the small and medium enterprise sector.
Managing of Cash more effectively
Cash is conceptualised as the central fundamental element of every business’s operations (Sherman, 2010). Tongan businesses T1, T2, T3, T4, T5 and T8 of Group- W follow the western conventional management system of cash as shown in the Figure 5.3.1-1 below.
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Invest excess cash
Borrow cash shortfall
Cash disbursements
Cash On Hand
Cash Receipts
Distribute profits
Source: adapted from Cash Management for SMEs by Jeffrey D. Sherman, 2010, p. 4 Figure 5.3.1-1: Group - W (Western- Conventional management system of Cash)
In order to manage cash more effectively amongst Tongan businesses of Group-W, there are potential factors to be considered as building blocks for successful cash management. Tongan businesses in Group-W suggest that all Tongan businesses should construct a planning and monitoring cash schedule in order to control cash and prevent loss within the business. T2 and T4 advise that a business should have its own bank account for its own services and other products. They recommend that collecting cash receipts from account receivables is more efficient when using the right techniques and correct accounting policy. The control of the cash disbursements is vital which may help to optimise the operations to reduce cash requirements. Further borrowing and credit transactions must be forecast and also excess funds must be invested as retained earnings for business growth and further expansion when it is needed. According to Sherman (2010) the optimisation of cash management, helps to improve the business’s control system, better manage risk and enhance operations. In fact, improving cash management in Group-W of Tongan businesses will result in increasing their businesses' profits and maximising cash availability or at least reducing bank overdrafts.
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Budgeting and Forecasting- Planning and Monitoring Cash
In the context of cash management, budgets and forecasts are very powerful and useful tools. According to the outcome of Talanoa session with T1, T2, T3, T4, T5 and T8 they are all aware of the need to have a financial plan (budgeting and forecasting) and associated monitoring procedures for cash and cash equivalent in their businesses. They explain that good cash management is very important for managing working capital in the business. If the business does well in marketing and sales to earn revenues, but is not implementing a good cash management system to monitor cash properly, it is a waste of time and effort to run a business here in New Zealand. They recommend a few techniques to follow in managing cash in business. They first suggest the accounting software system should be realistic and simple to monitor and control cash in the business. Cash budget or Forecasts must be prepared at the beginning of the financial year as a roadmap for the business as a whole. T1 explains from the Western business Model perspective that there should be a master budget that controls all factors to be flexible during the financial year when this is needed. Thus this statement is relatively matched up with the suggestion made by Hatten (2008) and Gitman (2009).
Cash Flow Budgeting
Hatten (2008) and Gitman (2009) explain the significance of a cash budget as an important tool in cash management. They mention that main objective of cash budget is to estimate the future cash shortages or cash surplus balances of a business via a forecast of cash receipts and cash disbursements during the financial accounting period. Moreover, a cash budget can possibly highlight future deficiencies and surpluses of cash. A cash budget can accordingly be useful in many ways. T8 explains the importance of having a cash budget up front when he applies for government funds to finance his business. He must have a cash flow forecast in place. He explains that cash budget allows him time to arrange additional financing within the business. It also reveals the amount and timing of surplus cash available for investment in the business. T1, T2 and T5 reveal that cash budgets assist their businesses to forecast and plan the time for debt repayment. Moreover, a cash budget shows the amount of cash available for dividend payments to shareholders (refer T2). The directors of T1 and T2 refer to a cash budget as one
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step in the process of applying the solvency test prior to authorising a distribution to the company shareholders. T3 reveals that the cash budget is useful as a supporting document that may be required by financing institutions (i.e. banks) for loan applications. FT4 supports the above mentioned statement made by T1and T2, i.e. the fundamental need to have cash budget in the business and he extends this concept by suggesting the capital expenditure (Capex) in a business in a similar manner (NVivo9-FT4-100). According to Hatten (2008) and Gitman (2009) the cash budget is normally used for both short-term and long-term planning in a given business. Within the short-term cash budgets may forecast the week ahead and are necessary to break down on a daily basis in order to plan for daily changes in cash account balance. For the medium and long-term cash budgets tend to forecast for at least 6 to 12 months, revealing monthly changes in cash account balances. T1 fully explained the procedures he used for cash flow forecasting and projections of his business expenditures and revenues. T1 uses excel spread-sheets to undertake all projections and budgeting for cash and other operating facilities of his business (NVivo9-T1-67). Group– T: (T- business model) Analysis of the Talanoa session with T6, T7 and FT3 reveal that the system they use to operate their businesses is called WC Flexible System or No System. They just operate their business according to what happens on the business day with the mindset of what they would have proposed to do on the day. They suggest that the nature of their business controls most of their business activities and operations. They are both concentrating on providing services and trying to complete every job on time without worrying about the other side of the business such as managing cash flows. The talents and skills they have persuade them to act in this manner and totally ignore the management of cash inflows and outflows simultaneously.
T6 explains that the WC Flexible system is the key to his business operation. He loves to be flexible in time and effort to do things in his own business. He is very creative and innovative in designing new ideas to match up any business strategy of a given job. In fact, he confesses that WC Flexible system consists of no business plan, no cash flow forecast, no operational or capital budgeting, no cash control policy, and no reserves for business contingencies. Moreover, cash flows are a major problem for his business. He admits that
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Financial Management is a major challenge for his business. He arguably should retain someone to handle all financial matters while he concentrates on marketing and selling services to his customers (NVivo9-T6-34).
Cash Flow Management of Group – T (T6, T7 and FT3)
T6, T7 and FT3 state the nature of the WC Flexible system they use in their business operations creates financial difficulties. Managing cash flows is a major challenge for them. There is no cash budget (forecast) which creates a mixed system of handling of cash within the business. This type of WC Flexible System may apply to the case study (CS1) discussed in Chapter 4 that demonstrates cash flow problems and other financial difficulties. The findings emphasise that WC Flexible System used by Group-T in managing their working capital components (i.e. cash management), causes a major impact on the businesses’ financial performance. This flexible system allows the owner/manager to withdraw a bulk of cash for his own use as owner’s shares from the business.
T6 admits that the balance of his ‘drawing account’ is huge in comparison with the amount of retained earnings re-investing in the business for its own future growth. In fact, the working capital components of his business are not controllable or manageable due to the WC Flexible System he has used to operate his business for so many years. T6 confesses that he almost went into liquidation at one stage due to a shortage in cash inflows to meet his business obligations. Moreover, the view of flexible system of cash management that many Tongan businesses (refer T6, T7 and FT3) advocate in this study has a number of risk implications on the business performance. The conceptual model in Figure 5.3.1-2 demonstrates the view of a Tongan flexible system of cash management in their entrepreneurship.
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Borrow cash shortfall Bank Overdrafts
Cash disbursements
Business Risk Financial Risk “Flexible system Shortterm Liquidity Risk
Cash Receipts
WCM (Cash On Hand)
Ret ained Earnings
Remittances (relatives, community) Distribute profits Drawings as shares (Dividends)
Figure 5.3.1-2: Group- T (Tongan WC Flexible System of Cash management)
Business Risk of Group-T
Gitman (2009) states business risk is the chance that the business will be unable to cover its operating costs. T4 emphasises and supports Gitman’s statement above that business risk would possibly emerge if there are no regulations or clear policies to control business activity (NVvio9-T4-71). T6 spelled out that cash flow has been one of his business risks (problems) for more than five financial years. The cash and credit transactions are both extremely exercised in the business. Thus this study recommends further research on business risk for Tongan business in New Zealand.
Financial Risk of Group-T
Gitman (2009) and Oliver & English (2007) recommend that level of financial risk is driven by the predictability of the business’s operating cash flows and its fixed-cost financial obligations. T4 of Group-W suggests, it is important to get specific financial advice to give appropriate and fair procedures for a business activity to follow (NVivo9=T4-92,
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NVivo9=T4-78). This study recommends that further research is done on financial risk associated with business risk for Tongan businesses in New Zealand.
Short-term Liquidity Risk of Group-T
This study finds that the short-term liquidity risk is related to working capital management of the Tongan businesses in New Zealand. The analysis of short-term liquidity risk requires an understanding of the operating cycle as being explained in Chapter 2 of this study. If a business can delay all cash flows to suppliers, employees, and others until it receives cash from customers, and receives more cash than it must disburse, then the firm will not likely encounter short-term liquidity problems (Stickney, Brown, Wahlen, Baginski, & Bradshaw, 2010).
T6 and T7 of Group-T cannot time their cash inflows and outflows precisely because of the flexible system they use in business. This means that the owner-managers of these two particular businesses require weekly or semi-monthly payments from customers in order to meet their outgoings, whereas their customers may delay payments for more than 30 days. T6 admits that the cash out flows to assist the production of their products in a given financial year can exceed the cash inflows from the lower level of sales of prior financial accounting periods. This inconsistency of cash inflows and cash outflows causes the business to operate at a net loss for a certain financial period. It is frequently found that the interrelationship of the working capital components in the operating cycle results in a net cash outflow instead of a net cash inflow.
Drawings of cash, Remittances and Sharing- Group-T
To recall the drawings concept of cash by the owner from business bank account is for the purpose of remittance made to relatives and communities in Tonga. T1 and T2 of Group-W emphasise the fact that many Tongan businesses usually withdraw cash from their business in order to support their relatives in Tonga in terms of ‘remittance’. T1 categorises ‘remittance’ as default social welfare for many Tongan, and that has a negative impact on the business financial performance (NVivo9-T1-182).
T1 from Group-W and T6 from Group-T agreed that remittance is a kind of sharing in Tonga traditional cultural aspects. It does not matter how serious the future impact on the business
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financial performance is, but it is necessary to help out the relatives and families members in Tonga and also the same here in New Zealand (Nvivo9-T1-154 & 155).
T6 admits that he looks after many members of his family and his wife’s mother back in Tonga. This statement raises an important issue regarding the traditional Tongan social and cultural influences on their business performances. The researcher recommends that there is a need for further research on social and cultural factors that impact on business financial performance (NVivo9-T6-104)
Motives for Holding Cash of Group-W
T1, T2, T3, T4, T5 and T8 of Group-W realise the motives of holding cash for their business everyday operational transactions. In the classical approach, Tongan businesses in Group – W are assumed to hold cash because it is a medium of exchange that can be used to carry the everyday business transactions. According to Keynes (2006) there are three motives behind the demand for cash (i.e. money) in every business; Transactions motive Precautionary motive or ( Safety motive) Speculative motive (Keynes, 2006) Keynes (2006) explains that the transactions motive is to hold cash for the everyday business operational transactions. T6 and T7 of Group-T say that the transaction motive is determined primarily by the level of people’s transactions and it is proportional to their income. Some cash balances in Tongan businesses like other businesses are needed to pay for certain predictable obligations as they fall due, such as employees’ wages, suppliers’ bills and taxes to the Inland Revenue Department of New Zealand.
Keynes (2006) believes the safety (or precautionary) motive is also needed in addition to holding money (cash) to carry out current business transactions. As not all day-to-day payments are predictable, some additional cash balances are needed to allow for unforeseen cash needs. For Tongan businesses, these funds could be invested in interest-earning marketable securities that are transferred into cash as the need arises (NVivo9-T2-25).
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Keynes (2006) believes that the mount of precautionary cash balances, business people want to hold is determined primarily by the level of transactions that they expect to make in the future and that these transactions are proportional to income. Thus, T1 and T2 excel the same perception the ‘Keynes (2006)’ postulates, the demand for “precautionary cash balances” are proportional to income. Consequently, Keynes (2006) suggests that cash is the store of “wealth” and called this a reason for holding cash the speculative motive. In fact, a few Tongan businesses (refer Group-W) may maintain additional funds (cash) in interest-earning marketable securities in order to take advantage of unexpected investment opportunities as they arise. Thus the speculative motive for Tongan businesses is to take advantage of potential investment whereas the precautionary motive relates to unforeseen operating and financing needs.
Overcoming a ‘Cash Flow Problem’ of Group-T
However the findings from the Talanoa sessions with T1 of Group-W suggest potential steps to optimise cash inflows and decelerate cash outflow for Tongan small businesses in New Zealand. Thus T1 finally recommends the possible ways of managing cash flows to avoid liquidity risk in the Tongan businesses in New Zealand and are listed in Appendix 12 (NVivo9-T1-53).
Oliver & English (2007) supports the above findings from Talanoa session with Tongan businesses of Group -W to overcome a cash flow problem. If the business cash flow remains positive there is no need for concern. If the business bank balance drives into negative, these are the following suggested options to be considered. 1. Shorten the operating cycle - Increase the efficiency of Operating Cycle’s components and reduce the cash committed to them. Increase the stock-turnover and reduce the average age of trade debtors (account receivables), while maintaining the same level of sales. This requires more aggressive collection of account receivables and tighter control of inventory level 2. Increase the net profit margin - This can be done by increasing price, reducing cost of sales, reducing operating expenses. 3. Reduce the sales volume - Reduction in sales volume decreases the investment in the working capital components of the operating cycle. One way to slow down sales
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while increasing both Net Profit Margin and cash flow is to selectively increase prices. 4. Increase the trade payables - Stretch payments to suppliers beyond the selling terms. This may risk business reputation. 5. Short-term borrowing - Short-term borrowing of cash is used to finance temporary increases in working capital. 5.3.2 Inventory Management
Inventory constitutes the central element of the production cycle. This production view is applied to services and manufacturing simultaneously. Inventory may be purchased for resale or there may be a production process that converts inventory received into another form of inventory for subsequent sale (Sherman, 2010).
Purchase
Inventory
Sale
Raw Materials
Work in progress
Finished Goods
Figure 5.3.2-1: Production cycle adapted from Sherman 2010, p.73
In this study only FT4 and T5 of Group-W and T6 of Group-T are involved in buying and selling physical stock (i.e. beverage and foods). These businesses mainly involve cash transactions. FT4 advocates the importance of inventory, to have a proper perpetual control system to monitor and manage inventory in the business. FT4 actively follows the western conventional model of inventory management as nominated by Arnold (2008) in Figure 2.4-1of Chapter 2. FT4 of Group-W discussed in the Talanoa session the actual perpetual inventory system to monitor and control its stocks (NVivo9-FT4-56).
Just-In-Time Inventory Ordering Technique
FT4, T4 and T5 recommend the Just-in-Time method of ordering inventory for their businesses. According to Sherman (2010) Just-in- time is an approach to managing inventory that strives to minimise inventory of raw materials and WIP by receiving raw materials
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inventory as it is required. Using the Just-in Time inventory ordering system would be useful for all businesses to enhance and monitor the availability of the inventory level in the business. It helps to reduce the amount of carrying costs tied up in stock that in turn may increase the cash flow of operating activities in the business. Following up from the previous discussion of cash flow, Just-in-time is recommended to control the level of inventory in the business. T4 notes that Just-in-Time is also effective at exposing bottlenecks in their beverage and food business activity. FT4 supports T4’s perception with his comment as follows: “........We do. We do it. But it is more order form and its managed by us, probably my father, he does the ordering. And he knows what he needs; we have a bit of forecasting of what’s coming up. And especially with it being a bit tough on cash flow and you don’t hold too much stock because you can order quickly (NVivo9-FT4-58)”.
Perpetual Inventory System
Kirkwood et al., (1986) discuss the critical parts of costing and controlling of inventory level in a given business. They note that western perpetual inventory techniques such as Last-InFirst-Out (LIFO), First-In-First-Out (FIFO), Weighted Average (WA) and Actual (identifiable) have been exercised inevitably in many SMEs. A perpetual inventory system allows much greater control over the inventories and it is generally recognised to be the best (Kirkwood et al., 1986). In this study FT4 and T5 adopt the Weighted Average Cost method. It is assumed that inventory items are completely intermingled and so a new weighted average cost price is calculated after each item of purchase. FT4 comments that the Weighted Average Cost method is used to calculate the costs attributed to the sale and the closing inventory balance (NVivo9-FT4-64, 62 & 119).
o Flexible system for Stock Control in T6 of Group-T
T6 of Group-T fails to control its inventory due to improper perpetual inventory techniques implemented in the business. This is linked to the WC Flexible system adopted by this particular business to manage its working capital. The closing inventory figure is not recorded due to there being no stock take at the end of the financial year. T6 admits that
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there is no stock control system and that this aspect of financial management is totally ignored. T6 does not know that looking after its trading stock is an important element of the Operating Cycle and has a major influence on cash flow. FT2 of Group-T argues that some of the Tongan businesses are having a challenge in deciding the right stock to be ordered (NVivo9-FT2-66). FT1 comments that some Tongan businesses in New Zealand ignore the significance of management and financial accounting in keeping the records of business transactions. This means that there is no accounting system in place to keep the records of inventory in some Tongan businesses in New Zealand (NVivo9-FT1-68).
o Selling Time and Services – Group-W
Most of the Tongan businesses of Group-W and Group-T are actively selling time and services as inventory in their businesses. These Tongan businesses sell services instead of tangible goods. T1 and T2 discuss the fundamental elements of costing and budgeting for the variables and fixed costs involved in the work-in-progress of their professional services. In the Talanoa session T1 articulates the western process of inventory management process. This particular business starts the professional services by designing the services in their normal practices and also minimises levels of services (inventory) required. Every service has to be allocated to staff as purchase orders just like in a retail and manufacturing business. Once the job order is received then the costing process is calculated for each job. Finally the accounting process is produced using MYOB for the particular job and then followed by the billing process and mailing the bill to customers.
o Costing and Analysis of Inventory or Services of Group-W
Sherman (2010) notes there is a need for inventory costing system to track business inventory cost in order to determine the profitability of particular products or services and customers. Costing is an important element in small business to control jobs and make them more efficient. T1 of Group–W follows the conventional costing system according to regulations and accounting standards. Cost and management accounting is fully utilised in the business for costing and records keeping of its professional services (NVivo9-T1-53).
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o
Informal Costing System of Group-T
The findings from the Talanoa session with T6 of Group-T are that he formulates his own informal costing system to calculate jobs and projects from potential customers. Despite informality of the costing system T6 states that labours hourly rates, direct materials and overheads are still considered for costing of jobs and projects.
T6 and T7 consider that some Tongan businesses are not interested in costing because of its complexity. They are mainly focused on cash inflow rather than considering the significance of jobs or projects costing. FT4 of Group-W reveals that the costing practices of many Tongan businesses depend on the nature and size of their businesses (NVivo9-FT4-119). 5.3.3 Account Receivables Management
Credit and Collection
According to Kelly & McGowen (2010) accounts receivable represent what credit customers owe the firm. Allowing customers to buy on credit can significantly increase sales. As the discussion of the cash budget in Chapter 2 shows, credit sales can create cash flow problems because they delay the receipt of cash the business needs to meet its financial obligations. All credit customers who pay late or do not pay at all only exacerbate the problem. Credit and Collections can be broken down into three main elements credit, sales and collections, and there are specific processes for each element.
CREDIT Elements Processes Setting credit policy Evaluating customer credit and setting credit limit
SALES
COLLECTIONS
Prompt fulfilment and Invoicing Accurate and up-to-date customer records
Prompt follow-up of accounts Alternative payments channels: cheque, credit cards, electronic funds, direct, debits etc
Agreed and understood terms and conditions
Source adapted from Sherman, 2010. p. 67
Figure 5.3.3-1: Credit and Collection Techniques for SMEs
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Sherman (2010) states that each process has the potential to improve (reduce) accounts receivables balance if done “thoughtfully”. T4 of Group-W suggests that Sales are the essential element of the operating cycle that drives the business activity to achieve ‘breakeven point’ in order to cover the cost of sales and then generates profit as the ‘bottomline’(NVivo9=T4-76).
Credit Trade Policy and Collections of Group-W
According to T1, T2 and T5 of Group-W, it is important for Tongan businesses in New Zealand to have a well thought-out policy that balances the advantages of offering credit with the costs. T1 thoroughly explains the working capital policies used in his business that follows 100% the Western Conventional Method of managing accounts receivable. Kelly & McGowen (2010) suggest the key elements of the Western Credit Trade Policy should include:
•
Setting credit terms: For how long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments? T1 of Group-W in this study emphasises the significance of setting credit terms giving 21 days to pay and 5% discount as an incentive system for customers to pay their payments promptly (NVivo9T1-57).
•
Establishing credit standards: How should the business decide which customers qualify for credit? What type of credit information should it require, and how strict should its standards be? T1 allows the ageing of debtors to be factored into the account receivables management process in terms of 30, 60 and 90 days associated with 5% discount respectively (NVivo9-T1-92 & 93).
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Deciding on an appropriate collection policy: How aggressive should the business be at collecting past-due accounts? At what point does it make sense to take (or at least threaten to take) legal action against late-paying customers or to turn over the accounts to collection agencies? T1of Group-W also discusses that his business has an aggressive policy for the collection of account receivables. Old bad debts are then written off as per his business credit standards and collection policy (NVivo9-T1- 95 & 107).
Credits selection techniques of T1 of Group-W
From previous accounting experiences and his education T1 suggests a few selected techniques of deciding the credit allowance to be given to customers. Credit selection is
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given based on their characters, capacity, capital they own, collateral assets available for use and their economic circumstances. According to Gitman (2009) five credits selection techniques as standards to be implemented in every business as follows:
Table 5.3.3-1: Credit Selection and Standards
1. Character 2. Capacity
Regards the applicant’s record of meeting past obligation Checks the applicant’s ability to repay the requested credit, emphasis on cash flows and debt ratios to assess the applicant’s capacity in order to meet obligations Considers the financial strength of the applicant as reflected by its ownership position (i.e. analyse the applicant’s debt relative to equity and profitability ratios) considers the amount of assets the applicant (customer) has available for use in securing the credit Checks the current economic and business climate (i.e. credit transactions)
3. Capital
4. Collateral. 5. Conditions
Source Adapted: Gitman (2009. p. 612-613)
Gitman (2009) and Hatten (2008) discuss that business will sometimes contemplate changing its credit standards in order to improve returns and greater value for shareholders or owners equity.
‘Smart Fee Model’ for Account Receivables Collection of T1- Group-W
T1 suggests that an essential aspect of managing accounts receivable is using a unique collection method known as the Smart Fee Model. Under this Smart Fee Model the customers can open an account with them and randomly drops in small amount of cash as a reserve for future payment. Once the account is due for payment then the amount is deducted from this particular account balance at the point of time (NVivo9-T1-136).
‘NO’ Account Receivables for FT4, T2 and T8 of Group-W
T2, T8 and FT4 do not have accounts receivable in their businesses because they solely trade in cash. T8’s business is totally funded from the Government. FT4 says that having a zero balance for accounts receivable is vital in order to avoid any cash flow problem within the business. He does, however, lend money to relatives and these cash loans can be difficult to collect (NVivo9-FT4-111).
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‘NO’ Credit Trade and Collection Policy for T6, T7 and FT3 of Group-T
The concept of the WC Flexible System used in T6, T7 and FT3 of Group-T’s businesses has an unplanned credit trade policy and unstructured collections strategy. T6 admits that the age of accounts receivable causes cash flow difficulties in the business. FT3 schedules the collection of account receivables for the 20th of every month but unfortunately fails to keep it up consistently. Moreover, huge amounts of accounts receivable are being written off as Bad debts due to being outstanding for more than six months (NVivo9-FT3-42). 5.3.4 Account Payable Management
By comparison, Account Payables analysis is more complex than that of Accounts Receivable since the accounts payable relates to both cost of sales and to expenses. In order to analyse the account payables more accurately, the management accounting team should look at the inventory purchases instead of cost of sales and expenses excluding salaries and wages (Sherman, 2010).
Maintaining Good Relationships with Suppliers (Creditors) of Group-W
T1, T3, T4, T5, T8 and FT4 of Group-W, are very concerned to manage their account payables in order to maintain good relationships with their creditors. In terms of maintaining their good relationship with suppliers, the negotiation of discounts, target market and system are taken into account in order to improve their cash flows. Consequently, they are consistently paying their creditors mainly on the 20th of every month (NVivo9-FT4-76).
Good Accounting Records System of Group-W
All the Tongan businesses of Group-W are currently using proper accounting software such as MYOB and XERO, in order to record their business accounting transactions. This accounting practice helps them to record and manage every transaction in a proper financial and managerial accounting system. Thus financial statements are prepared as from source documentation up to the final accounts including the analysis of the financial position (NVivo9-T5-64& 90).
Account Payables Control Account of Group –W (i.e. Control System in place)
The Accounts Payable Control Account is part of the main control account system practices by the Tongan businesses of Group-W who are following the Western Conventional Model of financial accounting records system (NVivo9-T5-90).
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WC Flexible accounting system for controlling of account payables of Group-T
Many owners-managers of Tongan businesses are not concerned about managing accounts payable. The flexible system used by T6 and T7 causes a big challenge for them in order to control their accounts payable properly. T6 states that Money Works accounting software is used for their accounting records system but it is limited. Despite this challenge, T6 and FT3 of Group-T attempt to pay their creditors on the 20th and 26th of the month respectively. The main issue that arises is the cash inflow in order to settle all the accounts payable outstanding balances (NVivo9-FT3-72).
Operating Cycle
Sherman (2010), Arnold (2008) and Gitman (2009) state that the Operating Cycle is a series of activities that continually transform the interrelationship of working capital components mainly cash, inventory, accounts receivables and accounts payables. Cash is the ‘King’ is the main central element of this operating cycle. The Operating Cycle repeats itself continuously, if there are no bottlenecks to restrict its flow. To recall the operating cycle discusses in Chapter 2 of this study, the conceptual model of the potential Operating Cycle is represented as follows:
CASH
PURCHASING
SERVICES
RAW MATERIALS
ACCOUNTS RECEIVABLE / PAYABLES COLLECTIONS SALES FINISHED GOODS
(Source; Adapted from Arnolds. 2008:530)
Figure5.3.4-1: Operating Cycle of Working Capital Components
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Interrelationship of Working Capital Components of Group-W
The Operating Cycle model in Figure5.3.4-1 is applied to the Tongan businesses of GroupW. T4 and T5 carry out retailing of beverage and food and selling of coffee in the forms of this Operating Cycle. In the Talanoa session T4 and T5 discuss the significance of understanding the interrelationship of working capital components in the operating cycle. T4 suggests that when bottlenecks do happen in the operating cycle, they cause a stop and start reaction disrupting a smooth flow in the processes of purchasing and selling goods. Because their businesses operate a cash only businesses ‘Cash is the King’ (NVivo9=T4-76 & 96).
o Cash conversion cycle- ( AAI, ACP, APP) of Group-W
Sherman (2010) states that cash is transformed into inventory (i.e. stock) and services via the purchasing process of the cycle, but the impact is delayed by supplier credit. Inventory is transformed into accounts receivable (i.e. debtors) by selling on credit. Accounts receivables are transformed back into cash when payment is collected from customers.
T4 discussed the impact of the other working capital components on cash flow of the business. For example, if the collection of accounts receivable from customers slows down then cash will dry up. The purchase of inventory will be affected and is reduced. T4 and T5 note that once purchases have been cut, sales will decline when inventory runs out. However when the business has to carry too much stock it is going to affect the cash flow and put much more pressure on the business financial performance.
The objective of cash flow budgeting discussed in section 5.3.1 is to keep the operating cycle running smoothly. Consequently, the shorter the operating cycle, the less cash is required to invest in inventory and accounts receivable and it is easier for the owner-manager to maintain cash flow (Oliver & English, 2007). T1, T2, T4 and T5 support the concept of ability to control the length of the operating cycle that plays the essential part in cash flow management (NVivo9=T4-74).
‘WC Flexible System’ of Operating Cycle (i.e. Mixed and Confused) of Group-T
The operating cycle of T6 and T7 of Group-T is totally a mix and match concept and very confused system of managing its working capital components. It is unstructured and very complex to follow in terms of working capital management. From the findings of the focus group using the Talanoa approach FT3 discuss the embeddedness of socio-cultural
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characteristics of Tongan people involved in starting a business in the Western Commercial paradigm. Many Tongan businesses preserve Tongan social status in the way they are run. It is hard for Tongan businesses to separate the personal effects from the business entity. Thus this is called a Tongan WC Flexible System of Operating Cycle of business (refer Figure 5.3.1-2) (NVivo9-FT3-21).
FT3 recommends that Tongan business people should keep separate their social and cultural status from the way they run their business in order to become successful here in New Zealand (NVivo9-FT3-21). This study finds out that the influence of socio-cultural traditional Tongan status on business success and failure is a huge area needing future study. 5.3.5 Summary and Conceptual Models of WCM impacts on Performance
Palangi or Western Conventional Model of Group-W
‘Financial Performance’ is a measure of performance such as profit or rate of return on assets that is based upon applying generally accepted accounting principles (GAAP) (Deegan & Samkin, 2006). Under the Western Conventional Model used by T1, T2, T3, T4, T5 and T8 of Group-W, their business financial performance is measured in terms of profitability analysing the key ratios of Net Profit After Tax (NPAT), Return on Investment (ROI) and Return on Equity (ROE). Therefore the business performance analysis of CS1 discussed in Chapter 4 shows how Tongan businesses of Group-W analyse and measure business performance using financial ratios in the ‘Palangi way or Western Conventional Model’ (NVivo9-FT2-23) .
Other Related Accounting Concepts impact on Tongan SMEs
Financial and Managerial Accounting concepts are completely practiced by the Tongan businesses of Group-W in preparing of their accounts. T1, T2, T4 and T5 emphasise the significance of other related business concepts prior to Working Capital Management in the Tongan business. These financial and managerial concepts are known such as accounting entity or business is a separate entity, business planning and budgeting, succession planning, financing of business (debt and equity), understanding of the business concepts (business model), capital investment, and advantages of using information technology system. They are considered to be very critical in order to control and manage the working capital components in the Tongan businesses.
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•
Business is a Separate Entity or Accounting Entity
The Accounting Entity concept regards the business as being a separate entity from the owners. All business transactions are recorded from the viewpoint of the business and the owners are kept as separate outsiders. Therefore ‘business is a separate entity’ or an ‘accounting entity’(Kirkwood et al., 1986).
T1, T2 and T4 of Group-W discussed the fundamental aspects of keeping the Tongan businesses activities separate from the owners’ books of accounting systems. This proposal is supported by FT4 from the Tongan Professionals’ ‘Focus Group’ Talanoa session. Thus the following comments from T1 and FT4 represents their view of an accounting entity being a separate legal entity (NVivo9-T1- 31, 214 & NVio9-FT3-17). FT2 emphasised that all Tongan entrepreneurs should be taught in the Tongan community to understand the significance of business concepts. It is not a sudden element of life but it is a separate entity to be strategically planned and implemented with correct accounting practices and appropriate procedures (NVivo9-FT2-102).
•
Business Planning and Budgeting
The concepts of business planning and budgeting are the essential elements of starting of a business. They help the owners-managers of small businesses to work smarter rather than work harder. The business plans are categorised into three main types such as Marketing plans, Operating plans and Financial plans (Oliver & English, 2007). T1 explains that Tongan businesses should have a Marketing plans that is all about identifying and satisfying market segments and their needs, and finally creating a strong competitive advantage (NVivo9-T1-213). Operating plans are concerned with day-to-day operations, work flows and efficiency of Tongan businesses. T1, T2, T3, T4, T5 and T8 suggest that financial plans are used for budgeting and quantifying the marketing and operation plans in dollar amounts. Moreover, planning assists the owners-managers of Tongan businesses to avoid viewing the future in a negative aspect (NVivo9-T8-10).
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The concept of Business Planning enables Tongan businesses (refer Group-W), to recognise problems and seek quick assistance from business advisers such as PBT and the Tongan Council Advisory Committee. Business planning assists in reaching the target of smooth growth to avoid future crises. T1 emphasises that business planning and budgeting help Tongan businesses to monitor and control business performance to achieve business goals.
•
Financial Structure - Debt and Equity Financing
Business financing is a huge area for Tongan SMEs in New Zealand. It is a challenge for Tongan SMEs to decide the right proportion of finance needed for their businesses. According to T1 and T2 many Tongan businesses (refer Group-W), are heavily reliant on equity finance for starting their businesses. It is really hard for them to gain access to debt financing from other financial institutions due to the high financial risk of their businesses. Thus T2 suggests that Tongan businesses should be aware of the financial risk when using debt financing in regards to their affordability of debt servicing (NVivo9-T2-113).
The concept of Equity Financing is mainly practiced by the Tongan businesses in New Zealand. In equity financing the owner advances their capital in the business with the expectation of a good return on investment. This is a permanent part of the capital structure. The business owners can increase the equity capital by investing more of their money in the business (Oliver & English, 2007). T2 discusses the importance of equity financing for Tongan business in New Zealand. There is a need for further research on Financial Structures for Tongan business in New Zealand or in a Western Commercial Paradigm (NVivo9-T2-25 & 117).
Conceptual model of WC Flexible System of Group-T impacts on Performance
This section is linked to the case study of CS1 discussed in Chapter 4 in terms of business financial performance. In fact the outcome of CS1 case study discussed in Chapter 4 demonstrates that similar findings emerge from the Talanoa Interview sessions and focus group with the Tongan businesses and Professionals of Group-T. Moreover this section also identifies the impact of the WC Flexible System of Group-T on business financial performance and completes a conceptualised model.
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According to the findings from the Talanoa session with Tongan Professionals many Tongan businesses follow this WC Flexible System of working capital management traditionally. Their businesses have financial problems and fail to survive for a long period of time. The WC Flexible System seriously influences the financial performance of their businesses. Thus based on the findings and discussion of Tongan WC Flexible System in this Chapter and CS1 discussed in Chapter 4 the researcher has developed a conceptual model for Tongan businesses of Group-T (refer to T6, T7 and FT3) and CS1 case study (refer Chapter 4).
Accounts Payable Accounts Payable Bank Overdrafts (Borrow cash shortfall)
Accounts Payable Cash disbursements
Business Risk Financial Risk “Flexible system
Inventory WCM (Cash On Hand) Account Receivables, Cash Receipts
Liquidity Risk
Remittances (relatives, community)
Retained Earnings
Distribute profits
Drawings as shares (Dividends)
Figure 5.3.5-1: Tongan WC Flexible System
However the following table demonstrates the combined findings from the Talanoa sessions with Group-T (refer Chapter 5) and CS1 (refer Chapter 4) in contrast with the findings emerge from the Talanoa sessions with Tongan businesses of Group-W (refer Chapter 5).
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Table 5.3.5-1: Combined Findings from Talanoa sessions WORKING CAPITAL MANAGEMENT 1 Cash Flow Management
Findings from Group T and CS1
Findings from Group W
References
No business plan in place, No Cash Budget (Forecast) No Operational budgeting,, Drawings of Cash and Remittances Cash flow problem arises , Cash and Credit transactions Flexible management system of cash
Cash Flow Budget, Cash Receipts and Cash Disbursements, Borrow Cash Shortfall, Distribute Profits, Proper system in place for reconciliation and controlling. Motives of holding cash for the reinvestment (Invest excess cash)
Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W
2
Inventory Management
3
Account Receivables Management Account Payables Management
No Perpetual Inventory Control Flexible system for stock control in T6 and T7 of Group-T, Selling time and services, Informal Costing System No Credit trade policy, No account collection policy in place, more than 12 months, No Account Receivables Control Accounts Bad debts Flexible accounting system for controlling of account payables Flexible accounting policy or procedures
Inventory Control system, LIFO, FIFO and Weighted Average. Just In Time (JIT) Selling time and services, Costing and analysis Control Accounts, system in place, aging of debtors and credit terms policies in place (30, 60 an 90 days)- Aggressive, conservative and defensive policies Control System in place, Motives of holding cash Maintaining good relationship with suppliers Negotiating discounts or other terms to improve cash flows Good processes reduce likelihood of error Interrelationship of WC components such Cash, Raw Materials, Debtors, Finished Goods in a complete ‘Operating Cycle’(Purchasing, Services, Collections, Sales), Cash conversion cycle – (AAI, ACP, APP) Register with Company office. Separate entity, Utilisation of Financial and Management Accounting. Proper business plan implemented and using MYOB for accounting
Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1, Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W
4
5
Operating Cycle
Flexible System of Operating Cycle (i.e. Mixed and Confused) Unstructured and Incomplete, Cash conversion cycle is a challenge No business plan, using accounting software with limited skills, Combination of owner and business, Flexible and Unstructured system
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Business structure & Business Financial Performance
Measures Business performance by Cash at Bank balances No auditing, No analysis and interpretations of financial performance and position. Retained Earnings is not consistent Cash Flow statement is not prepared Outstanding taxes, GST and FBT are paid irregularly
Preparing of Financial Statements , Accounting Entity or Business is a Separate Entity, Measuring of Profitability using Financial Ratios etc Performing Audit program Reinvesting of retained earning Paying taxes based on IRD system
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Chapter 6: Research Conclusion and Recommendations
6.1 Introduction
This Chapter provides the final conclusions of the research findings. These findings have been achieved on the basis of financial analysis of a case study and discussion from the results of Tongan SMEs and Tongan professionals in New Zealand via the traditional Talanoa Approach and NVivo-9 qualitative analysis software. The findings assist in providing answers to the primary question set out in Chapter 1. The primary research question for this research study is how do Tongan enterprises in New Zealand manage their Working Capital Components in terms of performance? Following the recommendations for further study with regard to Tongan SMEs Working Capital Management in New Zealand, the suggested recommendations are given based on the findings from Talanoa sessions with Tongan businesses of Group-W, Group-T outlined in Chapter 5 and CS1 case study discusses in Chapter 4. 6.2 Research Conclusions
As discussed in Chapter 1that Tongan SMEs contribute to the New Zealand economy in various businesses profiled such as accounting firms, retail, financial services, art gallery, business consultancy, graphic design and communication. Chapter 1 discussed the characteristics of SMEs in New Zealand in contrast with the definition of SMEs in other countries. It also briefly outlined the overview of financial management in relation to SMEs in New Zealand. Consequently it identified the portion of ‘Working Capital Management Components’ such as Cash, Inventory, Accounts Receivable, Accounts Payable and Operating Cycle that are chosen to be analysed and their impact on Tongan SMEs financial performance. These ‘Working Capital Management Components’ have been discussed in the context of the literature in Chapter 2. The contribution of this study is now discussed. Firstly it includes the combination of Talanoa and NVvio9 (refer section 6.2.1) as a potential qualitative approach for SMEs research in business context (refer Chapter 3). Secondly the development of theory and conceptual model of Tongan SMEs WCM as discussed in Chapter 5 (refer section 6.2.2). Thirdly the empirical contributions to the literature of SMEs ‘Working Capital Management’ are discussed in Chapters 4 and 5 (refer section 6.2.3).
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6.2.1
Combination of Talanoa and NVivo9 as Qualitative Approach for SMEs
The combination of Talanoa and NVivo9 Approach is recognised as a potential qualitative approach for further research of SMEs (i.e. Tongan SMEs). Chapter 3 discusses the Talanoa Approach as a means to move beyond the description and to generate or discover a theory, an abstract analytical schema of a process similar to Grounded Theory. Talanoa Approach has been used in many previous studies in various areas in the academic and business context (Halapua, 2007; Otsuka, 2005; S. Prescott, 2009; Thaman, 2002; Vaka'uta, 2009). Talanoa and NVivo9 are used in this particular study to collect data, and the analysing and coding process of the qualitative data.
The Talanoa Approach is an unstructured system of Pacific oral communication. Despite the unstructured characteristics of Talanoa Approach, the researcher considers it to be a systematic and constructive approach that depends on the nature of the businesses context involved in this particular study. The systematic approach requires that the researcher investigates to develop a theory systematically, to explain a process, action, or interaction on any interested topic of research. The systematic approach typically involves conducting a few interviews based on several visits to the field for assembling data to saturate the categories, or seeking information to add-on until there is no more to be found. The researcher collects data and analyses observation and produce documents from the data immediately.
The constructive approach of Talanoa depends on the researcher’s views, learning about the experience within embedded, hidden networks, situations, and relationships, and making visible hierarchies of power, communication, and opportunity. This constructive approach places emphasis on the views, values, beliefs, feelings, assumptions, and ideologies of individuals rather than on the methods of research (Halapua, 2007; Otsuka, 2005; Thaman, 2002; Vaka'uta, 2009). The discussion of NVivo9 is also undertaken in Chapter 3. OSR International, the developer of NVivo9, advocates only to provide the researcher with a set of tools that will assist the researcher in understanding an analysis of qualitative data (Bazeley, 2007). In NVivo9, conceptual maps, flow charts, or purely exploratory diagrams can be created using the modelling tool, and are generically referred to as models. The NVivo9 software is used to
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assist the researcher in the concept-building process and also helping with the organising of the conceptual framework development of working capital management for enterprises. The NVivo9 software is used in this study to organise data in a systematic manner and to recognise patterns lying between the data (Bazeley, 2007). Consequently, the combination of Talanoa and NVivo9 Approach is a potential contribution to SMEs research context.
6.2.2 Conceptual Model of WC Flexible System of Tongan SMEs on Performance
This section is linked to the case study of CS1 discussed in Chapter 4 in terms of business financial performance. In fact the outcome of CS1 case study discussed in Chapter 4 demonstrates that similar findings emerge from the Talanoa Interview sessions and focus group with the Tongan businesses and Professionals of Group-T. Moreover this section also identifies the impact of the WC Flexible System of Group-T on business financial performance and completes a conceptualised model.
According to the findings from the Talanoa session with Tongan Professionals many Tongan businesses traditionally follow this WC Flexible System of working capital management. Their businesses have financial problems and fail to survive for a long period of time. The WC Flexible System seriously influences the financial performance of their businesses. Thus based on the findings and discussion of Tongan WC Flexible System in Chapter 5 and CS1 discussed in Chapter 4, the researcher has developed a conceptual model for Tongan businesses of Group-T (refer to T6, T7 and FT3) and CS1 case study (refer Chapter 4) as shown in Figure 5.3.5-1.
6.2.3 Empirical Contributions (Group-W, CS1 Case Study and Group-T)
Cash Flow Management Section 5.3.1 discusses the current practices and policies employed by the Tongan SMEs of Group-W and Group-T respectively. In fact that Tongan SMEs of Group-W employed the ‘Western Conventional Model’ of managing WCC in their businesses.
In managing cash in Group-W they consistently construct cash flow budgeting consisting of cash receipts and disbursements. This helps to manage cash flow more effectively throughout the day-to-day operation of the business. The concept of budgeting and planning are always considered by these Tongan businesses of Group-W in order to monitor their cash
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position from weekly and monthly basis in relation to the master budget of both operating and capital expenditure (Capex). Motives of holding cash are seriously employed by these Tongan businesses of Group-W, in terms of transactions motive, precautionary motive and speculative motive. These techniques of motives of holding cash provide assistance in monitoring cash transactions in the day-to-day business operation. It also saves additional cash for the safety of the business operation and any unexpected obligation in the future. MYOB and XERO accounting software are both well presented as useful accounting package for their businesses financial and managerial records keeping.
The Tongan SMEs of Group-T and CS1 case study both employed an informal accounting practice in managing of cash flow in their businesses. This informal accounting system is known as WC Flexible System model of managing WC in Group-T and CS1. The nature of this WC Flexible System is inconsistent and unstructured. The concept of cash flow budgeting is not considered. Simultaneously controlling and planning need not be accounted for in this WC Flexible System. The WCM impact on business performance is much riskier, with the expectation of business failure. The business and financial risks include the drawings of cash, short-term bank overdraft and remittances and sharing are recognised to be the most nuances of the impact on Tongan businesses performance. Section 5.3.1 also discusses recommendations from the findings to overcome the cash flow problem of GroupT and CS1.The Tongan businesses of Group-T use the Moneyworks accounting software for recording of business transactions. Finally the cash portion of retained earning is rarely reinvested into the business capital structure. Inventory Management Section 5.3.2 discusses the relevant accounting practices employed by the Tongan SMEs of Group-W, CS1 and Group-T to monitor inventory in their businesses. This Group-W splits the Tongan SMEs into two categories namely services and retail. But they still follow the Western Conventional Model of managing WCC in their businesses.
The findings from this Group-W state that T4 and T5 use the Weighted Average method for perpetual control inventory system in their retail businesses. In section 5.3.2 this also includes the concept of inventory which is the central element of the production cycle as Figure 5.3.2-1. Just-In-Time is recommended to be the suitable method of ordering inventory
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for ‘retail’ businesses in Group-W and T6 of Group-T. In fact Tongan businesses of Group-T (refer T6), still use the WC Flexible System for managing of its inventory. Thus there is no appropriate perpetual inventory control system to monitoring stock of Tongan SMEs of Group-T. This means that the concept of financial and management accounting techniques and practices are not properly executed by this Group-T. The costing system used by GroupT is also informal and privately owned because of its flexibility. Moreover the costing and analysis of inventory and services of Group-W is an important element in their businesses. It provides a need for an inventory system to track and determine the profitability of particular products or services and customers. MYOB and XERO accounting software are suitable for Inventory management of Group-W. In control system of inventory, the monthly stocktaking process is systematically carried out in order to achieve the closing balance of inventory in every month. Accounts Receivable Management Section 5.3.3 discusses the practice and techniques employed by Tongan SMEs of Group-W, and Group-T respectively. The discussion focuses firstly on credit trade policy and collection of accounts from potential customers. The specific processes and elements of credit, sales and collections are considered in this section. Following the suggestion from Group-W that sales is the essential element of his business operating cycle which drives the business activity to achieve break-even point in order to cover coast of sales and then generates out profit for the business growth.
Group-W discussed the credit and collection techniques for SMEs. Setting up a credit policy and evaluating customers for credit limit are very important. In relation to sales the process of prompt fulfilment and invoicing of customer are recommended to be accurate and the customers’ records always kept up-to-date. Consequently agreed and understood terms and conditions of credit sales are critical. Under the collections process accounts receivable should be followed up promptly and regularly. Alternative payment options are recommended to be simple and costless such as issuing of cheques or electronic funds etc.
Kelly & McGowen (2010) suggest that the key elements of the ‘Western Credit Trade Policy’ should include, setting credit terms, establishing credit standards and deciding on an appropriate collection policy. This questions how aggressive should the business be at
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collecting past due-accounts. Tongan businesses of Group-W adopt the aggressive policy of debtors’ collection process. Gitman (2009) suggests that five main credits selection techniques as standards for both small and medium enterprises such as character, capacity, capital, collateral and conditions of debtors.
Section 5.3.3 also discusses that there is no accounts receivable for FT4, T2, and T8 of Group-W. They normally carried out their business activities on a cash basis only. The financing of T8 business is subsidised from government grants. Thus the zero balance of accounts receivable is exercised in their businesses. Findings from Talanoa sessions with T6, T7 and FT3 of Group-T recall the WC Flexible System reflects the unplanned credit trade policy and unstructured collections strategy in their businesses. This means that there is no credit trade and collection policy for Tongan SMEs of Group-T. Thus Group-T notes that cash flow problem and creation of bad debts are recognised to be negatively impact on their businesses performance. Accounts Payable Management Section 5.3.4 discusses that ‘accounts payable’ analysis is quite complex than the ‘accounts receivable’. In analysing accounts payable more accurately, the management accounting team of the business should look at the inventory purchases instead of cost of sales and expenses excluding ‘salaries and wages’ (Sherman, 2010).
Findings from Group-W Talanoa sessions emphasise the significance of maintaining relationships with potential suppliers or creditors. The negotiation of discounts, target market and system are very important to be considered in order to improve cash flows. Thus the payment date is recommended to be on the very last day of the payment schedule. MYOB and XERO are actively presented to keep the records of all accounts payable and the accounts payable control account. Most of the Tongan businesses of Group-T are not concerned about the management of accounts payable. This is reflected on the WC Flexible System they use, which results in uncertain cash inflow to settle all the accounts payable on time. Operating Cycle According to Sherman (2010), Arnold (2008) and Gitman (2009) the Operating Cycle is a series of activities that continually transform the interrelationship of working capital
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components. It is measured in elapsed time by summing the average age of inventory (AAI) and the average collection period (ACP). Gitman (2009) discusses that ‘Operating Cycle’ is the time from the beginning of the production process to collection of cash from the sale of finished goods. It is algebraically formulated in the equation as follows: OC = AAI +ACP.
‘Cash is the King’ it is the central element of the Operating Cycle in every business. Section 5.3.5 discusses the interrelationship of the working capital components of Tongan SMEs of Group-W and Group-T. T4 suggests that when bottlenecks occur in the Operating Cycle, they cause a stop and start reaction that disrupts the smooth flow of the Operating Cycle in the purchasing and selling of finished goods. The Cash Conversion Cycle (CCC) is the operating cycle less the average payment period. It is algebraically written as: CCC = OC – APP or CCC = AAI + ACP –APP. It represents the amount of time the business’s resources are tied up (refer Figure 2.4.6-1)
Findings from Talanoa sessions with Tongan SMEs of Group-T discuss the WC Flexible System of Operating Cycle of business (refer Figure 5.3.5-1). FT3 discusses the embeddedness of Tongan socio-cultural characteristics in the Operating Cycle causes the bottlenecks of the working capital management in their businesses. Consequently Operating Cycle has been conceptualised in terms of WCM indicates the embeddedness of sociocultural factors (refer Appendix 13). • Business Financial Performance
Section 5.3.6 discusses the two conceptual models, the Western Conventional Model and WC Flexible System of WCM utilised by the Group-W, CS1 and Group-T in this study. It also discusses the impact of WCM on the financial performance of the Tongan businesses. According to Deegan & Samkin (2006) that financial performance is a measure of performance such as profits or return on assets (ROA) which is based upon applying generally accepted accounting principles (GAAP).
Findings of Talanoa sessions with Tongan SMEs of Group-T suggested that performance is measured by ‘cash at bank account balance’. It is also measured with the volume of disposal income and revenue received from the business activities. The bank account balance acts as the measuring tool for cash flow statements in the Tongan SMEs. Thus the cash flow
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statement is never prepared. Financial analysis and interpretations of financial performance and position are never carried out in the Tongan businesses studied. The discussion of CS1 in chapter 4, suggested that the financial ratios analysis using the DuPont system is suitable for Tongan SMEs. The financial results of CS1 discusses in chapter 4 create recommended financial plan for WCM of any Tongan SME operating in the Western Commercial Paradigm (refer Appendices 7 & 16).
The primary research question is focused on the impact of working capital management on performance of the Tongan operating in New Zealand. Thus the findings from the case study and Talanoa sessions with Tongan businesses answers the research question with respects gaps to fill in Tongan business literature. 6.3 Limitations of the Study
This study is a qualitative research using the Pacific Traditional Talanoa Approach and NVivo9 qualitative software to collect the data from eight Tongan SMEs, and four Tongan professionals. A Talanoa session was also carried out with one business owner-manager as a case study (refer CS1). The purpose of ‘case study’ is to verify the validity and reliability of collective data, using key financial ratios to analyse and explore its WCM impacts on the financial performance. A combination of Talanoa and NVivo9 sessions were also conducted within the Tongan church kava ceremonies in order to triangulate the essence of data relation to Tongan business context, focused on WCM.
The participants involved in this research were chosen from a number of Tongan SMEs via New Zealand Tongan Business Council (NZTBC) in 2011. The participants for the focus group were chosen from a number of Tongan professionals throughout the Tongan community in Auckland. The challenge of this study is the willingness of the participants to involve in this business research. Not only that but the limited numbers of Tongan SMEs operating in New Zealand. This particular study is intended to explore the current policies and techniques of Working Capital Management (WCM) employed by the Tongan SMEs in New Zealand. Consequently some of the Tongan businesses currently followed the Western Conventional Model of managing Working Capital in their businesses and some Tongan businesses employed their own WC Flexible System as per findings and discussion in chapter 4 and 5.
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6.4
Future Research Opportunities
This study has identified some key areas for further research in order to fill the gap for Tongan SMEs research in the Western Commercial Paradigm such as New Zealand. The following bulleted points are recommended for further study using both qualitative and quantitative approaches in relation to Tongan SMEs operating in New Zealand. • • • • • • • • • Socio-Cultural Factors impact on Tongan SMEs performance in New Zealand Human Resources Management practices of Tongan SMEs in New Zealand Marketing Management practices of Tongan SMEs in New Zealand Environmental factors affect Tongan SMEs operation in New Zealand Success and failure of Tongan Entrepreneurship in New Zealand Taxation Compliance of the Tongan SMEs in New Zealand Financial and Management accounting of the Tongan SMEs in New Zealand Business risk management is a challenge for Tongan businesses in New Zealand. Financial Structure for Tongan business in New Zealand or in a Western Commercial Paradigm. Closing Statement
6.5
Working Capital Management (WCM) practices and techniques are very important for Tongan SMEs operating in the western commercial paradigm. This study provides the awareness of the Tongan owners-managers in relation to the fundamental role played by the components of WCM in any form of business operation in New Zealand. The findings from the Talanoa sessions with Tongan business owners accomplished the aim of this study as discussed in chapter 1 focusing on the components of WCM such as cash, inventory, accounts receivable, accounts payable and their interrelationship within the Operating Cycle. T1, T2, T3, T5, FT1, and FT2, recommend the government website for all businesses; http://www.business.govt.nz/starting-up/cash-flow-forecasting, as a very useful website for all small and medium enterprises in New Zealand. This website provides all relevant information for starting up a business, managing and growing of a business here in New Zealand. It also provides information about compliances related to any type of small and medium enterprises and how to construct a business plan with comprehensive template for a cash flow forecast and other related financial forecasts. It also provides procedures in how to
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deal with cash flow problems in a business and demonstrates step-by-step how to calculate break-even point for sales of any product in the business.
The findings also helped to develop the two conceptual models of WCM for the Tongan businesses and Western Conventional Model as discussed in chapter 5 and 6 (refer Appendix 13). These conceptual models demonstrate the dynamics of the WC components within the business operating cycle. This study has addressed the issues of ‘WC Flexible System’ for managing of working capital components, leading for business risks, financial and liquidity risks in relation to performance. Finally the findings from this study may assist financial policy providers and accountants for Tongan businesses in New Zealand and other western countries.
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Appendix 1A: Information for participants
Date: 2 February, 2011
Dear Sir/Madam,
Project: “The Impact of Working Capital Management Dynamics on Business Performance of Tongan Enterprises in New Zealand”
My name is Feletiliki Kefu Manisela Finau. I am writing to invite you to participate in my academic research project that I am conducting as part of the requirement for a Master in Business Management that I am doing through Unitec Institute of Technology of New Zealand. Your agreement to take part in this research project will be greatly appreciated. Participation is voluntary and confidential. The purpose of this research is to understand the current business practices around Working Capital Management that are used by the Tongan Small and Medium Enterprises’ (SMEs) in Auckland. This research will therefore, analyze how the five chosen Working Capital Management Components: (1) Cash; 2) debtors or account receivables; 3) stock or inventory; 4) accounts payables and 5) operating cycle; impacts the business performance of Tongan Small and Medium Enterprises’ (SMEs) in Auckland. In order to pursue the main aim of this study, the following specific objectives have been identified: • To investigate the various working capital management practices and techniques that are currently employed by Tongan SMEs in Auckland • To explore how Tongan SMEs integrate the five working capital management components identified above in the equation of the ‘Operating Cycle’ • Finally, to develop a conceptual model and to provide some key recommendations that will improve Tongan SMEs use of working capital management The result of this research will provide some key recommendations that will assist Tongan Small and Medium Enterprises (SMEs) operating in Auckland and in New Zealand in order to enhance their financial management and maximization of profit and growth. Your participation will involve in a focus-group among five to seven Tongan professionals from the Tongan community here in Auckland. The focus group will be facilitated by the researcher in the Pacific way of Talanoa session. The focus-group will take approximately 45-60minutes. The venue for the focus-group will be held at the Unitec Institute of Technology of New Zealand. I will also seek your permission to allow me to tape record the Talanoa session in which I will later transcribe. All features that may or could identify you will be removed. All information collected will be stored in a lock and secure place and will only be accessible to the researcher and his supervisors. If you agree to participate, you will be asked to sign a consent form. This will not stop you from changing your mind if you wish to withdraw from the project. However, because of our schedule, any withdrawals must be done within 2 weeks after I have collected data from the focus-group. Your name and information that may identify you will be kept completely confidential. All information collected from you will be stored on a password protected file and only you, the researcher and my supervisors will have access to this information. All participants in this research project will be identified ONLY by code reference without disclosing the organisation’s or participant’s name.
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This study has been approved by the Unitec Research Ethics Committee (UREC). If you have any concerns regarding this research project, please feel free to contact or notify the: UREC Secretary Research Office Building 180, Room 3008 Unitec New Zealand Private Bag 92025 Auckland Ph. 815 4321 ext 6162 Email: [email protected] For more information about this project, please contact me or my supervisors. Our contact details are noted below. Principal supervisor: Dr Helen Mitchell, Department of Management and Marketing Faculty of Creative Industries and Business Unitec Institute of Technology Private Bag 92025 Auckland, New Zealand 64 9 815 4321 Ext 7011 Email: [email protected].
Yours sincerely, ............................
Feletiliki K.M Finau
BCom (Accounting & Finance) - University of Auckland PGDipBus, GDipProfAcc – UNITEC Institute of Technology of New Zealand Master Student Department of Management and Marketing Faculty of Creative Industries and Business Unitec Institute of Technology Auckland, New Zealand Telephone: 64 9 815 4321, Home: (09) 818 3908, Mobile: 021-0234-5545 Email: [email protected] or [email protected] UNITEC RESEARCH ETHICS COMMITTEE REGISTRATION NUMBER (UREC): 2011-1151 This study has been approved by the UNITEC Research Ethics Committee from (29/03/2011) to ( 28/03/2012 ). If you have any complaints or reservations about the ethical conduct of this research, you may contact the Committee through the UREC Secretary (ph: 09 815-4321 ext 6162). Any issues you raise will be treated in confidence and investigated fully, and you will be informed of the outcome.
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Appendix 1B: Participant consent
Participant consent form Title of Project: “The Impact of Working Capital Management Dynamics on Business Performance of Tongan Enterprises in New Zealand” Project Supervisors: Dr Helen Mitchell (Principal Supervisor) Andrew Slessor (Associate Supervisor) Researcher: • Feletiliki Kefu Manisela Finau (aka Fredrick Finau)
I have had the research project explained to me and I have read and understood the information sheet given to me. I understand that I do not have to be part of this if I do not want to and I may withdraw at any time prior to the completion of the research project. I understand that everything I say is confidential and none of the information I give will identify me. The only persons who will know what I have said will be the researcher and their supervisor. I also understand that all the information that I give will be stored securely on a computer at Unitec for a period of 5 years. I understand that my discussion with the researcher will be taped and transcribed by the researcher. I understand that I can see the finished research document if I choose to. I have had time to consider everything and I give my consent to be a part of this project.
•
•
•
• •
Participant Signature: ………………………….. Date: ……………………………
Project Researcher: ……………………………. Date: ……………………………
UREC REGISTRATION NUMBER: 2011-1151 This study has been approved by the UNITEC Research Ethics Committee from ( 29/03/2011) to ( 28/03/2012). If you have any complaints or reservations about the ethical conduct of this research, you may contact the Committee through the UREC Secretary (ph: 09 815-4321 ext 6162). Any issues you raise will be treated in confidence and investigated fully, and you will be informed of the outcome.
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Appendix 1C: Approval letter from Unitec Ethics Research Committee
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Appendix 2: Assumptions of the main paradigms
Assumption Ontological Question What is the nature of reality What is the relationship of the researcher to what is researched? What is the process of research? Positivist (Quantitative) Reality is objective and singular, apart from the researcher Researcher is independent from that being researched Deductive process, Causes and effect Static design categories isolated before study Context-free. Generalisations leading to prediction, explanation and understanding Accurate and reliable through validity and reliability Source: Creswell (1997, p.5) Phenomenological (Qualitative) Reality is subjective and multiple as seen by the participants in a study Researcher interacts with that being researched
Epistemological
Methodological
Inductive process, Mutual simultaneous shaping of factors Emerging design categories identified during research process Context-bound. Patterns, theories developed for understanding
Accurate and reliable through verification
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Appendix 3: Philosophical Assumptions for Qualitative Inquiry
Assumption 1.Ontological Question What is the nature of reality? Characteristics) Reality is subjective and multiple, as seen by participants in the study Implications for Practice Research uses quotes and themes in words of participants and provides evidence of different perspectives Researcher collaborates, spends time in field with participants, and becomes an “insider” Researcher only discusses values that shapes the narrative and includes his or her own interpretation in conjunction with the interpretations of participants Researcher uses an engaging style of narrative, may use firstperson pronoun, and employs the language of qualitative research Researcher works with particulars (details) before generations, describes in detail the context of the study, and continually revises questions from experiences in the field Researcher tries to consolidate the views and experiences together of participants Researchers and participants are both in a state of mutual simultaneous shaping and it is impossible to distinguish causes from effects
2.Epistemological
3.Axiological
What is the relationship of the researcher and that being researched? What is the role of values?
Researcher attempts to lessen distance between himself or herself and that being researched Researcher acknowledges that research is value-laden and that biases are present
4.Rhetorical
What is the language of research?
Researcher writes in a literary, informal style using the personal voice and uses qualitative terms and limited definitions Researcher uses inductive logic, studies the topic within its context, and uses an emerging design
5.Methodological
What is the process of research?
6.Generalizability
What is the possibility of generalisation?
Aiming of inquiry is to develop an unique body of knowledge in the form of working strategies that describe the individual case
7.Casual linkages
What is the possibility of causal linkages?
Source: (Creswell, 2006; Guba & Lincoln, 1988; Lincoln & Guba, 1985)
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Appendix 4: DuPont System
Sales revenues $
minus
Cost of goods sold $ Income statement Net profit after taxes $
minus
Operating expenses
divided by
Net Profit Margin %
Sales $
minus
Interest expense $
multiplied by
Sales $ Current Assets $
Return on Assets % (ROA) Total Asset turnover
plus
No-current assets $ Balance sheet Current liabilities $
divided by
Total assets $
multiplied by
Total Liabilities $
Total liabilities & shareholders’ equity = total liabilities Financial leverage multiplier
Return on Equity % (ROE)
plus
plus
Interest expense $ Shareholders’ equity $
divided by
Ordinary shareholders’ equity $
Source: Adapted from Gitman (2009, p.66)
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Appendix 5: Results of CS1 Financial Statements Analysis
Current Ratio = Current Assets Current Liabilities
Quick ratio = Current assets – Inventory Current Liabilities
Liquidity Ratios:
Current Ratio Quick Ratio Short fall %
2006
1.04:1 1.04:1 0
2007
0.98:1 0.98:1 2%
2008
1.11:1 1.11:1 0
2009
0.75:1 0.75:1 25%
2010
0.77:1 0.77:1 23%
Liquidity Ratios of CS1 (2006-2010)
1.20 1.00 0.80 Ratios 0.60 0.40 0.20 0.00 2006 2007 2008 Years Figure 4.2-1: Current and Quick Ratios of CS1 ACP = Account Receivable Ave Sales per day 2009 2010 1.04 1.11 0.98 0.75 0.77
Current Ratio: Quick Ratio
Account Payment Period =Account Payable Ave purchase per day
Inventory turnover = Cost of Goods Sold Inventory
Activity Ratios:
Inventory Turnover Total Asset Turnover Average Collection Period (ACP) Average Period Payment (APP)
2006
NA 3.07 42 179
2007
NA 2.35 20 165
2008
NA 3.48 26 152
2009
NA 7.50 40 256
2010
NA 6.94 31 50
Activity Ratios of CS1 (2006-2010).
300 Number of Days 250 200 150 100 50 0 2006 2007 2008 Years Figure 4.2-2: Activity Ratios of CS1 2009 2010 42 20 26 40 31 50 179 165 152 Average Collection Period Average Payment Period 256
104
Total Asset Turnover = Sales Total Assets Activity Ratios: Inventory Turnover Total Asset Turnover 2006 NA 3.07 2007 NA 2.35 2008 NA 3.48 2009 NA 7.50 2010 NA 6.94
Activity Ratios of CS1 (2006-2010)
8.00 7.00 Ratios in times per year 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2006 2007 2008 Years Figure 4.2-3: Total Asset Turnover and Inventory Turnover Ratios Debt Ratio = Total Debt Total Assets 2009 2010 3.48 3.07 2.35 Total Asset Turnover Inventory Turnover 7.50 6.94
Leverage Ratios:
Total Assets Total Liabilities Debt Ratio
2006
$ 254,948 $ 248,539 97% $ $
2007
237,776 271,238 114% $ $
2008
206,825 235,126 114% $ $
2009
132,227 210,272 159% $ $
2010
102,525 154,636 151%
Debt Ratio of CS1 (2006-2010).
160% 151% 140% Percentage of Debt (%) 120% 100% 80% 60% 40% 20% 0% 2006 2007 2008 Years 2009 2010 Debt Ratio 114% 97% 114% 115%
Figure 4.2-4: Leverage Ratios of CS1
105
Time Interest Earned = Operating Income Interest Expense Leverage Ratios: Net Profit/Loss after Dep Interest Interest -Other Total Interest Expenses Time Interest Earned (%) Time Interest Earned -$ $ $ $ 2006 4,729 5,833 471 6,304 $ $ $ $ 2007 4,680 549 9,284 9,833 47.59% 0.48 $ $ $ $ 2008 19 700 26,904 27,604 0.07% 0.001 $ $ $ $ 2009 6,263 607 37,276 37,883 16.53% 0.17 2010 -$ 17,159 $ $ $ 2,987 2,681 5,668
-75.02% -0.75
-302.73% -3.03
Time Interest Earnedof CS1 (2006-2010)
1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 -2.50 -3.00 -3.50 0.48 2006 -0.75 2007 0.00 2008
0.17 2009 2010 Time Interest Earned
Percentage (%)
-3.03 Years
Figure 4.2-5: Time Interest Earned of CS1 Net Profit Margin = Net Income Sales
Profitability Ratio
Net Profit Margin (NPM) Net Profit Margin (NPM) Net Profit (Loss) After Tax Sales
2006
-0.60% -0.006 -$ 4,729
2007
0.84% 0.0084 $ $ 4,680 559,564
2008
0.003% 0.00003 $ $ 19 720,410
2009
0.44% 0.0044 $ $ 4,384 991,222
2010
-2.41% -0.0241 -$ $ 17,159 711,588
$ 782,376
Net Profit Margin (%) of CS1
1.00% Percentage (%) 0.00% 2006-0.60% 2007 -1.00% -2.00% -2.41% -3.00% Years 0.84% 0.44% 0.00% 2008 2009 2010 Net Profit Margin (%)
Figure 4.2-6: Net Profit Margin Ratio of CS1
106
ROA = net profits after taxes total Assets Profitability Ratio Total Assets Net Profit (Loss) After Tax Total Equity Return on Assets (ROA or ROI) Return on Equity (ROE) 2006 $ 254,948 -$ 4,729 $ $ 2007 295,943 4,680
ROE = Net Profit After Tax Owner’s Equity 2008 $ $ 248,971 19 $ $ 2009 184,993 4,384 $ -$ 2010 132,115 17,159
$
6,409
-1.85% -13%
$
24,705
1.58% 19%
$
13,845
0.01% 0.14%
-$
25,279
2.37% -17%
$
22,521
-12.99% 76%
Profitability Ratios of CS1
40.00% 19% 20.00% 0.60% Percentage (%) 0.00% -20.00% -40.00% -60.00% -80.00% -100.00% Years -76% 2006 -13% 2007 2008 2009 -17% 0.84% 0.14% 0.00% 0.44% -2.41% 2010 Return on Assets Return on Equity
Figure 4.2-7: Profitability Ratios of CS1
Key Financial Ratios
Liquidity Ratios
(Working Capital ratio) or Current Ratio = Current Assets Current Liabilities Inventory Turnover = Cost of Goods Sold Inventory Total Asset turnover = Sales Total Assets Debt Ratio = Total Liabilities Total Assets Net Profit Margin = Net Profit Margin Sales Quick Ratio = (Current Asset – Inventory) Current Liabilities ACP = Account Receivable Ave Sales per day APP =AP /Ave purchase per day Time Interest Earned = Operating Income Interest Expense Return on Asset = Net Profit After Tax Total Assets Return On Equity = Net Profit After Tax Ordinary Shareholder Equity
Activity Ratios (efficiency) Leverage Ratios Profitability Ratios
Key: CA = current asset, CL = current liabilities, COGS = Cost of goods sold, I = Inventory, AP = Account Payable, AR = Account Receivable, TA = Total Assets, TL = Total Liabilities, NPAT = Net Profit After Tax, OSHE = Ordinary shareholders’ equity, ACP = Account collection period, APP = Account payment period, GPM = Gross profit margin, NPM = Net profit Margin,
Table 6.5-1 Key ratios for Working capital and performance utilisation
107
Sales Other Income Overseas Work Total Income Opening Stock Purchases (Materials Cost) Media Bookings Labour Costs (Direct Wages) Direct Costs Hireage Subcontracts Total Costs (COGS) Closing Inventory Gross Profit Margin Other Income Interest Received TOTAL INCOME OPERATING EXPENSES: Selling & Distribution Expenses General Administration Expenses Financial Expenses Total Operating Expenses Net Earnings before Depreciation Depreciation Adjustments Net Profit/Loss after Dep Income Tax Expenses Net Profit (Loss) After Tax
Name of Communication Co. (CS1) Statement of Financial Performance for the year ended 31 March __________ 2006 2007 2008 2009 $ 782,376 $ 559,564 $ 720,410 $ 991,222 $ 26,561 $ 13,744 $ 1,854 $ 294,335 $ $ $ $ $ 808,937 $ 573,308 $ 722,264 $ 1,285,557 $ $ 1,075 $ $ $ 274,410 $ 144,906 $ 155,221 $ 121,368 $ $ $ $ 239,821 $ 322,512 $ 172,820 $ 170,480 $ 191,176 $ 21,764 $ 95,665 $ 115,233 $ 57,819 $ $ 400 $ $ 1,050 $ 12,881 $ 20,080 $ 227,297 $ 618,686 $ 427,747 $ 461,014 $ 838,531 $ $ $ $ $ 190,251 $ 145,561 $ 261,250 $ 447,026 $ 579 $ 190,830 $ $ $ $ $ $ -$ $ -$ 12,016 157,881 7,361 177,258 13,572 18,301 4,729 4,729 $ 17,386.00 $ 162,947 $ 15,221 $ 91,024 $ 20,525 $ 126,770 $ 36,177 $ 31,497 $ 4,680 $ $ 4,680
108
$ $ $ $ $ $ $ $ $ $ $ $ $ $
2010 711,588 11,944 700 724,232 145,630 144,756 131,816 35,656 224 94,039 552,121 172,112
$ 14,202.00 $ 275,452 $ 15,570 $ 208,333 $ 35,369 $ 259,272 $ 16,180 $ 16,161 $ 19 $ $ 19
$ 431.00 $ 447,457 $ 49,641 $ 330,487 $ 45,131 $ 425,259 $ 22,198 $ 15,935 $ 6,263 $ 1,879 $ 4,384
$ 3,201 $ 175,313 $ 36,459 $ 118,896 $ 25,409 $ 180,764 -$ 5,451 $ 11,708 -$ 17,159 $ -$ 17,159
Name of Communication Co. (CS1) Statement of Financial Position for the year ended 31 March __________ 2006 CURRENT ASSETS: ASB Accelerator Account ASB Business Saver Account RWT Paid Loan to Staff Account Receivables Other Debtors CS1 shareholder advances Deferred Interest Total Current Assets NON-CURRENT ASSETS: Fixed Assets as per Schedule Investments ASB Term Investment Total Non-Current Assets TOTAL ASSETS EQUITY: Share Capital Shareholder Contributions Retained Earnings TOTAL EQUITY $ $ $ $ 100 3,700 2,609 6,409
109
2007 $ $ $ $ $ $ $ $ $ 14,112 31,418 192,246 237,776 $ $ $ $ $ $ $ $ $
2008 1 22,512 51,542 132,770 206,825 $ $ $ $ $ $ $ $ $
2009 1,303 72 22,512 108,340 132,227 $ $ $ $ $ $ $ $ $
2010 2 22,512 60,544 19,467 102,525
$ $ $ $ $ $ $ $
66 113 90,813 14,112 87,832 550
$ 193,486
$
50,781
$
47,108
$
30,947
$
41,298
$
29,590
$ $
10,681 61,462
$ $ $
11,059 58,167 295,943
$ $ $
11,199 42,146 248,971
$ $ $
11,468 52,766 184,993
$ $ $
29,590 132,115
$ 254,948
$ $ $ $
100 24,605 24,705
$ $ $ $
100 13,745 13,845
$ $ -$ -$
100 25,379 25,279
$ $ -$ -$
100 22,621 22,521
2006 CURRENT LIABILITIES ASB Cheque Account GST Owing Account Payable Provision for Income Tax (Taxation Payable) FBT Payable PAYE Payable Current portion of term Loans Total Current Liabilities NON-CURRENT LIABILITIES: Loan - Pacific Business Trust Hire Purchase- Fuji Xerox Limited Hire Purchase - Power Book HP -CW2000 HP -Laptop 2 MTF Leasing Limited Prepaid Interest - MTF Leasing Prepaid Interest Hire Purchase - CW2000 LTD (Server) Prepaid Interest - HP (Server) Less Current Portion Loan - Lt Total Non Current Liabilities TOTAL LIABILITIES TOTAL EQUITY & LIABILITIES $ $ $ $ $ $ $ $ $ $ $ $ 39,280 16,462 7,543 63,285 $ $ $ $ $ -$ $ $ -$ -$ $ $ $ $ $ $ 7,594 24,929 $ $ $ $ $ $ $ $
2007 7,052 28,050 65,452 3,876 18,549 76,257 44,023 243,259 $ $ $ $ $ $ $ $
2008 6,631 42,430 64,731 4,176 19,949 49,068 23,848 210,833 $ $ $ $ $ $ $ $
2009 35,883 84,998 6,585 22,615 26,981 177,062 $ $ $ $ $ $ $ $
2010 53,090 19,448 20,115 1,552 24,013 14,192 132,410
$ 134,945 $ $ $ $ 4,025 13,761 -
$ 185,254
43,827 5,032 2,532 16 21,618 991 44,023 27,979 271,238 295,943
$ $ $ $ $ $ $ $ -$ -$ $ $ $ $
30,864 10,888 11 23,848 6,400 24,293 235,126 248,971
$ $ $ $
22,094 3,513 1,620
$ $ $ $ $
15,334 501 9 6,400 22,226 154,636 132,115
-$ -$
310 107
$ -$ $
$ $ $ $ $ $
6,400 33,210 210,272 184,993
$ $ $ $ $ $
$ 248,539 $ 254,948
110
Financial Ratios Analysis of CS1 (2006 -2010) 2006 Liquidity Ratios: Current Ratio Quick Ratio Activity Ratios: Average Collection Period (ACP) Average Period Payment (APP) Average Purchase per day Total Asset Turnover Leverage Ratios: Debt Ratio Total Assets Total Liabilities Interest Interest -Other Total Interest Expenses Time Interest Earned (%) Profitability Ratio Return on Assets (ROA or ROI) Return on Equity (ROE) Net Profit Margin (NPM) Ordinary Shareholders' Equity Average Sales per day $ 97% $ 254,948 $ 248,539 $ $ $ 5,833 471 6,304 -75.02% -1.85% -74% -0.60% -$ 22,521 1,950 -$ $ $ $ $ $ $ 114% 237,776 271,238 549 9,284 9,833 47.59% 1.58% 19% 0.84% 25,279 2,716 $ $ $ $ $ $ $ 114% 206,825 235,126 700 26,904 27,604 0.07% 0.01% 0.14% 0.003% 13,844 1,974 $ $ $ $ $ $ $ 159% 132,227 210,272 607 37,276 37,883 16.53% 2.37% -17% 0.44% 24,705 1,533 $ $ $ $ $ $ $ 151% 102,525 154,636 2,987 2,681 5,668 -302.73% -12.99% 76% -2.41% 37,476 2,143 $ 1.04 1.04 days 42 179 751.81 3.07 $ 2007 0.98 0.98 days 20 165 397.00 2.35 $ 2008 0.98 0.98 days 26 152 425.26 3.48 $ 2009 0.75 0.75 days 40 256 332.52 7.50 $ 2010 0.77 0.77 days 31 50 398.99 6.94
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Appendix 6: Summary of Talanoa Session with Observation of CS1
Main Themes Sub-Themes • • Financial Management Working Capital Management Policy • • • • Liquidity Ratios of CS1 Current Ratio of CS1 • • Quick Ratio of CS1 Activity Ratio of CS1 Average Collection Period (ACP) of CS1 Average Payment Period (APP) of CS1 Total Assets Turnover Debt Ratio of CS1 Time Interest earned ROA, NPAT, ROE Description of Views and Ideas No Business Plan in Place No WCM Policy system for this CS1 Financial and Management accounting are challenge for CS1 No CASH Budget No operating and Capital Budget Investing in Short-term current assets such as account receivables with no credit management policy Low working capital ratio No Closing Inventory in Balance sheet • Evidences from Talanoa session Financial and Management accounting system are not properly utilised (Accounting software – Money works (not fully understand)) The aggressive, conservative and defensive policies are not recognised by the business owner/manager No cash flow forecast or operating budget Owing huge amount to creditors (account payables) Cash flow problem arises CS1 cannot meet its obligations Average collection period (ACP) is a huge challenge Poor Inventory (stock) control (No stock take) No Account Receivables collection policy in place Flexible system , Own your own boss No Account Payable Management system in place No Account Payables policy in place Dependable on Cash at Bank Balances Used assets more efficiently to generate Sales Investing in short-term assets Huge Cash flow Problem occurred throughout 2009 and 2010, Liquidation process Drawings of Cash for personal use Reference from Talanoa session Literatures
•
NVivo9 -CS1
• • • • • • • • • • • • • •
Abel (2008), Afza (2007), Baig. V (2009), Chandra P (2008), Dhiraj (2009) Prescott (2009), McInnes (2000)
NVivo9 -CS1
Gitman (2009), Hatten (2008), Brealey et al, (2006), Oliver & English (2007) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008) Prescott (2009), McInnes (2000) Hatten (2008) Prescott (2009), McInnes (2000)
NVivo9 -CS1
• • • •
No Account Collection Policy Unstructured system No WCM Policy system Flexible system
NVivo9 -CS1
NVivo9 -CS1
• • • • • •
High assets turnover ratio Cash flow problem Inability to service debts More financial leverage Return on Investment or Assets Return on owner’s Equity
NVivo9 -CS1
Leverage Ratios of CS1
NVivo9 -CS1
Profitability Ratio of CS1
•
NVivo9 -CS1
112
Appendix 7: Recommended WCM for CS1’s Business Performance
Cash Management Inventory Management Account Receivables Management Improving of credit and collection process in terms of three elements such as Credit Policy, Sales and Collections Credit: setting credit policy, evaluating customer credit and setting credit limit Account Payables Management Business Performance Risk Management Using key Financial ratios such as ROA or ROI, ROE and others to analyse the business performance Liquidity ratios, Activity ratios, Leverage ratios and profitability ratios to be used for analysis DuPont Analysis system is suitable for CS1
Forecast short-term cash flows (cash receipts & cash disbursements) Preparing of cash flows forecast on timely basis Follow-up variances between actual and forecast or actual results and budget results (Cash Flow statements to be introduced using indirect method) Owner-manager should change actions which affect cash flows and cash balances Analysing cash flows and identifying variances
Optimising inventory levels and production efficiency (reducing inventory level without impairing customer service) Increasing inventory turnover by focus on inventory levels. Considering the Gross Margin as % of sales Contracts and purchase ordersclear typical terms to be considered Costing and analysis using traditional inventory costing (direct labour, direct materials and overheads) Just In Time Inventory order system (JIT) Stock take process and inventory control system Deals with returns and complaints promptly System in place for monitoring & controlling overheads costs Business Plan with Inventory Forecasting and Budgeting
Payables and payments for suppliers and creditors, Invoice promptly and up-to-date. Paying the Account Payables on the last date
Reconciled suppliers statements Ageing reports of account payables Understanding of policies for suppliers, utilities, credit cards etc Account Payables Control Account to be reconciled against the general ledger regularly Account for related accounts such as GST, Freight & Shipping, extra charges, discount for prompt payments, return and defects For every purchase must have purchase order (PO) and approved by management. Maintaining an approved vendor list Maintaining of suppliers files with copies of correspondence, contracts, purchase orders, and others Business Plan with Account Payables Forecast and Budgeting
Sales: Prompt fulfilment and invoicing, accurate and up-todate customer records Collections: Prompt follow-up of accounts, payment using cheque, credit card, electronic funds transfer etc Controlling of account receivables - clear “Payment Terms”. Account Receivable Control A/C (reconciliation) Late payments are not acceptable Business Plan with Account Receivables Forecast and Budgeting
Internal Control and policies system to be in place for cash (i.e. preventative and detective controls). Written policies Financial and Management Accounting software to be used (Information and Technology) e.g. MYOB, XERO etc Business Plan with complete Financial Forecasts and budgeting
Avoid, mitigate, transfer and accept RISK in the business (RISK associates RETURN) Business Plan with Financial Measurement
113
Appendix 8: Evidences from Interview Talanoa sessions and NVvivo9 Codes:
Tongan SMEs Category Accounting Firm (AF) Evidences from Interview Talanoa sessions and NVvivo9 -Codes Code
First and fore mostly, finally, which I think is really important is your business is your priority. Your Constant Comparison and Classical Content Analysis (NVIvo9)
Working Capital Management
T1
business has to survive. It has to work. Your business has to support itself and support you, before you worry about supporting anybody else. And it grows across our culture. Basically you need to learn to be selfish (NVivo9-T1-214) The Tongan business we need to plan. You need to budget. You need to get very good at what you do. It
Business is a Separate Entity
Accounting Entity
AF
T1
is competitive out there. And where possible you need to try and grow your business. Because the moment you stand still you go backwards (NVivo9-T1-213)
Business Plan Budget
Accounting Entity
“................... whilst we’re chartered accountants, right, it’s just a business like no other business. What do we do? We sell services to people. We don’t sell products. We sell services. AF T1 And it’s a wide range of services. How do we charge for those services? We charge based on time engaged. So if you bring a job to me it would take me 5 hours to complete. You’ll get charged for 5 hours. This is breaking it down to its simplest thing” (P4 NVivo9-T1-53).
A lot of what we do though is generally end of year compliance. A lot of my clients I don’t see until once a year. Where we can we try and teach them to do their own accounting. We are using MYOB a lot. Install it for them. Teach them how to use it. (NVivo9-T1-149) ................. I had an electrician. He makes a lot of money. But I taught him how to do his own accounting.
Selling Time & Services Costing basis MYOB- Accounting system Accounting Practices MYOB- Accounting Practice Budgeting Budgeting (Operating)
Inventory & Cost Management
AF
T1
Management Accounting
AF
T1
He brings the most perfect records to me on MYOB. He does his own budgets. He’s an electrician and he’s got 2 premises (NVivo9-T1-152)
Management Accounting
.......... Right like I told you, we sell time. There’s 260 working days in a year, right. The AF T1 government says you’ve got to give 4 weeks holiday. So the government says I think every year there’s 11 statutory holidays. Some year’s bosses get lucky coz Anzac Day falls over Easter, so I don’t have to give 2 days off work. But I budget on 10, that’s annual leave, that’s statutory
114
Management Accounting Cash Flow
holidays. (NVivo9-T1-64 T1-64) “.... I then go the law requires that you give everybody 5 days sick leave. And guess what the palangis take none, the Indians take none and the Tongans take 10 so. But I allow 5 days for AF T1 sick. Everybody has to get special days. Hey that’s what you budget for in a Tongan business. We have more funerals than anybody else. So 2 days special leave. Palangis take nothing, the Tongans take 4. So it doesn’t bother me. I say it in jest. (NVivo9-T1-65)
“............... But this is the process I go through when I set my budgets. And then the Society of Accountants says that all members have to have 20 hours structured learning a year. Right. So 20 hours is half a week. But there’s also 20 hours unstructured. So basically 40 hours a year. 5 working days your staff are off at courses or something like that so. Mine’s 5 days for study. (NVivo9-T1-66) 260, 240, 230, 225, 223, 218. So to use a bit of a term, I know that I have 218 bums on seats days here. So my factory is, I have 218, for every staff member I have, I’ve got them here for 218 days. Right. But
Budgeting (operating)
Management Accounting Cash Flow
Budgeting (Operating)
Management Accounting Cash Flow
AF
T1
Budgeting (Operating)
Management Accounting Cash Flow
AF
T1
there’s 8 hours in a day, not counting lunch. We start work at 8 and finish at 5. An hour for lunch, that still gives them 8 hours a day. It’s impossible to keep. It is physically not possible to be productive for that whole 8 hours all of the time. So I allow. (NVivo9-T1-67) So I basically start with 218 days. And as I said we charge out at 6 minute units. 10 units to the hour. 80 units to the day. So I say, I’ve got 218, I have 80 units a day and we have time sheets. Unless you account
Budgeting (Operating)
Management Accounting Cash Flow
AF
T1
for all 8 hours your can’t log out. But realistically you have to give them morning tea, afternoon tea, sitting around waiting for partners to supervise. So I take off 5 units a day, so basically I say, if you work for me I can sell 7 and a half hours of your day every day for 218 days a year (NVivo9-T1-68) And I think we see it everywhere with our Tongan businesses. Putting it on the other side. One of the things that I see as an outsider looking into Tonga is remittances has a negative effect. Because I think Remittances - has become Tonga’s default social welfare.
Cash Management
AF
that remittances has in many respect has become Tonga’s default social welfare. Because there are many T1 families now who can survive on the $300 a week that they’re getting from the 3 sons working in New Zealand. You’ve got 3 sons working in New Zealand will send you 100 bucks a week. $300 New Zealand is $500 Tongan. Easy to live (NVivo9-T1-182)
115
A lot of it is bank statements. Old fashioned ways. Although K..... out there, he’s slowly teaching these guys to do their own bookkeeping. Helping them out. Where I see a lot of Tongan businesses fall down.
AF
I’ve looked after businesses in the past, the Tongan guys. I had a couple of guys who were very good T1 painters. And I did their books for them and their plan and all that. But then all of a sudden some priorities come up in the Islands and they will take all the money from the business. Sort out what’s the problem in the Islands. But then they just kill their own business (NVivo9-T1-154) Because what happens then is that they can’t pay the PAYE, can’t pay the GST coz they’ve sent all the
Remittances has a negative effect on business financial performance
Cash Management
Cash Flow Problem Motive of Holding Cash Cash Flow (Good)
Cash Management
AF
T1
money home. And ultimately the tax department will chase you and all this and you get behind and it’s just impossible to recover (NVivo9-T1-155) Now what you find is that you have a core of clients who are very good at running their own businesses. Have good cash flows. They will always pay you on time. You do their work and you send them a bill at the
Cash Management
AF
T1
end of the month. By the 20th they’ve paid you. And it’s beautiful to have clients like that. (NVivo9-T1105) You drive it. And there’s a lot that you have to factor in. You’ve got cash payments on loan, that’s Cash Flow Cash Management
AF
T1
principal and interest. You break out the interest. You break out the principal. So that’s a very sensible cash flow forecast. And that’s our guide for the year (NVivo9-T1-101) Yeah. Now in reality when you look at the cost of an accounting practice. Our biggest single cost is wages. You can’t defer paying the wages and say I’ll pay you on the 20th of the month. Wages have to go
Costs (operating Expenses)
Cash Management
AF
T1
out every fortnight. So you’ve got no choice. So then your next biggest cost is probably your premises rent. That goes out by automatic payment on the 1st of the month. (NVivo9-T1-119) Productivity. My performance is when I set the budget, I look at the budget monthly, units. I get a
Productivity
Performance
AF
T1
summary every month. And I measure your productivity. And if we’re good and I try to hit my monthly budgets for billing. I am always excited when I’m over budget (NVivo9-T1-138)
.... you need to be able to be profitable. Because every time you go into business its risky. Because you
Risk associates Returns
Performance
AF
T1
take on a lot of risk. I guarantee the rent. I guarantee the bank overdraft. I guarantee the bank borrowings. That’s a huge risk. So you need to make good profit. (NVivo9-T1-193)
116
Profitability Return on Investment
(Assets)
There has to be reward for risk. So you need to make the return over and above what you could ordinarily. Risk associates Returns
Performance
AF
T1
In my business I just say I’ve got to make money well over and above what I could get working for somebody else. (NVivo9-T1-196)
AF AF AF AF AF AF AF AF AF AF
T1 T1 T1 T1 T1 T1 T1 T1 T1 T1
“..receiving prompt payment from clients here in NZ and Tonga....” (P4 NVivo9-T1-53). “Quickly convert of payments into cash...............” (P4 NVivo9-T1-53). “Decentralising of cash collections from customers (debtors)” (P4 NVivo9-T1-53). “..........Collecting centres here in NZ and in Tonga........” (P4 NVivo9-T1-53). “......... holding payments until the last date of the payment to creditors.. “(P4 NVivo9-T1-53). “...... payments made by cheques and drafts...............” (P4 NVivo9-T1-53). “...... minimising the number of payments............ Batched payments..............” (P4 NVivo9-T153). “........... centralising all payments to the main head office........ payroll” (P4 NVivo9-T1-53). “.......... using online banking payments........... and inter-bank transfer funds...........” (P4 NVivo9-T1-53). ....... Floating Funds............. arises from bank reconciliation .... P4 NVivo9-T1-53
Because one of the worst things about the accounting industry is that people pay, they’re notoriously slow. You know we talk about having an average age of debtors of 30, 60 and 90 day. Well accountants are over 60 days. People are just slow to pay their accountants. I don’t know why. I talk to all my accounting
Accelerating cash inflows Accelerating cash inflows Accelerating cash inflows Accelerating cash inflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows Decelerating cash outflows
Ageing of Debtors Deciding on an appropriate collection policy
Cash Management Cash Management Cash Management Cash Management Cash Management Cash Management Cash Management
Cash Management Cash Management
Cash Management
Account Receivables Management
AF
T1
friends and we’re always ringing debtors. Chasing it. (NVivo9-T1-92) You know and that’s just New Zealanders just live on debt. Businesses always manage debt out. So if you were to look at my aged debtors there would be quite a loading in the 60 to 90 days. (NVivo9-T1-93)
117
The only way you can manage that really is you have somebody out there, and I have a guy that’s almost
AF
T1
full time. He’s kind of like an admin man. He does office accounting and things like that. Who is on the phone ringing? (NVivo9-T1-107) All that accumulates on a time and cost ledger and when the job is finished, we pull that time and cost
Policy of collecting Debtors
Account Receivables Management Account Receivables Management Account Receivables
AF
T1
ledger and we bill the customer, right. And we give the customers 21 days to pay with a 5% discount. And that’s the theory (NVivo9-T1-57) And then I analyse it. So I then have to convert this to cash flow. Right. But the cash flow, because your sales are not cash. Right. So I then do what I call my debtors driver. Right. That’s what I started the year
Credit Policy, (setting credit Terms) Cash Discount (5%) Account Collection Policy Allowed Bad Debts Improving Cash Flows Incentives System
AF
T1
with – oh these dates should’ve been changed but it doesn’t matter. This is what I started the year with. Right. Opening balance. That’s what I bill. Allow for some write offs. That’s what I should collect each month based on my debtors. (NVivo9-T1-95) We try and incentivise people. Like we say if you pay within 21 days you can take a 5% discount. And I’ve
AF
T1
factored that discount into it. When you work out overdraft interest rates and all that. 5%. Plus it’s a good little incentive to get people to pay earlier. Sometimes for you, you know, your business might be hard to find just $3,000 in one month. But you can
Account Receivables Management Account Receivables Management
AF
T1
find 250 every month. A little bit every month. It builds up and when you come to see the accountant, you’re in credit. And that’s the theory, that’s the model we’re working towards (NVivo9-T1-136)
Receivables in Advance
Well we’ve got a system. We’ve got MYOB to look after the accounting. We’ve got our own management........ And then we do reconciliation at the end of the day of what money was received. What
MYOB- Accounting system Accounting Practices
Management Accounting
Financial Services (FS)
money for the day and if there was any shortage. But we have got other control mechanism in place. And
T2
then we process it to the MYOB and every, the next day. So today’s transactions will be processed tomorrow. And everything is through the bank. So most of our transactions goes through the bank. A lot of people direct credit the money straight to our account. So we have to reconcile those entries every day as well. To make sure that we receive the money before we issue the transfer overseas. (NVivo9-T2-15) Yeah from past years I know which months is our peak months, which is Christmas, January is slow. It’s
FS
T2
Budgeting Cash Flow Forecast
alright. February is slow. Because its obviously school, beginning of the school term here in New Zealand
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Cash Flow Management
so people don’t have much money to send overseas. But March is okay. April is okay. We start picking up in May. May and June because of the conference in Tonga. The church conferences. So June is really good. July is alright. August we will just, August is slightly steady. October. And then November it picks up again. December. December is our (NVivo9-T2-29) They need the remittance man. They do. Because that’s income and income for Tonga, you know. And they need it because there’s so much outgoing and not much income to Tonga. That’s why they started that Remittances has a negative effect on business financial performance Cash Management
FS
T2
project because, you know how they don’t have much exports at the moment. They started, the government started the work scheme program between New Zealand and Australia. And they are using the people, that’s the sell, they’re selling the people, the labour. To bring back money to the government, to the country (.NVivo9-T2-127)
FS
T2
Reconciliation at the end of the day. Control Mechanism in place for controlling purpose. Using of MYOB for records keeping. All cash transactions is going through the bank. (NVivo9-T2-23) Well obviously, the main problem is you’ve got to have someone in Tonga that is very trustworthy for receiving the money. A trustworthy company in Tonga. Because I know for certain that some company, money transfer company they started, and they disappear. Because the people in Tonga misuse the
Reconciliation of Cash Transactions Misused of Funds
Cash Management Cash Management
FS
T2
money. Instead of paying out to the customers, they misuse the money. So I know, I know a couple for sure that that’s the problem. (NVivo9-T2-141)
Yeah I think, I notice in Tonga, a key factor is loan. If you take out a loan to run a business, you have to service that loan and its quite expensive especially if the interest rate is high. And the reason why we are
Debt Financing
Financing of Business
FS
T2
surviving is that we don’t have a loan. You know, we have cash surplus everyday. So, but it will depend on the economy mate. Like last year we felt that the economy was down and we were suffering quite a bit and we were just getting to the edge. And it picked up towards of last year, and its been good. We’ve been doing alright since then (NVivo9-T2-113) Well first of all you got to, you got to have a basic knowledge of how a business operates. Yeah. Because
Debt Financing
FS
T2
not only that you have got tax matters that you have to, you’ve got tax obligations to the inland revenue department. And like I said if you’ve got some cash, it would be good if you start out with some cash. If
Financing of Business
119
you start out with a huge loan it is going to affect you, you know. (NVivo9-T2-117) .”............. But we already send the 3 grand over to Tonga from our, because we’ve got some money since we first started, been generating the profit. Little profit, but the owner invested a bit of money into the
Capital Investment
Equity Financing
FS
T2
business, a couple of hundred grand. So that’s the money we’ve been loaning off. And little bits and pieces we chip it in and we just keep it there. There’s no major capital investment, apart from the computers and the office equipment. But there’s no other. (NVivo9-T2-25)”
GST. And you’re paying your normal stuff for the IRD. You’re paying your power, your phone. Those things they’re monthly. And your part of the rent that you have is a percentage of it, is actually paid by the
GST and other costs
Business obligations
Business Consultancy (BC)
T3
business. The cost of your vehicle, running your vehicle is part of the business. So those things like that when you’re in business for a while are basic. But I try not to have too much commitment in terms of putting pressure on the business. Because as I said, especially in the current climate. So you just got to have to live within your means ( NVivo9-T29) No, no separate. Because I have my own personal account and the business account. The business account is still business. And the personal account your personal account. So you have to separate it because as I
Business is a Separate entity
Accounting Entity
BC
T3
say part of the rent is paid by the business. You work out a percentage of the area that you use for business. Not only for this room here but the kitchen, the sitting room, sometimes we have people we meet in the sitting room, and sometimes we have it in the kitchen. So all of those costs are part of the business (NVivo9-T31)
BC
“.......... Not only has the old professional way of having a fixed office and you gone there. Because technology has changed, enable you to do a lot of things. When I travel I check my e-mail on my phone.
T3
Most of my communication is mainly controlled by my Blackberry. So its, the space on my Blackberry can have the same as what my desktop. So it suited the type of business that I’m in. But not every business person will have that type of flexibility. So it allows me to do, get away from a lot of unnecessary cost. So it enabled me to survive and also call it a business (NVivo9-T33)
Advantages of using Technology in Business Minimising Costs
Social media and Technology
BC
“............. There was a very quite high rate of failure and some of them they’re Tongan businesses. And I
T3
think that because I used to try to advocate and trying to ask the board that yes we can lend money, but we
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Managing of near Cash and cash equivalent
Cash Management
have to manage it in a way. Because sometimes we come from the Tonga, from the Pacific, and then we try to actually do the business in a Palangi way that’s fine. But most of the people that we send money to still have the Island way, they have the Tongan way. Because when they have a lump sum of money right in front on them, other priorities over ride the interest of the business. And I actually saw that. And we used to write off loans that was bad loans, that was sent to, that was 7 years ago now. And I used to, and I have a very lively debate at the board room because I saw the trend is not getting any better (NVivo9-T39)
Managing in Tongan style
BC
It is just the cash flow. As I said its not consistent, it spikes you know. All of a sudden you have got a huge spike of money arriving. But people who don’t understand the nature of the business that’s not, yes, it’s a big bulk of money but you’re going to have to manage it you know. And that’s a weakness of the business
Cash Flow Problem
Cash Management
T3
because the inconsistency of the flow of cash. So that also hold you from further development in the other area of the business that you want to expend to. So it focus you on what you’re doing now and how can I build on that (NVivo9-T49)
BC
I think
that all those things that you mentioned are critically important. It is just driving the road, you’ve
Managing WC
WCM
got to make sure you stay on the road. If you slightly get on the road you might get a bit of loose metal
T3
and then you might go off the road and then you might get an accident. I just see that running a business is like driving on a road. Make sure you stay on the road and sometimes you speed up and you might get fined by the traffic officer. But that’s the idea of running a business, stay on the road, you know (NVivo9T59)
BC T3
I don’t have it apart from just the Western model. But just to be clear to our Tongan business people don’t forget that commerce and business is quite a foreign thing to us. Some of those other cultures commerce has always been part of their culture, part of their life. But commerce for us is only less than 200 years. So we’ve got a lot to catch up. And I think that the only thing you can learn from it is learn from others mistakes and avoid getting into the wrong side of the road (NVivo9-T65)
Western and Tongan Business Models
Business Models
BC T3
I think that’s only excuses. Our social, there’s nothing wrong with our culture. There’s only people who actually poorly manage their business and blame the culture for the failure of their business. There’s nothing wrong with that. (NVivo9-T67)
Poor management skills is the problem
Social &Cultural Factors
121
Over 50% of that funding is for staff wages. The majority of the funding that we receive from grants and
Cash Flow (Funding) from the government
Cash Management
Coffee Bar
T5
from school contracts go directly to staff wages. And the balance of it, the rest is to pay our creditors. To pay for our rental, the overheads, the running of the vehicles, running camps for the school etc.( NVivo9T5-18) Yes at the beginning of the year. From the 1st of July we have to provide a budget for the Ministry of Social Development. That is required before a new agreement is signed. And also in February prior to March board members meet and a budget is presented to them for the whole year. So yeah, the government require a budget and a cash flow to be produced for their financial year, beginning 1st July.
Cash Flow Budgeting
Cash Management
CB
T5
And we work on a budget for our financial year, which begins in 1st April. And sometimes we look specifically at schools, where we have a separate budget for the calendar year start from the 1st of January to December to fit in with the school year. So yeah we do have, we do require to be regularly produce a budget when they ask for it. (NVivo9-T5-22)
CB
........ 100% of any money generated from the selling of the coffee goes directly to the ........ for the delivery
T5
of the programs. (NVivo9-T5-28) No. We are currently working with the Charities Commission. We have had somebody assisting us with drawing up the necessary documentation to be presented to the Charities Commission. That has crossed;
Extra Financing of the Business Activity Legalised Business activity
Cash Management
CB T5
Business Activity
we have visited the idea of perhaps treating the selling of the coffee as a separate entity from Family Works. But now it is written into our constitution that we need to present that to the Charities Commission to ensure that we are not doing anything illegally ( NVivo9-T5-32)
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Well we have to show that we do have something to sell. Like for instance we do have the coffee to sell. We created a separate bank account which accounted for all the transactions for coffee. The cost of the sale of coffee. And the money made from the sale. The sale of coffee. And the cost of the sale of coffee. And so one account, one account that we’ve created to ensure that all transactions as far as coffee is concerned is made through that account. And the money transferred can only be transferred from that account to our
Cash Sale Transactions Inventory
Cash Management
Inventory Management
CB
T5
main operating account for FW Ltd. So we are keeping track on what we expense, all the expenses we have to make as far as coffee is concerned. We are keeping track of any funds that are being made from the sale of the coffee by keeping it separate from our operating account. Operating account for FW Ltd. We cannot access funds from the sale of coffee unless it is transferred from that account to our operating account.(NVivo9-T5-60)
Cash Control
CB CB
T5 T5
Bank Reconciliation
............... I try to do it at least once or twice a week....................(NVivo9-T5-76) ........We use Zero accounting software (NVivo9-T5-64) No we have got no issue with Zero. Yeah it fits in well with, directly your bank statements from the bank.
Cash Management Management Accounting Management Accounting
CB
T5
It’s there and you’ve got immediate access to your reconciliations etc and any other reports you want.
Zero Accounting Software Zero Accounting Software
(NVivo9-T5-74)
Yes. Every year. All our accounts are audited. Like I said earlier we need to finish, we need to have a draft by the end of this week so that could be sent to our auditor and have to be audited. When we are applying for funding whether it is from the government or from other agencies, we need to produce a set of financial, audited accounts.(NVivo9-T5-88) I’m required to give our general manager..........., at the end of the month a, something like a trial balance or profit and loss, monthly profit and loss. And he can view of what has happened and what has been taking place during the month. And sometimes I have to put these in a list of all the creditors, the accounts
CB
T5
Audit is needed for T4’s financial statements
Management Accounting
Financial Statements Records keeping
Financial Accounting
CB
T5
that are due at the end of the month. Especially when I realised that we don’t have enough money. Like for instance today I had to give him a list of what I needed to pay today. These were overdue accounts.
(NVivo9-T5-90)
123
Yeah. Because we are not getting enough funding from the government we seem to watch our cash flow
Cash Flow
Cash Management
CB
T5
and what we spend every month. And because our staff are also needing to be paid on time we are extra vigilant of what we are spending (NVivo9-T5-92)
Yeah I think the fact that people want to have businesses is really good. And I think that passion and energy they need to focus it in on finding something to make the business successful. So if they don’t have experience in financial management then to go and seek help. And finding someone they trust is really important. If you’re getting advice from someone that you don’t trust. I find that a lot of people in the Pacific communities they don’t necessarily trust who they’re getting advice from then it won’t work. So
Financial Advice and planning E.g. PBT
Financial Management Cash Management
Retail –Beverage and Food
T4
finding someone that you trust and have confidence is very important. I know the Pacific Business Trust do a lot of workshops on how to set up businesses, and business planning and even cash management. But yeah if you can find an accountant like K....... He’s very trustworthy, very ethical. And he will, if he’s saying I don’t think this is going to work. You will potentially lose money. That’s the advice that you want to get. But if they’re saying look if you do these things right then this should go well. Then that’s good as well so then you know what you need to focus on. So it’s about planning and getting that financial advice up front before you commit your time and energy (NVivo9=T4-78) Yeah so what we did, we actually both the businesses we bought, we purchased them as going concerns. So they already existed. So what we did is we did a financial model. And basically an evaluation based on a forecast, discount and cash flows to see if the numbers stacked up based on the price. Then we went through and thought what we could do better and if we could actually improve it. And could we actually
Business Strategy, Vision and Mission
Business Starts
RBF
T4
increase the value of the business. So we didn’t actually try and, we didn’t change the names of anything. But what we did is we took the existing business model and we thought, one, is the purchase price justified. And then two, do we think we could do it better. Especially with “TTW” because we had some experience from in town. So we knew that we can, if we do these things we should be able to save some costs and maybe increase margin. Those are the kind of things we were looking at. (NVivo9=T4-80) I think that working capital is important. But the other important side is sales. The sales are what drive
RBF
T4
Cash Sales
your business. So if you have, if your sales are at a level above break even or at a level where you’re
Working Capital Management
124
targeting to make the return you’re after then that’s good. But then managing your working capital is going to make sure that the cash is in the right place at the right time to facilitate those sales. And you know making a profit is the goal at the end of the day (NVivo9=T4-76) Yeah I mean if you don’t pay your creditors then you are going to risk not getting supply. If you don’t manage your inventory you can, one, you’re going to have too much stock and its going to be bad for cash flow and put pressure on you there. Cost for cash, you know your interest costs will go up. And you, you know, when you go through a hard time then you need to just run a very lean ship. And that’s
Break Even Point
Management Accounting
Inventory, creditors, cash flow, Sales volume and suppliers
Working Capital Management
RBF
T4
why we monitor everything like a hawk. Cash on a daily basis. And we’re finding that this year things are going better. Even though sales are still flat. The cash situation has relaxed and things are a bit happier just looking after our working capital. So the next bit to grow sales is through a bit of a renovation and for that we are going to our suppliers and asking them for help. Because that’s what they do. They will give us contributions for that to help grow their sales. But yeah it’s all part of running a good business. You’re managing your working capital very closely(.NVivo9=T4-74) Yeah I mean we, we, there’s very, there are strict regulations around the sale of liquor and alcohol and we take our responsibility very seriously. We have had problems in the past. But we are learning from them and moving away from them. But yeah this area of business, we act ethically as best that we can. We don't want trouble. It’s not good, the long term success of your business is to have happy customers and a happy community that supports your business. And if you’re causing problems then all you’re going to do is
Bottlenecks in the Operating Cycle
Long-term GoalHappy Customers and Happy Community
Business Risk
RBF
T4
make your business, put your business at risk. So that’s not our goal at all. And yeah, I mean, I know that the Tongan, you can get problems with certain elements of the Tongan community when they drink. Yeah we’ve had that and we no longer, we have come up with systems to stop that. So, and to be honest with this space here most of the problems have happened outside in the car park. Where they don’t even come in, they stay outside and drink in the car park. (NVivo9=T4-71) That’s where you need to get specific financial advice. You need to be comfortable with the risks. To me its, you have the risk that if anything goes wrong you potentially lose your house. And if you’re willing to
Control System for RISK Management
Financial Advice
Business Risk
RBF
T4
take that risk because you think the business is safe and good then go for it. But you need, there’s always pros and cons, two sides to every story. (NVivo9=T4-92)
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RBF
T4
We follow the right procedures to get rid of them. (NVivo9=T4-102) Yeah. There are certain processes under the employment relations act but yes, the goal is to get rid of the bad staff. You don’t give them a second chance. Even family. (NVivo9=T4-104)
Cash management Employment Relations Act Ethical Responsibility Employee Relationship Cash Flow
Financial Management Human Resources
RBF
T4
Yes integrity is important in business. (NVivo9=T4-106) Yeah you’ve got to try and get good staff and keep them happy. Yeah, spend time with them, but you know, if you get the right staff hopefully they make your life easier ( NVivo9=T4-100)
RBF
T4
Cash is king. (NVivo9=T4-96)
Cash Management
And it was just me and my wife. We employed up to 5 people at one point. And did a lot of sign writing. Again it’s designing it and sending it here to print. But the more jobs I got. I went to the Ministry, the government Ministry. I went to the Civil Aviation. Ministry of Agriculture. And got, and asked them to give
Creative and natural skills Family business
Formation and Starting of Business
Graphic Design & Communication
me their annual reports to format and print. So we did that as well. But again I have never been trained. I
T6
have never been, but when I left................. I went to the New Zealand High Commissioners office and said I wanted to start a publication and I want a computer. They gave me the latest computer at that time and all the programs that you need for desktop publishing. And that’s how, and then I just learned as I went.
(NVivo9-T6-18)
That’s a really difficult part of the business is the management side of it, particularly the financial. I hate it. I wish somebody would take it off me. I didn’t have a business plan. I would rather not invoice. Although last year we turned over 1.5. I despise it. I hate it. I would (laughter) I mean one of our
Financial Management is a challenge for T6
Financial Management
GDC
T6
contracts is a $750,000, is a $300,000 contract. I am managing to do it but it is part of the business that I wish at the beginning I had a partner with it. I did partner with somebody in the beginning, and it didn’t work out. And that was for that reason. When I started off I didn’t want to be perceived as a one man band. I didn’t want to be perceived as a garage jobby. I wanted to be fully accredited, professional. When I go and present I present like any other agency. When I go and tender for work I tender like any other
126
agency. And that’s why I partnered with somebody who was high in finance, skilled in finance as well as on line technology. It was fairly new at the time and I wanted to have that edge. It didn’t work out because his business went off really well. And mine did as well. So we couldn’t contribute to each other’s business and so we decided to go our separate ways. (NVivo9-T6-34) But the key. I am really struggling with financial management. I wish I could do it better but I don’t know how. We produce incredible work that I am really proud of. And I love this to bits. I love what I do totally.
GDC
T6
And very passionate about it. I think personally, I think there is no other designer like me in terms of weaving in Pacific concepts and being, the ability to resonate with the target group. And that’s one of our tag line, is that we know the market because we are the market. Did that answer your question? (NVivo9-T6-36) I am worried about it. I am terribly worried about it. I mean it is at a stage now that I am stressing over it. You know coz since last year, towards the end of the last year, work has just died. Cash flow is a big problem for me now. There were no reserves. But the thing is when it gets to this time of the year, May, June. April, May, June. It is the end of the financial year for government departments and there’s under spend. And when there’s under spend money is thrown away. And that’s going to prop us up and we’ve got a lot of work, there’s enough work coming in now. But the thing is that it won’t be invoiced until next month. And cash flow is a huge problem. (NVivo9-T6-68) Cash flow. In this down period. Which really started from about October last year? We are just getting out
Financial Management is a challenge for T6
Financial Management
Cash Flow Problem
Cash Management
GDC
T6
Cash Flow Problem
Cash Management
GDC
T6
of it. And I mean they’re suppliers I have used for a long time and they’re very patient with us. The bank also is giving us some leeway. (NVivo9-T6-92) It’s the b..... Tongan way. We are just so generous. We look after so many people. My sister when she was
GDC
T6
here, my sister has since moved to Australia with her son, she’s got a contract with her rates. But when she was here, my mum is still here though; she lives in the rest home. My wife’s family is in Tonga we always –(NVivo9-T6-104)
Sharing- Cultural Factor
Business and Owner are combined
Art Gallery AG
T7 T7
..........No need for Cash Flow forecast.................... ................... Accountant looks after the records keeping................ using MYOB Accounting
127
Cash Flow Cash Flow
Cash Management Cash Management
software................... cash transactions are recorded.....................(NVivo9-T7-61) Because the more you know and buy will come later. It is not about trying to buy and selling it. It is more because people’s minds think about it. But I’m not saying, I’m thing. Tonga is pretty good. I think Tongan people they are not business. I am not saying they are not business because we are AG T7 physical but we are production only if we really wanted to do that. Because for us business, you need to live with the Palangi (laughter). And you know I am not putting that down. But just the way that our structure, you know (NVivo9-T7-237) Socio-Cultural Embeddedness of Cultural and Identity
Yeah. And that’s what, because technology, I mean business now, business people have to think in a different way about things, because it is no longer what business we are thinking of. And I AG T7 think business now its about communication. And when you have the communication that is the best business ever. Because networking, networking before wasn’t, networking has become number one because its –(NVivo9-T7-235)
Advantages of using Technology in Business Minimising Costs
Social media and Technology
Pacific Business Consulting Services
........... financial plans are used for budgeting and quantifying the marketing and operation T8 plans in dollar amounts........... planning assists the owners-managers of Tongan businesses to avoid viewing the future in a negative aspect..... ( NVivo9-T8-10)
Focus Group Professionals Business Advisory (Consultants)
Evidences form Focus Group Talanoa session Code
From my perspective I think one of the biggest challenges that they face is actually learning how to manage what we look at as an income and expenses. And its something that’s so alien to them and I am
Constant Comparison and Classical Content Analysis (NVIvo9)
Working Capital Management Management Accounting
FT1
not just talking Tongan here. It’s from a Pacific point of view. And I think it’s just about going back to basics, and advising them. I think that would be a big help. If you actually know what your income is, what
Income and Expenses are challenge for Tongan Business (Pacific Businesses) Budgeting
128
are your expenses and then transferring that into the business world. That’s the biggest challenge for them. Because a lot of them walk in the door and they have no idea what their own personal budgets are. (NVivo9-FT1-25) I don’t know if I can, most of the people who I am working with are start-ups. So they’re at the very seed, I suppose, they’re at start up. And a lot of them don’t have any processes in place. I can tell you that now.
No System or Flexible System
Unstructured Business System
BAC1
FT1
A lot of them do not have a lot of processes in place. Those people that I have been dealing with who are currently trading, are wanting to say the least. They appear to have no processes. (NVivo9-FT1-3) Again it is lack of accountability and processes. Honestly, I don’t know how some of them do it. They buy things and they don’t keep records. So its, from my point of view, it’s a real challenge. And it goes back to
No System for Records Keeping
Management Accounting
BAC1
FT1
the first question that was asked what systems are in place and I am sorry to say none, in most cases.
(NVivo9-FT1-68)
It is just it is very difficult idea for having the business and the owner is two different entities. But looking from a cultural perspective it seems to be, either you live in the community as a “fie Business Advisory (Consultants) Palangi”. No but that’s the way. ............ if you love your business you have to do it in the FT2 Palangi way. And we still fulfil our obligations to our Tongan roots and our Tongan families. But at the same time we do it from your own pocket and not the, as another payment of the business (NVivo9-FT2-23)
That’s the main fuel of the business. Because you can’t do a lot if you’re relatives and you live like a Palangi. Because sometimes they’re oh we’ll pay you tomorrow. We will pay you the next day or whatever.
Palangi or Western Business Model Separate the owner’s expenses from the business
Business Model
Business Entity
Cash Flow
Cash Management
BAC2
FT2
But when the services are done then I pay. You ask for them to come back, oh they go and do another service. And that’s the biggest. If you want a Tongan definition I will say that’s he [22.33] (laughter). (NVivo9-FT2-33) Taking a Tongan business forward, for example, like a garage or workshop or whatever ... whatever. Once
Cash Flow ProblemRelatives and cousins
Cash Management
BAC2
FT2
you allow it, they will have thoughts that they owe you and they don’t turn up because they know you’re a Tongan, you’re a relative, you’re a cousin. (NVivo9-FT2-35)
129
Look at the Tongan newspapers on a weekly basis and see how many pages full of people who are owing
BAC2
FT2
money to Tongan businesses. They publish the names in there and try to put them into this disappointment and shame them. (NVivo9-FT2-37) Well doing the thing here is to, but going back to the other slides that we talk about, knowing the strengths and weaknesses of the business then you can sale that they deal in credit or cash. From ..................
Methods of Collection of Outstanding Accounts- Publish on local News paper Identifying Strengths, weaknesses etc
Cash Management
SWOT Analysis
BAC2
FT2
perspective his projects are usually medium to large projects and you can’t deal in cash with those ones. Because like any other project they give you parts of payments from the cabinet. (NVivo9-FT2-51) But from this type of business you can’t really deal with Tongans and that, I mean, they will take you the
BAC2
FT2
whole year to run around after them to get the money. It’s either cash or no drink. (NVivo9-FT2-54) Just going back to the previous, you have to adopt the management and techniques that is most appropriate for the survival of your business. Because if you know the right stock your ordering very much
Collection of Cash from Tongan Customers Ordering of stock
Cash Management
Inventory Management
BAC2
FT2
depends on any functions tonight or functions tomorrow, the season, if it is in the peak of summer. So stock for the summer and stock for the winter will be completely different. (NVivo9-FT2-66) Yeah I agree with what they say but I want to add to it. One o the main thing that is missed by our Tongan, about 90% of our Tongan in New Zealand, in Auckland, they don’t care about customers coming back tomorrow. They only serve them or the day. They really, it is the model of doing things. They do a service and let them go. If you look at other businesses, their main thing is to make the customer happy, they always come
Customers Retention
Account Receivables Management
BAC2
FT2
back. For most of our Tongan friends in business, they don’t really, look at those people doing the stone fences. They don’t really care. That’s how much, they don’t really care that their customer will last for the previous job, they remember them. They just don’t care, they get half of the money and go. They don’t care about it. They still the Tongan model is getting our people to come back. (NVivo9-FT2-92)
I will say that the Tongan entrepreneurs to understand that they are not going to get any immediate profit, the
Understanding the business concepts
Entrepreneurship
BAC2
FT2
very best money. Because you can’t be a millionaire overnight. You have obligations to be fulfilled. They are business, government and legal things to be done before they ever see a single cent free of everything. I guess we have to do this in our Sunday services, rather than talking about Luke and John. Talk about businesses
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(laughter). The businesses feed the church.( NVivo9-FT2-102)
If you want to run a business you’re immediately remove yourself from the Tongan mentality. And to be able to run a business successfully you’ve got to totally remove yourself from being a Tongan. But a
Social –Cultural Tongan mentality Western Commercial Paradigm (Palangi)
Business Owner/Manager
FT3
business person, the characteristic of how you run the business will be influenced by how Tongan you are, well not how Tongan you are, we are just talking about Tongans here. But there are certain things about being a Tongan is a huge asset in running a business. But it’s the ability to separate that from, you are entering a whole Palangi world and you should be running things that way.(NVivo9-FT3-21)
Embeddedness of Cultural and Identity
BOM BOM BOM
FT3
Cash flow, what’s in the bank? Yeah cash flow is your ability to meet your obligations. For me that’s cash flow. (NVivo9-FT3-27)
Cash Flow measures
Cash Management
FT3 FT3
Credit. Mainly. 20th of the following......................( NVivo9-FT3-42) 20th of the month. Well we receive it on the 20th and we pay out on the 26th. (NVivo9-FT3-72)
Credit Sales collect on 20th Month Paying Creditors & Creditors Control
Account Receivables Account Payables
Cash Flow Forecast
Our business is very cash, there’s always a lot of cash going over the bar and on the premises, so we have to have very good systems. We have shifts changing and if you're not careful you’ll wake up in the morning there’s 2 grand missing and no one knows what’s happened. So you have to have very good systems. Its just
Cash Management
Chartered Accountant
FT4
ono the facts of our industry. And in terms of cash management. We need forecasts because we need to know that we’ve got 20th of the month payments, you’ve got tax payments, and you’ve got GST. And then you’ve got your seasonality. And you need to know. You don’t know how much you can take out unless you know what’s coming up. Like at the moment we are looking at doing a bit of renovation, so your CAPEX expenditure and we need to know can we afford this. So if we put this money in, will we be able to pay the bills if we shut down for a week or so. So you’ve got to do the cash flow (NVivo9-FT4-100)
CA
FT4
Well inventory is pretty important. It’s how we keep our sales. We have to make sure that we don’t lose
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Inventory Control
Inventory
sales because we don’t have the right stock. But you don’t want to have too much. And then it’s also a balance of discounts.(NVivo9-FT4-56) We do. We do it. But it is more order form and its managed by us, probably my father, he does the
Management Inventory Control Ordering system Just In Time (JIT) Inventory Control & Method Inventory Management Inventory Management
CA
FT4
ordering. And he knows what he needs, we have a bit of forecasting of what’s coming up. And especially with it being a bit tough on cash flow and you don’t hold too much stock because you can order quickly. (NVivo9-FT4-58) Yeah but then you got to have controls, stock takes and procedures for receipting and controls over,
CA
FT4
furniture and forecasting (NVivo9-FT4-62) ..........Weighted averaged.........( NVivo9-FT4-64) I don’t know if it’s Tongan perspective. Its industry specific, it depends on the industry. And again ideally
Inventory Control
CA
FT4
you are doing industry best practice relative to the size of your business. But I mean if you had bad stock control it can be cause of business failure, so it’s very important. (NVivo9-FT4-119) Me, personally I think we need to somehow separate the business from the individual family. So if the
Inventory Management
CA
FT4
business is burdened with other obligations then that is the start, when things can go wrong. So the business, keep it separate, keep it professional. And then you got to run pretty good disciplined systems because otherwise you are setting it up for possible failure (NVivo9-FT4-17)
Business is a separate entity
Business Entity
CA CA
FT4 FT4
............. We’re cash, cash business.......... (NVivo9-FT4-46) We don’t have many but we do. There are certain things that my dad can’t say no too. It’s not business related. I try to, especially outside the business. (NVivo9-FT4-111) I am pretty straightforward. Bottom line is profits for me. But in terms of family, I know that there are
Cash Accounting NO Account Receivables for FT4 Profit (Bottom Line)
Management accounting Account Receivables Profitability
CA
FT4
other aspects of it. We employ like so many families and that’s a good thing. I know that it means a lot to us. But we can do it and make the profit.( NVivo9-FT4-157) Yeah we pay 20th of the month. It is very important for my parents to pay on time. So and you know like if you are going to have a long term business you need to keep your suppliers happy. And if you pay them on
Relationship with Suppliers (Creditors)
Account Payables
CA
FT4
time and have a good relationship you can ask them for support, discounts, markets, systems. (NVivo9FT4-76)
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Our business is very cash, there’s always a lot of cash going over the bar and on the premises, so we have to have very good systems. We have shifts changing and if you're not careful you’ll wake up in the morning there’s 2 grand missing and no one knows what’s happened. So you have to have very good systems. Its just ono the facts of our industry. And in terms of cash management. We need forecasts because we need to
Cash Flow forecast is important for T5
Cash Management
CA
FT4
know that we’ve got 20th of the month payments, you’ve got tax payments, you’ve got GST. And then you’ve got your seasonality. And you need to know. You don’t know how much you can take out unless you know what’s coming up. Like at the moment we are looking at doing a bit of renovation, so your CAPEX expenditure and we need to know can we afford this. So if we put this money in, will we be able to pay the bills if we shut down for a week or so. So you’ve got to do the cash flow. (NVivo9-FT4-100)
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Appendix 9: Conceptual Model of Financial Management
Financial Management
Financial planning and control
Financial accounting & Information andTechnology systems Statement of Financial Performance (Income Statement)
Analysis & Interpretation of financial reports
Cost and Management Accounting
Capital Budgeting
Working Capital Management
Financial Budgeting
Current ratio and Quick ratio
Standard costing &Activity Based Costing (ABC)
Average rate of return (ARR)
Cash management
Operational Budgeting
Statement of Financial Position (Balance Sheet)
Return on Assets (ROA) & Return on Equity (ROE)
Just in time (JIT)
Payback period & Net Present Value
Account receivable management
Statement of Cash Flow
Balanced Scorecard
Profitability Index & Internal rate of return (IRR)
Inventory management
Computerised Accounting systems eg MYOB
Cost-volumeanalysis (Break-even analysis)
Account Payable management
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Appendix 10: Constant Comparison and Classical Content Analysis
Source: Adopted from (Leech & Onwuegbuzie, 2011)
Using NVivo9 to Conduct “Constant Comparison” and “Classical Content Analysis” If a node exists that you would like to • Highlight selected text and right click to open a list of choices. reuse • Select Code Selection. Select At Existing Nodes. • The Select Project Items window will appear. Check the box next to the node you would like to reuse. Click on OK. Your selected text is now code If there is not an existing node to reuse • • • • Once your text is coded, you can create Tree Nodes • • • • • • • • Once your “Tree Nodes” are organized To see the frequency of used codes in one source • • • • Highlight selected text. Right click to open a list of choices. Select Code Selection. Select At New Node. The New Node window will appear. Type the name of the new node in the box next to Name. You can also include a description of the node under Description. Click on OK. Your selected text is now coded. These are groupings of your Free Nodes. First, click on Nodes (located in the bottom left hand corner). Your Free Nodes will be displayed. Look through your free nodes and identify nodes that are similar. If you are unsure, you can double click on the node to bring up the data that have been coded with the node. Highlight and drag your free nodes that are similar over to Tree Node (located in the upper left hand corner). Once you have moved all the similar free nodes, click on Tree Nodes. The Tree Nodes will now be displayed. Right click and select New Tree Node. Type in the name of your new Tree Node. Then, click on the nodes that are included in this Tree Node and drag them into the new category. Each Tree Node can then be written as a theme (perform this step outside of the NVivo program). Click on View = Coding Stripes. Select with type of strips you would like to view (None, Selected Items, Nodes Most Coding, Nodes Least Coding, Nodes Recently Coding). The coding stripes will appear to the right of the data window.
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Appendix 11: Process of Building Theory from Case Study
Process of Building Theory from Case Study Research Step Getting Started Selecting Cases Activity Definition of research question Possibly a priori constructs Neither theory nor hypotheses Specified population Theoretical, not random, sampling Multiple data collection methods Qualitative and quantitative data combined Multiple investigators Overlap data collection and analysis, Including field notes Flexible and opportunistic data collection methods Analyzing Data Within-case analysis Cross-case pattern search using divergent techniques Shaping Hypotheses Iterative tabulation of evidence for each construct Replication, not sampling, logic across cases Search evidence for "why" behind relationships Comparison with conflicting literature Comparison with similar literature Reaching Closure Theoretical saturation when possible Reason Focuses efforts Provides better grounding of construct measures Retains theoretical flexibility Constrains extraneous variation and sharpens external validity Focuses efforts on theoretically useful cases-i.e., those that replicate or extend theory by filling conceptual categories Strengthens grounding of theory by triangulation of evidence Synergistic view of evidence Fosters divergent perspectives and strengthens grounding Speeds analyses and reveals helpful adjustments to data collection Allows investigators to take advantage of emergent themes and unique case features Gains familiarity with data and preliminary theory generation Forces investigators to look beyond initial impressions and see evidence thru multiple lenses Sharpens construct definition, validity, and measurability Confirms, extends, and sharpens theory Builds internal validity, raises theoretical level, and sharpens construct definitions Sharpens generalizability, improves construct definition, and raises theoretical level Ends process when marginal Improvement becomes small
Crafting Instruments and Protocols Entering the Field
Enfolding Literature
Source: (Eisenhardt, 1989a, p. 533)
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Appendix 12; Options for Overcoming a Cash Flow Crisis
1. Shorten the operating cycleIncrease the efficiency of Operating Cycle’s components and reduce the cash committed to them. Increase the stockturnover and reduce the average age of trade debtors (account receivables), while maintaining the same level of sales. This requires more aggressive collection of account receivables and tighter control of inventory level 2. Increase the net profit margin 3. Reduce the sales volume This can be done by increasing price, reducing cost of sales, reducing operating expenses. Reduction in sales volume decreases the investment in the working capital components of the operating cycle. One way to slow down sales while increasing both Net Profit Margin and cash flow, is to selectively increase prices 4. Increase the trade payables 5. Short-term borrowing 6. Look for ‘Equity Capital’ 7. Maintain a minimum cash reserve Stretch payments to suppliers beyond the selling terms. This may risk business reputation Short-term borrowing of cash is used to finance temporary increases in working capital. Inserting owner’s equity capital in to the business or taking in new owners in the form of partners or shareholders Cash is an idle asset and it is better to consider some minimum cash reserve to pay the bills of the business as they come due
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Appendix 13: Conceptual Models of WCM for Tongan SMEs
Inventory Management
Accounts Payable Bank Overdrafts
Accounts Payable (Borrow cash shortfall) Accounts Payable Cash disbursements Business Risk Financial Risk “WC Flexible system Liquidit y Risk
Accounts Payable Borrow cash shortfall WCM (Cash )
Accounts Payable Cash disbursements
Inventory, WCM Account Receivables, Cash Receipts (Cash )
Remittances (relatives, community) Drawings as shares (Dividends)
Account Receivable Cash Receipts Distribute profits Invest excess cash
Retained Earnings
Distribute profits
Source; adapted from Jeffrey D. Sherman, 2010, p. 4
Source: Develops by the researcher from the findings received in the research project
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Appendix 14: Talanoa analysis on Liquidity of CS1
Main Themes Sub-Themes • • • • • • Current Ratio of CS1 Liquidity Ratios of CS1 Quick Ratio of CS1 Average Collection Period (ACP) of CS1 Activity Ratio of CS1 Average Payment Period (APP) of CS1 Total Assets Turnover Debt Ratio of CS1 Time Interest earned ROA, NPAT, ROE • • Description of Views and Ideas No Business Plan in Place No WCM Policy system for this CS1 Financial and Management accounting are challenge for CS1 No CASH Budget No operating and Capital Budget Investing in Short-term current assets such as account receivables with no credit management policy Low working capital ratio No Closing Inventory in Balance sheet • Evidences from Talanoa session Financial and Management accounting system are not properly utilised (Accounting software – Money works (not fully understand)) The aggressive, conservative and defensive policies are not recognised by the business owner/manager No cash flow forecast or operating budget Owing huge amount to creditors (account payables) Cash flow problem arises CS1 cannot meet its obligations Average collection period (ACP) is a huge challenge Poor Inventory (stock) control (No stock take) No Account Receivables collection policy in place Flexible system , Own your own boss No Account Payable Management system in place No Account Payables policy in place Dependable on Cash at Bank Balances Used assets more efficiently to generate Sales Investing in short-term assets Huge Cash flow Problem occurred throughout 2009 and 2010, Liquidation process Drawings of Cash for personal use NVivo9 -CS1 Reference from Talanoa session Literatures
Financial Management
Working Capital Management Policy
• •
NVivo9 -CS1
Abel (2008), Afza (2007), Baig. V (2009), Chandra P (2008), Dhiraj (2009) McInnes (2000)
• • • • • • • • • • • • •
NVivo9 -CS1
Gitman (2009), Hatten (2008), Brealey et al, (2006), Oliver & English (2007) Gitman (2009), Hatten (2008), Brealey et al, (2006), Prescott (2009) Gitman (2009), Hatten (2008), Brealey et al, (2006) Gitman (2009), Hatten (2008), Brealey et al, (2006) Gitman (2009), Hatten (2008) McInnes (2000) Hatten (2008) Oliver & English (2007) McInnes (2000) Hatten (2008) Oliver & English (2007)
NVivo9 -CS1
• • • •
No Account Collection Policy Unstructured system No WCM Policy system Flexible system
NVivo9 -CS1
NVivo9 -CS1
• • • • • •
High assets turnover ratio Cash flow problem Inability to service debts More financial leverage Return on Investment or Assets Return on owner’s Equity
NVivo9 -CS1
Leverage Ratios of CS1
NVivo9 -CS1
Profitability Ratio of CS1
•
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Appendix 15: Combined Findings from Talanoa sessions (Group W, T & CS1)
WORKING CAPITAL MANAGEMENT 1 Cash Flow Management Findings from Group T and CS1 No business plan in place, No Cash Budget (Forecast) No Operational budgeting,, Drawings of Cash and Remittances Cash flow problem arises, Cash and Credit transactions Flexible management system of cash No Perpetual Inventory Control Flexible system for stock control in T6 and T7 of Group-T, Selling time and services, Informal Costing System No Credit trade policy, No account collection policy in place, more than 12 months, No Account Receivables Control Accounts Bad debts Flexible accounting system for controlling of account payables Flexible accounting policy or procedures 5 Operating Cycle Flexible System of Operating Cycle (i.e. Mixed and Confused) Unstructured and Incomplete Cash conversion cycle is a challenge No business plan, using accounting software with limited skills, Combination of owner and business, Flexible and Unstructured system Measures Business performance by Cash at Bank balances No auditing, No analysis and interpretations of financial performance and position. Retained Earnings is not consistent Cash Flow statement is not prepared Outstanding taxes, GST and FBT are paid irregularly Findings from Group W Cash Flow Budget, Cash Receipts and Cash Disbursements, Borrow Cash Shortfall, Distribute Profits Proper system in place for reconciliation and controlling. Motives of holding cash for the reinvestment (Invest excess cash) References Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W
2
Inventory Management
Inventory Control system, LIFO, FIFO and Weighted Average. Just In Time (JIT) Selling time and services, Costing and analysis Control Accounts, system in place, aging of debtors and credit terms policies in place (30, 60 an 90 days)- Aggressive, conservative and defensive policies Control System in place, Motives of holding cash Maintaining good relationship with suppliers Negotiating discounts or other terms to improve cash flows Good processes reduce likelihood of error Interrelationship of WC components such Cash, Raw Materials, Debtors, Finished Goods in a complete ‘Operating Cycle’(Purchasing, Services, Collections, Sales) Cash conversion cycle – (AAI, ACP, APP) Register with Company office. Separate entity, Utilisation of Financial and Management Accounting. Proper business plan implemented and using MYOB for accounting
3
Account Receivables Management
Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T, Group-W Talanoa session (Interviews & Focus Group) NVivo9 -CS1 Group-T Group-W
4
Account Payables Management
6
Business structure & Business Financial Performance
Preparing of Financial Statements , Accounting Entity or Business is a Separate Entity, Measuring of Profitability using Financial Ratios etc Performing Audit program Reinvesting of retained earning Paying taxes based on IRD system
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Appendix 16: Recommendations for WCM of CS1 & Tongan SMEs
Cash Management Forecast short-term cash flows (cash receipts & cash disbursements) Preparing of cash flows forecast on timely basis Follow-up variances between actual and forecast or actual results and budget results (Cash Flow statements to be introduced using indirect method) Owner-manager should change actions which affect cash flows and cash balances Analysing cash flows and identifying variances Inventory Management Optimising inventory levels and production efficiency (reducing inventory level without impairing customer service) Increasing inventory turnover by focus on inventory levels. Considering the Gross Margin as % of sales Contracts and purchase ordersclear typical terms to be considered Costing and analysis using traditional inventory costing (direct labour, direct materials and overheads) Just In Time Inventory order system (JIT) Stock take process and inventory control system Deals with returns and complaints promptly System in place for monitoring & controlling overheads costs Business Plan with Inventory Forecasting and Budgeting Account Receivables Management Improving of credit and collection process in terms of three elements such as Credit Policy, Sales and Collections Credit: setting credit policy, evaluating customer credit and setting credit limit Account Payables Management Payables and payments for suppliers and creditors, Invoice promptly and up-to-date. Paying the Account Payables on the last date Business Performance Risk Management Using key Financial ratios such as ROA or ROI, ROE and others to analyse the business performance Liquidity ratios, Activity ratios, Leverage ratios and profitability ratios to be used for analysis DuPont Analysis system is suitable for CS1
Reconciled suppliers statements Ageing reports of account payables Understanding of policies for suppliers, utilities, credit cards etc Account Payables Control Account to be reconciled against the general ledger regularly Account for related accounts such as GST, Freight & Shipping, extra charges, discount for prompt payments, return and defects For every purchase must have purchase order (PO) and approved by management. Maintaining an approved vendor list Maintaining of suppliers files with copies of correspondence, contracts, purchase orders, and others Business Plan with Account Payables Forecast and Budgeting
Sales: Prompt fulfilment and invoicing, accurate and up-todate customer records Collections: Prompt follow-up of accounts, payment using cheque, credit card, electronic funds transfer etc Controlling of account receivables - clear “Payment Terms”. Account Receivable Control A/C (reconciliation) Late payments are not acceptable
Internal Control and policies system to be in place for cash (i.e. preventative and detective controls). Written policies Financial and Management Accounting software to be used (Information and Technology) e.g. MYOB, XERO etc Business Plan with complete Financial Forecasts and budgeting
Avoid, mitigate, transfer and accept RISK in the business (RISK associates RETURN) Business Plan with Financial Measurement
Business Plan with Account Receivables Forecast and Budgeting
Source: Develop from findings emerged from Interviews Talanoa sessions with Tongan SMEs of Group-W, CS1case study and Focus Group of Professionals
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