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View metadata, citation and similar papers at core.ac.ukbrought to you byCOREprovided by Unisa Institutional RepositoryAN ASSESSMENT OF THE FINANCIAL MANAGEMENTSKILLS OF SMALL RETAIL BUSINESS OWNERS/MANAGERSIN Dr JS MOROKA MUNICIPALITYbyABRAM PHENYASubmitted in fulfilment of the requirements for the degree ofMASTER OF COMMERCEIn the subjectBUSINESS MANAGEMENTat theUNIVERSITY OF SOUTH AFRICASupervisor: Prof J MarxDate: July 2011
DECLARATIONStudent number:(0768 4606)I declare that:An assessment of the financial management skills of small retailbusiness owners/managers in Dr JS Moroka Municipality is my ownwork and that all the sources that I have used or quoted have beenindicated and acknowledged by means of complete references.Date: .SignatureAM PhenyaAM Phenya Student Number 0768 4606Page -i-
ABSTRACTSouth Africa abandoned its apartheid system in 1994, which enabled thecountry to be integrated into the global economy. Due to the lack of globalcompetitiveness, between 70 and 80% of start-ups fail within five years(Goosain, 2004:23). People lost their jobs and the unemployment rateescalated from 17% to 28% (Kingdon and Knight, 2003). Governmentincreased its support to small businesses in order to stimulate economicgrowth and development as an alternative means of job creation. However,studies conducted to determine the performance of small businesses revealthat most of these businesses fail irrespective of the support they receivefrom government due to a lack of financial management skills. The studybeing reported here investigated which financial management skillsowners/managers of small business have and which ones are lacking inorder to recommend appropriate training interventions required to developand improve the financial management skills of such owners/managers andultimately the management of their businesses.A literature review was conducted regarding the small businessenvironment, training interventions and financial management skills.Financial management skill sets relevant to small business were identifiedand listed for empirical research purposes. Empirical research wasconducted on the target population within the indicated geographical area.The study confirmed that most small business owners/managers havelimited financial skills. Recommendations will be put forward on the type ofskills future training needs to focus on.Keywords: Small business, financial management skills, businessowners/managers, trainingAM Phenya Student Number 0768 4606Page -ii-
ACKNOWLEDGEMENTMy sincere gratitude to:My family, for allowing me the time and space to do this study;My supervisor, Prof J Marx, for his professional advice, his supportthroughout my studies, his patience and encouragement thatmotivated me to complete this research; andMr Andries Masenge of the Bureau for Market Research (BMR),for his assistance with the development of the questionnaires,lessons on data capturing and descriptive data analysis using theStatistically Package for Social Science (SPSS).Above all, I thank the Almighty Lord Jesus Christ. With his love andgenerosity, I managed to complete this study.AM Phenya Student Number 0768 4606Page -iii-
TABLE OF CONTENTSDeclaration . iAbstract . iiAcknowledgement . iiiTable of Contents . ivList of acronyms . viiList of figures . viiiList of tables . ixCHAPTER ONE: .21.5.31.5.41.5.51.5.61.5.71.6.1.7Background of the research . 1Problem statement . 4Objectives of the study . 5Literature review . 5Small business sector . 5The issue of skills in small businesses . 7Financial management of small businesses . 8Research methodology . 10Research design . 11Data collection . 12Questionnaire design . 12Population . 13Sampling . 15Data analysis . 16Reliability and validity . 17Chapter outlay . 17Summary . 18CHAPTER TWO: LITERATURE roduction . 20Definition of small business . 20Classification of small business sector . 22The role of small businesses in economic development . 23The issue of skills in South African SMMEs . 26Definition of skills . 27Financial management in small businesses . 28Objective of the business . 30Long-term financing decisions . 31Capital structure decisions in small business . 31Investment decision-making . 33AM Phenya Student Number 0768 4606Page -iv-
2.7.52.7.62.7.72.7.82.7.92.8Capital budgeting decisions in small business . 33Working capital management . 36Cash flow management . 38Analysis of financial statements . 39Short-term financial planning . 41Summary . 42CHAPTER THREE: RESEARCH .6.23.73.83.93.103.113.12Introduction . 44Methodological paradigm . 44Research design . 45Population and sample frame . 47Sample design . 48Non-probability sampling . 48Probability sampling . 49Sample size . 50Data collection method . 51Secondary data sources . 51Primary data sources . 51Structure of the questionnaire . 53Pilot study . 54Response rate . 54Interviewer . 55Reliability and validity . 55Summary . 57CHAPTER FOUR: ANALYSIS AND INTERPRETATION OFTHE RESULTS4.14.24.34.44.54.64.7Introduction . 58Criteria for small business . 58Experience, training and education . 62Demographic profile . 67Financial management skill sets . 69Training needed . 75Conclusion . 76AM Phenya Student Number 0768 4606Page -v-
CHAPTER FIVE: SMALL BUSINESS TRAININGSERVICE .3.35.3.45.3.55.3.65.3.75.4Introduction . 78Public sector training providers . 78Small business development agency . 78Gauteng Enterprise Propeller . 80Sector Education and Training Authority (SETA) . 81University of South Africa (Unisa). 82Private sector initiatives . 83South African Banks . 83South African Breweries . 84Providers of accounting software packages: Softline . 84Independent training providers . 85Further Education and Training (FET) colleges . 86Damelin college . 87Online delivery . 87Summary . 88CHAPTER SIX: SUMMARY, CONCLUSIONS ANDRECOMMENDATIONS6.16.26.36.46.5Introduction . 90Summary . 91Conclusions . 93Recommendations . 95Suggestion for future research . 97Bibliography . 98Annexure 1: Covering letter .107Annexure 2: Respondent and interviewer details as wellas questionnaire. 108AM Phenya Student Number 0768 4606Page -vi-
LIST OF ACRONYMSGEM-Global Entrepreneurship MonitorSMMEs-Small, medium and micro enterprisesGDP-Gross domestic productUSA-United States of AmericaLBSCs-Local business services centresRFIs-Retail financial intermediariesMACs-Manufacturing advice centresBMR-Bureau of Market ResearchUnisa-University of South AfricaSPSS-Statistical Package for Social SciencesAM Phenya Student Number 0768 4606Page -vii-
LIST OF FIGURESFigure 1.1Map of South African provinces.14Figure 2.1Financial management functions of the business. 29Figure 4.1Manager of the business (n 45) . 60Figure 4.2Gross monthly sales (n 45) . 61Figure 4.3Total assets at market value (n 45) . 62Figure 4.4Basic education (n 45) . 65Figure 4.5High education (n 45) . 65Figure 4.6Technical qualification (n 45) . 66Figure 4.7Business management training (n 45). 67Figure 4.8Gender composition (n 45) . 68Figure 4.9Race distribution (n 45) . 69Figure 4.10 Need for financial management training (n 45) . 75AM Phenya Student Number 0768 4606Page -viii-
LIST OF TABLESTable 1.1Financial management skills (n 45) . 9Table 2.1Estimated percentage contribution by size ofbusiness (n 45). 24Table 3.1Proportionate stratified sampling (n 45). 50Table 4.1Permanent and temporary staff (n 45) . 59Table 4.2Years in existence (n 45) . 63Table 4.3Previous work (n 45) . 64Table 4.4Descriptive statistics for age (n 44). 68Table 4.5Level of financial management skills (n 45) . 70Table 4.6Management of accounts receivable (n 45) . 73Table 4.7Knowledge regarding the functioning of thefinancial institutions (n 45) . 74AM Phenya Student Number 0768 4606Page -ix-
CHAPTER 11.1BACKGROUND OF THE RESEARCHGoosain (2004:23) found that 70% to 80% of the small businessesstarted in South Africa fail each year. Landzani and Van Vuuren(2004:157) add that when many small businesses emerge, aconsiderable number of them fail at the infancy stage and some failwithin few years after start-up. According to the GlobalEntrepreneurship Monitor (GEM) (2004:10), the failure isattributable to a lack of business management skills, especiallyfinancial management skills. In order to succeed and survive in themarket place, GEM (2004:12) suggested that a conduciveenvironment be develop for small businesses.In order to create an enabling environment for small businessesrequires that the issues that stifle their development and growth beaddressed. Initiatives such as a friendly regulatory environment,access to information, advice, finance and marketing anddifferential taxation support for managerial training are necessaryto enable small businesses to survive and adapt in the changing andchallenging environment (Government Gazette, 1995:10). In thenext section, issues that justify the support of small businesses arediscussed.Throughout the world, small, medium and micro enterprises(SMMEs) play a role in absorbing labour, penetrating new marketsand generally enhancing an enabling environment for entrepreneurship. This is partly due to the fact that SMMEs tend to be morelabour-intensive and therefore have a higher labour-absorptionAM Phenya Student Number 0768 4606Page -1-
capacity than big businesses (Jacqui and Macquet, 2002:11).SMMEs can be established for any business activities, in urban orrural areas, in big cities or very small villages (Amin, 2004:371).For instance, in the United States of America (US) smallbusinesses introduce innovative products and services, createdjobs, opened foreign markets and in the process sparked the USeconomy. In Japan, small businesses account for the bulk of thecountry’s established businesses that provide sustainable jobs. InTaiwan, small businesses account for 98% of the gross domesticproduct (GDP) (Landzani, 2004:154). SMMEs in South Africa canfollow this example and make a contribution to economic growthand reduce unemployment (Government Gazette, 1995:5).It is against this background that the South African governmentidentified small businesses as a vehicle to address the challenges ofjob creation, economic growth and income redistribution(Government Gazette, 1995:4). Central to this thinking is thenational government’s plan and strategy to assist the SMME sectorby creating an environment in which entrepreneurs flourish, inwhich investment opportunities are created and in whichproductivity is improved (Landzani, 2004:13).In 1995, government developed a national strategy for thepromotion and development of small business in South Africa(Government Gazette, 1995:5). Subsequent to the introduction ofthe national small business strategy was the establishment of thenew institutional structures designed to support, coordinate andmonitor the progress of the small business sector (Rogerson,AM Phenya Student Number 0768 4606Page -2-
2004:767). The new institutional structures consist of the followingrole players:Ntsika Enterprise Promotion Agency;Khula Enterprise Limited and Khula Credit Guarantee;the national small business council; andbusiness partners.Ntsika’s mandate was to facilitate access to non-financial areas ofsmall business support such as skills training and information.Khula s central activity was to facilitate access to finance for smallbusiness development. Khula provides loans and guarantees forretail banking institutions servicing the small business sector.Business partners are specialist investment groups, providing debtand equity investment, mentorship and property managementservices for small and medium enterprises in South Africa.To facilitate communication between Khula and Ntsika, a nationalsmall business council is established. The national small businesscouncil is an autonomous body led by the private sector consistingof small business representatives and associates. The council’smain objectives are to promote the interests of the small businesssector at national, provincial and local level and to submitrecommendations to government regarding existing and proposedlegislature impacting on small businesses. The main implementersof the programmes designed by Khula and Ntsika are highlightedbelow (Broembsen, 2003:5).A critical component of the support strategy was the establishmentof a set of decentralised local business services centres (LBSCs),AM Phenya Student Number 0768 4606Page -3-
provincial small business desks in each province, tender advicecentres, retail financial intermediaries (RFIs) and manufacturingadvice centres (MACs) (Rogerson, 2004:767).In support of the Khula and Ntsika programmes, the National SkillsAuthority introduced the National Skills Development Strategy.The main objective of this strategy is to stimulate and support skillsdevelopment in small businesses (Erasmus, 2005:15).Despite the introduction of a national strategy for the promotionand development of small business and the National SkillsDevelopment Strategy, research conducted by Roodt (2005:20)showed that about 30% of people participating actively in the smallbusiness sector lack business skills. These findings are consistentwith the research conducted by Ligthelm and Van Wyk (2004:1).This latter study showed that one out of every three smallbusinesses owners/managers issmallbusinesseslackfunctionally illiterate. Owners ofessentialfinancial/accountingskills,information technology skills and business skills required foreffective management of small businesses.1.2PROBLEM STATEMENTGiven that SMMEs can reduce the unemployment problems facedby South Africans but fail particularly due to lack of businessmanagement skills, it becomes imperative to investigate whichfinancial management skills owners of small businesses have andwhich ones they lack and what the implications for training anddevelopment are.AM Phenya Student Number 0768 4606Page -4-
1.3OBJECTIVES OF THE STUDYThe main objective of this study was to determine which financialmanagement skills owners/managers of small businesses in Dr JSMoroka Municipality have and which ones they lack and torecommend appropriate training required for developing andimproving their financial management skills. In order to achievethis objective, the following secondary objectives have beendeveloped.to investigate the current experience, training and educationof small business owners with respect to financialmanagement skills;to determine their financial management skills;to explore which training needs they have with respect tofinancial management skills; andto recommend possible suitable training providers offinancial skills development.1.4LITERATURE REVIEWThe literature review centred on the following themes: overview ofsmall businesses, skills development and financial managementskills.1.4.1 Small business sectorPolicy makers have a growing concern about the increase inunemployment, lack of job creation, poor economic growth andglobalisation. They believe that small business development is thesolution to this concern (Shafeek, 2006:25). The rationale forAM Phenya Student Number 0768 4606Page -5-
promoting small businesses is that this sector has a positive impacton the gross domestic product (GDP). The objective of this sectionis to define small businesses and to classify them into variouscategories using the National Small Business Act 102 of 1996. Thisis in line with the argument by Bridge and McMahon (2003:184)whose definition of small business is a point of departure for anystudy on the small business sector because it enables the researcherto limit and focus the study on small business. There is no single,uniformly accepted definition of a small business. Gibson andHolmes (2001:1) argue that small businesses are best defined andidentified by their inherent characteristics. From this point of view,Shafeek (2006:28), Gibson and Holmes (2001:01) and Nieman,Hough and Nieuwenhuizen (2006:5) consider a business to besmall if it has the following characteristics:no public negotiability of shares of ownership;independently owned and operated;owner personally guarantee any existing or plannedfinancing;closely controlled by owner, and the principal decisionmaking functions rest with the owner;less than 20 full-time employees; anda relatively small share of the marketplace or relatively littleimpact on its industry.The criteria set out above are not much different from the oneslisted in the National Small Business Act 102 of 1996. The Actclassifies small businesses into the following categories: small,medium and micro business with the general term “small business”AM Phenya Student Number 0768 4606Page -6-
and the acronym “SMMEs”. The classification is based on thenumber of employees each business employs, the turnovergenerated annually by the business, and the business asset value.The classification is considered when policies and programmesintended to support and develop small businesses are designed.This is necessary because the financial support and training needsfor small business differ from that of micro businesses(Broembsen, 2003:12).The focus for this study was limited to micro and small businesses.These businesses employ between 5 and 10 employees, generate anannual turnover of about R150 000 to R250 000 and has a totalgross asset value (excluding fixed property) ranging betweenR100 000 and R250 000.1.4.2 The issue of skills in small businessesSkill is knowledge demonstrated by actions or the ability toperform in a certain way. Skills are acquired through training andeducation (Perks & Smith, 2006:4). Education and training createcircumstances in which a person can acquire and apply the skillthat will help him/her achieve the objective of the business. Skillsdevelopment can be achieved through training and education(Erasmus, 2005:1, 2, 28). The difference between education andtraining is that education prepares the individual for life whiletraining prepares him or her to perform specific tasks. In this study,the focus was on skills development through training.AM Phenya Student Number 0768 4606Page -7-
Landzani (2004:154–156) argues that changing circumstancesrequire that small business managers/owners receive regulartraining in order to reduce failure rates, increase profits and achievegrowth. This is necessary because most small business owners starttheir businesses without appropriate training.This study was intended to support the above argument byinvestigating the current state of financial management skills and anagement skills training required. The following section givesan overview of financial management followed by a list offinancial management skills.1.4.3 Financial management of small businessesA business must have the necessary resources at its disposal if it isto function efficiently. In order to accumulate the resources, fundsare raised from the investors and lenders and invested in fixed andcurrent assets. Once resources have been raised, operation starts.During the operation, funds are earned and expenses are paid. Fromthe time of inception throughout its lifespan, the business usesfunds. Hence, there is a continual flow of funds to and from thebusiness. The management of these funds is called financialmanagement (Badenhorst-Weiss, Brevis-Landsberg, Cant, Du Toit,Erasmus, Kruger, Machado, Marx, Mpofu, ��421).Thefinancialmanagement function is distinguished from other businessfunctions such as marketing, human resource and operationmanagement but should not be seen in isolation from them. Allother business functions have financial implications for theAM Phenya Student Number 0768 4606Page -8-
business (Conradie and Fourie, 2002:5). In a business organisation,financial management is performed by a financial manager.Marx, De Swardt, Beaumont-Smith and Erasmus (2010:10)summarise the duties of the financial manager as follows:investment decision-making;financing decision-making;management of cash flow; andensuring profitability.Table 1 lists the main financial management tasks in the firstcolumn, followed by the specific skills required to execute thesefinancial management tasks in the next column. The varioussources are indicated in the last column.Table 1.1: Financial management skillsMain anning,control andreportingAM Phenya Student Number 0768 4606Specific skillsCapital budgetingManagement of networking capitalKnowledge of varioussources of fundsCalculate the cost ofcapitalSelect optimal capitalstructurePreparation of cashbudgetManagement of cashconversion cycleCollecting, analysingand communicatingfinancial informationProfit planningCash planningAuthorsNieman et al.(2006:11)Atrill and McLaney(2006:407)Gitman(2010:504–580)Nieman et al.(2006:101)Gitman(2010:641–643)Atrill and McLaney(2006:02)Walker and Petty(2001:61)Page -9-
In this study, the concept “financial management skills” will bereferring to those skills listed in Table 1.1. These skills will be usedas a guideline for the development of the questionnaire and theinterview schedules. The results of the analysis will be presentedand compared with the skills listed in Table 1.1.1.5RESEARCH METHODOLOGYThis study consisted of two parts, namely a literature review andthe empirical research component.As stated before, the literature review was used to definefundamental concepts, discuss small businesses and categorisefinancial management skills. Information was gathered fromsecondary and primary sources using books, journal articles,theses, government publications and interviewer-administratedquestionnaires.A quantitative approach was used in this study. A quantitativeapproach is highly formalised, controlled and has a range that isexactly defined (Segoale, 2001:19). A quantitative approach wasmainly used in this dissertation because of its relevance to theresearch topic and objectives. The objective was to measure datarather than to explore and evaluate meanings. The quantitativeapproach allowed the use of structured questionnaires to gatherquantifiable data, which could be analysed statistically to producequantified results. The quantitative research design used in thisstudy will be discussed in the following sections.AM Phenya Student Number 0768 4606Page -10-
1.5.1 Research designTustin, Ligthelm, Van Aardt, Van Wyk and Martins (2005:7, 82)define research as a systematic and objective collection, analysisand interpretation of data in order to address the research problem.The master plan that specifies the methods and procedures forcollecting and analysing the data is called the research design. Aresearch design known as a descriptive survey was used in thisstudy. This method yielded quantitative information that could beanalysed statistically. The selection of this method was based onthe objective of the study, the type of data and the analysistechniques, which were employed in this study.Survey research acquires information by asking questions, tabulating the answers and summarising the responses with percentages, frequency counts, or more sophisticated statistical indices,and then to draw inferences about a particular population from theresponses of the sample (Leedy & Ormrod, 2005:183–184).Sekaran (2003:118) states that at least the following topics shouldbe covered in research design:data collection methodsquestionnaire designsampling, anddata analysis.These topics will be discussed in the sections below.AM Phenya Student Number 0768 4606Page -11-
1.5.2 Data collectionData collection in descriptive surveys is normally conducted byface-to-face interviews, a telephone interview or a mailquestionnaire. In this study, data were collected by means ofinterviewer-administrated questionnaire. The usage of this methodwas based on its ability to generate a high response rate (Leedy &Ormrod, 2005:184). Prior to the interview, a motivational letterwas sent to the respondents explai
and improve the financial management skills of such owners/managers and ultimately the management of their businesses. A literature review was conducted regarding the small business environment, training interventions and financial management skills. Financial management skill sets relevant to small business were identified
