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ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia CASH FLOW INFORMATION AND SMALL ENTERPRISES' PERFORMANCE Norhasni Haron Senior Lecturer, Politeknik Seberang Perai, Pulau Pinang, Malaysia Sofri Yahya Associate Professor, Graduate School of Business (GSB), Universiti Sains Malaysia (USM), Penang Malaysia. Email: sofri@usm.my Md Harashid Haron Senior Lecturer, School of Management, Universiti Sains Malaysia (USM), Penang Malaysia. Email: mdharashid@gmail.com Abstract The present research article endeavors to investigate the role of cash flow information for decision making as part of cash management on performance of small enterprises. Based on Resource-based theory, cash flow information is expected to influence the performance of small businesses. The samples of small-sized manufacturers are taken from Malaysian SMEs 2010 Directory using stratified random sampling. A total of 209 respondents are considered for this study. The results have shown a positive significant influence of the extent of cash flow information from cash flow statement, cash ratio analysis, cash budget, inventory and bank balance used for financing and investment decision making on profitability performance, but not on growth performance. On the other hand, the extent of cash flow information from account receivable and account payable have shown insignificant influences on growth performance, and provided the negative impact on profitability performance. The study has revealed some key factors of cash flow information applicable to small business' performance. Key Words: Small Business, Cash Flow Management, Financial Performance, Malaysia Introduction The economic development, globalization, financial and economic crisis have contributed some pressure to the growth and survival of small companies. As the predominant mode of business organization in almost all countries in the world, small business performance is an essential economic issue. Despite of the important roles, small businesses have faced with few performance issues. Among the issues are high number of failures and the slow pace in growth. Small companies are more likely to fail compared with larger ones, and new companies are more likely to fail than older ones. Having to face business challenges, small businesses have to build strategies. Strategy implementation requires the firm to translate either its corporate, business or functional level 7 ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia strategies into action. In Malaysia, small and medium-sized enterprises account for 97.3% or 645,136 of all enterprises (SME 2011/12). The statistics have proven the huge establishment and predominant mode of business in Malaysia. Despite of their importance, they have strong influence on economic growth, technological progress and employment creation (Multhern, 1995), stability and health of technology (Abu Bakar, Sulaiman, & Osman, 2008). The establishment of small and medium-sized enterprises in developing countries is to remedy the problems of unemployment, increase the growth rate of real per capita income and investment, balance income distribution and improve economic stability (Hashim, 1999). Besides, they have evolved to become key suppliers and service providers to large corporations, multinational and transnational corporations and played significant roles as supporting industries to large manufacturers (Hashim, 1999). Therefore, the important role of small business has encouraged the understanding of why firms failed or succeed. Managing cash flow effectively is a part of functional strategies. However, this strategy is not much studied especially on small business (Scot, Jones, Bramley & Bolton, 1996; Kroes & Manikas, 2014). Managing cash flow information effectively provides benefits to businesses such as revealing cash performance, measuring liquidity and commanding resources capability, and predicting future credit and loan payments (Hodgson & Stevenson, 2000), and determining performance of the firm (Bernstein, Ingram & Lee, 1997). Consequently, cash flow information is highly ranked than other sources of information for decision-making purposes (Atrill & McLaney, 1999). On the other hand, poor quality of cash flow information may mislead creditors regarding cash flow per- formance and may limit the ability to evaluate the performance of a firm (Geile, 2007). The severe shortfall in cash would lead to difficult situation and has shown that about 80% of enterprises in developed countries have gone bankrupt (Yang, Wang, & Du, 2006). On the contrary, successful ownermanagers with financial position knowledge are able to collect, analyze and use more accounting information to enhance their business processes (Palmer & Hott, 1995). Issues Faced by Small Enterprises The problem of small and medium-sized enterprises failures is a worldwide problem. For example, the United States has recorded about 87,266 failures in 1991, which was up by 43.7% from 60,746 in 1990 (Lee, 1987). Approximately 20% of businesses closed down during their first year in business, 60% by the fifth year, and 75% by the tenth year (Shane, 1996; Nucci, 1999). In New Zealand, about 65% did not continue beyond their first year of operations. In Malaysia, the high number and percentage of small and medium-sized enterprises failures and discontinues have been reported since the year 2002. About 79,310 small and mediumsized enterprises discontinued in 2002 and the numbers are rising (Che Rose, Kumar, & Yen, 2006). It is also reported that only 10% of the start-ups survived beyond 10 years. According to Shariffudin, Othman, and Foong (2004), about 75.7% of the first year entrepreneurs failed and only 8% to 22% lasted through their next five years in Malaysia. The statistics have also shown that only 1 in 24 start-up entrepreneurs were successful. Subsequently, out of the 37,000 newly-started businesses, about 60% have failed each year in the past five years (Omar, 2006). The fact is that every entrepreneur strives to be successful, but many businesses failed during the first three to five years. At 8 ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia the national level, the failure of small and medium-sized enterprises could severely affect the employment rate, contribution to GDP and national economy. The other notable performance issue of small businesses is the slow pace in growth or no growth at all. A study conducted by Hashim and Osman (2003) on 151 small and medium-sized enterprises reported that about 53% of the samples experienced an annual growth rate of less than 50% for the past five years. Only 17.9% of the samples ranged their annual growth rate between 50% to 90% and only one sample has reported to grow at 100% rate. Unfortunately, 28.5% of the samples did not grow in the past five years. The low performance can also be seen in small businesses going international. SMIDEC (2008) reported that only 8% of the total number of small and medium-sized enterprises had expanded internationally and the contribution was only 19% of the total exports. This position does not reflect the target of the Seventh Malaysian Plan (1996-2000), which was to enhance the capacity of small and mediumsized enterprises to be competitive and export-oriented. Thus, the high rate of failures, the slow pace in growth and low numbers of international expansion have led to the failure to achieve the economic targets and the visions of the government. The failures and slow growth of small businesses would worsen during financial crisis and depression. The financial crisis in 1997 has led to the collapse and bankrupt of many small and medium-sized enterprises (Lakis, 2004). The recent survey on 1,248 of the businesses has shown that about 83% of small and mediumsized manufacturers were affected due to financial crisis (SMIDEC, 2008). Again in the first quarter of the year 2009, the slow growth momentum of small and mediumsized enterprises was due to the global eco- nomic depression, in which 21.6% were severely affected (Ahmad, 2009). There are many challenges faced by small businesses that probably contribute to their failures and slow growth. Cash management is among the most common challenges to small businesses. For example, the problem of managing cash has resulted in them failing to pay back their debts (SMIDEC, 2005). Non-performing loans (NPLs) are the implication of the inability to repay loans. It was reported that there were about 9.1% and 11.1% of NPLs in March 2008 and 2007 respectively (SMIDEC, 2007). Malaysian Investment Development Authority (MIDA) has reported that in 2008, about 37.8% of NPLs have been given further help. Subsequently, at the end of the year 2008, there were about 763 applications for NPLs at the value of RM 527 million (SMIDEC, 2007). Inability to generate necessary cash flows to meet their loan payments (Whah, 2006) and cash flow management (Ahmad, 2009) were the serious issues mostly faced by small businesses during the time of economic crisis and depression. Literature Review The studies on factors of small and mediumsized business survival are very rich (Lussier & Pfeifer, 2001). However, some conceptual flaws and variables gaps still remain. The analysis on past entrepreneurial researches from 1987 to 1993 by Murphy et al. (1996) found that less than half of the intercorrelations of performance measures are significant. Consequently, more than 25% of the significant correlations are negative. The analysis on the studies from late 1990s to 2000s still have shown the inconsistent impact of various determinants on small and medium-sized firm performance. 9 ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia The work by Maes et al., (2005) divided the internal or endogenous factors of small and medium-sized enterprises performance into three categories; owner-manager level, management practices and company characteristics. The study found that a lot of researches have focused on the owner-manager level factors such as the personal characteristics of owner-managers, personality attributes of owner-managers, personalities of entrepreneurs, entrepreneurial action, proactive and competitive aggressiveness and entrepreneurial orientation. While, the second category of research focuses is on the impact of internal factors or management practices of small business. These include planning sophistication, capital structure and intensity, service level or product quality, use of information systems, record keeping, and professional advice, social, supporting and inter-firm network, financial reporting practices, and supply chain integration. Generally, the studies on management practices are still ongoing. Consequently, many authors attribute small business failure to the lack of managerial practices (D'Amboise & Muldowney, 1988). Similarly, management practice is claimed to be more significant than personality attributes (Wijewardena & Tibbits, 1999) and having the most significant impact (Maes et al., 2005) in explaining the varied growth of small business. However, the factor that provides great impact is yet less emphasized and should continue to be emphasized. Finally, the third category of studies stresses on the importance of company characteristics, such as size and maturity or age (Roper, 1998). Maes et al., (2005) have shown that the owner-manager level and company characteristics have no direct significant impact on financial performance. The above findings imply that the management's practices are expected to associate more with the high business performance. Upon reviewing previous studies and gaps, this study is further investigating the management practices particularly in using the firm's resources with the application of Resource-Based Theory. The RBT has become one of the most influential perspectives guiding strategic management research and the empirical work offers strong support to assertion that the organization's performance is enhanced to the extent that they possess strategic resources. Accounting Information for Decision Making for Small Business The cognitive ability through the use of information for decision-making is the most valuable capability that creates heterogeneity resource for entrepreneurship. The cognitive ability such as a manager's skill and know-how, knowledge, strategic decisionmaking are likely to be valuable, rare, hard to imitate, and non-substitutive (Alvarez & Busenitz, 2001). It creates a heterogeneity resource that leads to the better performance of the businesses. The studies on accounting information and small business started as early as 1960s. it started with the financial ratio studied by The Bureau of Economic and Business Research, Temple University in Philadelphia in 1961 (McMohan & Holmes, 1991). In 1987, Thomas and Evanson (1987) have extended the impact of financial ratios in making operation decision and success of small retail business, but found no significant relationship. Later on, DeThomas and Fredenberger (1985) found that small enterprises have formal record keeping systems and financial statement, but did not use the information for decisionmaking. McMohan and Holmes (1991) explored the association between historical financial reporting and analysis practices with the growth and financial performance 10 ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia of small enterprises, but the direct causal link what stated to be difficult to establish. However, later studies have shown more significant relationships between small business performance and accounting information. For example, Collis (1994) who examined the financial information usage of 385 private limited and small companies in UK found that the most useful sources of monthly management accounts and cashflow information led to the success and survival of the businesses. Another study by Palmer and Hott (1995) found that the successful owner-managers collected and analyzed more on different accounting information. In the years 2000 onwards, studies have given better scenario on the usage of accounting information to small businesses. McMohan (2001) found that the extent and frequency of financial reporting practices influences business growth and performance among 1,763 SMEs in Australia. Argiles and Slof (2003) found that the financial performance of small Catalan farmers using the reports for decision-making purposes was significantly better than those who did not use the reports. Consequently, Dyt (2004) found that 97% of the businesses maintained their records and gathered the financial information. The study also found that 70% of the respondent reflected favorable view of the usefulness of cash-flow information. Another significant study by Mohd Harif and Osman (2008) showed that financial planning and control, financial accounting, and working capital management were core components of SMEs and highly practiced. These included Cash Flow Statement, inventory and cash management. The recent study conducted in Malaysia by Jaffar et al., (2011) who investigated the perceived usefulness of selected accounting information presented in the SMEs' financial statements found the usefulness of accounting information from 31 information including inventory, cash provided by operations, current assets and current liabilities. Thus, the study increased the significant importance of accounting information particularly inventory, cash flow statement, cash management to small businesses. Generally, the studies on usage of accounting information for decision-making started with the simple information such as financial ratio and evolved to a more comprehensive reporting. However, the studies have shown inconsistent results. Thus, it can be concluded that the studies on small business have shown the extension of accounting information preparation from financial ratio to formal record keeping, financial statement, cash-flow statement, and other management accounting reports to the influence of accounting information on small business performance. Research Methodology This study uses a firm as unit of analysis and the data used to test the hypotheses is the primary data. The data of this study were gathered from 209 small manufacturers in Malaysia. The sample was taken from the SME Directory 2010, using stratified random sampling. This study uses proportionate stratified random sampling that classifies the samples into ethnics as the sub-group, namely Malays, Chinese and Indians and they are mutually exclusive. Each stratum is established to ensure homogeneity, with very few differences on the variables of interest within each stratum but having heterogeneity between strata. Data were obtained through mailed questionnaires from owner-managers who own and manage their firms. It is a cross-sectional study where the 11 ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia questionnaires are sent to the selected respondents between years 2011 to 2013. To accomplish the study, the questionnaires used are the adopted questionnaires from the previous studies. This study uses two dimensions of financial performance namely growth and profitability. Profitability embeds the notion of strength of the business relative to the competitors and is measured by averaging the financial profitability ratios of return on asset (ROA), return on equity (ROE) and return on sale (ROS) in the year 2010. This study adopts the business performance composite measure (BPCM) as the mean values of ROA, ROE and ROS (Hashim, 2000). The reliability of this scale is high with a Cronbach's alpha value of 0.81. In this study, the respondents are asked to provide the company's net profit over the total sales in percentage and total sales in the year. The profit or return for the present year is then found by multiplying the percentage of net profit over total sales with the total sales of the year 2010. Then, the ROS, ROA and ROE are calculated by dividing the return or profit over sales, asset and equity in 2010. In the meantime, growth dimension embeds the notion of the well-being of the business relative to the competitors. A ratio of sale growth is computed by dividing the last-year to the first-year firm's sales (Davidson, 1991). Sale growth of this study is computed as a ratio of last-year to firstyear firm's sale for a three-year period (2008 and 2009; and 2009 and 2010). Then, the average sales ratio is derived by dividing the total sales ratio by two. The context of this study focuses on the most relevant tool in decision making or business transactions to small businesses that are financing and investment decision. Thus, the extent of cash flow used for financing and investment decision making is divided into two dimensions. The first dimension is the extent of cash flow information from CFS, cash budget, cash analysis, inventory and bank balance used for decision making. While, the second dimension is the extent of cash flow information from account receivable and account payable used for decision making. This study uses the instrument by Chong (1996) to measure the extent of accounting used for decisionmaking. They are asked to consider the extent of the information used in the context of the daily decision making practices. The extent of cash-flow information used is measured using the weighted average. The weighted average is produced by multiplying the frequent usage and the importance of the information in making the decision. The mean is computed from the weighted average of the cash flow information in making the decision. The higher the mean of the weighted average, the higher is the usage of the cash flow information used for decision making. Significant Findings and Results The extent of cash flow information from CFS, cash ratio, inventory, cash budget and bank balance used for financing and investment decision making had made stronger contribution is explaining the profitability with a beta coefficient of 0.213. This result of the analysis showed that the variable is statistically significant and unique contribution to the profitability at p value 0.034. Consistently, the extent of cash flow information from accounts receivable and accounts payable for financing and investment decision making were found to contribute significantly to profitability at p value 0.014. However, this relationship has a negative beta coefficient of -0.246. Thus, the extent of cash flow information from CFS, cash ratio analysis, inventory, cash budget and 12 ORGANIZATIONAL INNOVATION STRATEGIES Graduate School of Business (GSB), Universiti Sains Malaysia bank balance used for decision making had significant positive relationship on profitability. On the other hand, the negative beta weight of account receivables and account payables indicates that if the profitability performance is to be increased, it is necessary to reduce the extent of cash flow information from accounts receivable and accounts payable used for decision making. shown that only the extent of cash flow information from CFS, cash flow budget, inventory, cash flow ratio, and bank balance used for decision making has contributed significantly to profitability performance of small businesses. This means that the higher the information used for decision making, the higher the profitability performance of the small business. Both of the information from accounts receivable and accounts payable are significantly influenced the profitability performance of the small-sized enterprises, but leading to different directions. The growth performance did not show a significant influence with R2 = 0.021, F = 1.904, p = 0.112. The result also indicated that the model of the relationship between the extent of cash flow information used for investment and financing decision making and growth performance of small businesses was not significant. Thus, each of the cash flow information for decision making did not influence the growth performance of small businesses. However, the extent of cash flow information from accounts receivable and accounts payable is negatively influencing the profitability performance of small manufacturers. This means that the higher the extent of usage of cash flow information from accounts receivable and accounts payable for decision making, the lower the profitability performance of the small businesses. Consistently, Niskanen and Niskanen (2000) have found that sales growth is negatively associated with accounts payable. This indicated that the faster a firm grows, the less it will use trade credit in its financing. The study has come to the agreement that firms in trouble use more accounts payable. Discussion and Conclusions Therefore, the maximum amount of accounts payable used by firms who grow slowly and those who not grow at all. While the minimum amount of the accounts used by higher and faster growing firms. In conclusion, the performing firms do not make use of less account payable. Thus, the results of this study is consistent with those of previous studies on the negative association between the extent of usage of accounts receivable and accounts payable for decision making on small firms' performance. As the conclusion, cash flow information used decision making provide the impact to the performance of small businesses. The focus of the study is placed on the most basic and important resources to small businesses namely cash flow information used for decision making. The extent of cash flow information for decision making consists of two dimensions. The first dimension is the extent of cash flow information from cash ratio analysis, inventory, cash flow budget, bank balance, and cash flow statement for investment and financing decision making. The second dimension is the extent of cash flow information from accounts receivable and accounts payable for investment and financing decision making. 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