FINANCIAL REPORTING TO FINANCIERS BY AUSTRALIAN MANUFACTURING SMEs
by
Professor Richard G.P. McMahon,
Head, School of Commerce,
The Flinders University of South Australia,
GPO Box 2100,
Adelaide South Australia 5001.
Telephone: 08-82012840
Facsimile: 08-82012644
Email: Richard.McMahon@flinders.edu.au
School of Commerce
Research Paper Series: 98-11
ISSN 1441-3906
Summary
The purpose of this paper is to present new empirical evidence on financial reporting to
financiers by small and medium-sized enterprises (SMEs) engaged in manufacturing in
Australia. The primary concern is with preparation and dissemination to external
providers of finance of general purpose financial reports that may be historical and/or
future-oriented. The nature and frequency of formal financial reporting, undertaking
financial audits, the closeness of relationships with financiers outside of formal financial
reporting, respondents’ views on how well their financiers appear to understand their
businesses, and the propensity for the manufacturing SMEs studied to change their
financiers are all considered. The findings suggest that, compared to other Australian
SME research, financial reporting to financiers by the collaborating businesses is
evidently very comprehensive. This must be seen as encouraging from a financial control
viewpoint, and in terms of facilitating access to essential growth funding.
Acknowledgment:
Permission from the Australian Industrial Property Organisation to use data from the Australian
Manufacturing Council’s Best Financial Practice study, conducted in 1995, is gratefully acknowledged.
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FINANCIAL REPORTING TO FINANCIERS BY AUSTRALIAN MANUFACTURING SMEs
The purpose of this paper is to present new empirical evidence on financial reporting to financiers by
small and medium-sized enterprises (SMEs) engaged in manufacturing in Australia. The primary
concern is with preparation and dissemination of general purpose financial reports – the balance
sheet, the profit and loss statement, and the cash-flow statement. A broad view is taken of what
should be included amongst financial reporting practices. Specifically, both historical and futureoriented financial reporting are contemplated. Moreover, related matters such as undertaking financial
audits, the closeness of relationships with financiers outside of formal financial reporting (including
through financiers’ visits to factory premises, and whether or not financiers are kept informed of
significant emerging issues), respondents’ views on how well their financiers appear to understand
their businesses, and the propensity for the manufacturing SMEs studied to change their financiers
are also considered.
The paper proceeds by first reviewing the very limited empirical evidence presently available in
Australia on financial reporting to financiers by growing SMEs. After outlining the research data and
method employed in this study, the financial reporting practices of cooperating manufacturing SMEs
are described and analysed under the following broad headings: reliance upon external finance,
formal financial reporting to financiers, and financier relationships. The paper closes with a summary
of findings and conclusions arising from the research.
Previous Australian Research1
This section of the paper examines the limited empirical evidence presently available in Australia on
financial reporting to financiers by growing SMEs. McCahey (1986) reports on the financial reporting
practices of 40 small companies situated mainly in Melbourne, Victoria and surrounding suburbs.
Owner-managers are ranked as the most important users of financial reports, closely followed by
bank lending officers. Where they exist, non-managing owners are ranked highly as users, but behind
owner-managers. The financial reports apparently provided to external users are indicated in Table 1.
––––––––––––
Take in Table 1
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3
Reflecting the types of financial reports mainly provided, reporting is predominantly on an annual
basis. When asked what financial reports they provide in support of loan applications, the
respondents to McCahey's (1986) survey indicate as in Table 2.
––––––––––––
Take in Table 2
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The respondents are of the opinion that bank lending officers do not regard the information contained
in the financial reports as being as important to the lending decision as the enterprise's credit history.
In 1994, the National Investment Council, an advisory body to the Australian federal
government on investment related matters, commissioned a study which sought (inter alia) to assess
apparent causes of market failure in relation to financing of SMEs, particularly those with high growth
potential. The study resulted in a report entitled Financing Growth: Policy Options to Improve the Flow
of Capital to Australia’s Small and Medium Enterprises (Marsden Jacob Associates, 1995, pp. 1-2)
which includes amongst its key findings the following:
 Just 10 per cent or so of SMEs aspire to significant growth, and only about 30 per cent of these
are willing to employ external equity financing.
 Most growth SMEs seeking external equity financing are not ‘investment ready’ in that they fail
to meet basic requirements for attractiveness to potential external investors.
The report goes on to point out that many growth SMEs in Australia simply do not know what is
necessary in order to be investment ready, and therefore fail to attract the external financing they
require for growth and development.
Consequently, another study was commissioned by the Australian government that culminated
in a report entitled Investment Readiness Study (Ernst & Young and Centre for Innovation and
Enterprise, 1997, p. viii) which defines investment readiness as ‘ a state of preparedness and/or
willingness to take on an equity investor’. Amongst the three major factors identified as being
important to an external investor’s assessment of a particular concern’s investment readiness is ‘the
capabilities of management and the internal operations and control present in the business to achieve
the identified growth potential’ (Ernst & Young and Centre for Innovation and Enterprise, 1997, p. 4).
Amongst SME weaknesses associated with a lack of investment readiness are ‘poor internal systems’
and ‘lack of management information systems’. Such failings are claimed to not only limit
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management’s ability to successfully manage growth; but to also lead to an information asymmetry
which makes it difficult for potential financiers to appropriately assess the risk and return parameters
for an investment in the business. In a matrix of investment decision criteria for various investor
groups, the following financial reporting considerations are listed:
 Annual budgets and cash-flow forecasts are used.
 Monthly management information is available.
 Financial statements are audited.
Clearly then, timely and relevant financial reporting is a key element of investment readiness amongst
growth SMEs in Australia.
In connection with the research described later in this paper, in 1995 the Australian
Manufacturing Council conducted a mailed questionnaire survey of financial institutions that may
provide debt finance to growing SMEs. The survey produced 15 replies from 42 mailings giving a
response rate of 35.7 per cent (Australian Manufacturing Council, 1996). It is useful here to give some
attention to the results of this survey for light they may shed on expectations of Australian lenders
regarding the initial and on-going provision of financial information by SMEs that seek to borrow.
Financial institutions surveyed indicate that the main problems they experience with manufacturing
SMEs are as follows (Australian Manufacturing Council, 1996):
 Poor financial reporting and management systems – often high-quality, up-to-date information
is not available on a regular and timely basis, but is provided months in arrears.
 Poor understanding of financial information – especially the significance of debtors, creditors
and stock cycles and their impact on cash-flow and ability to service debt.
 Lack of business plans or financial forecasts – suggesting that no strategies exist to underpin
cash-flow projections and that, therefore, the credibility of those projections, and management
competence generally, is questionable.
Amongst the reported consequences of these problems related to the limited availability, usefulness
and reliability of financial information is ‘uncontrolled growth’ amongst many SMEs approaching
financial institutions.
The following information is reported by the financial institutions responding to the survey to be
the minimum documentation that must be attached to an application from a potential borrower
(Australian Manufacturing Council, 1996):
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 Profit and loss statements and balance sheets for the last three years, possibly audited by an
independent professional accountant.
 Current year cash-flow statement and cash-flow forecasts for the term of the debt.
 Budget projections for the next 12 months.
 Aged debtors, creditors and stock schedules.
 Statement of assets and liabilities of the principals (owners and owner-managers).
Of the types of financial information identified above, cash-flow statements and forecasts are reported
to be most critical in determining the outcome of a loan application. Examining the sensitivity of cashflow projections to changing enterprise, industry and economy-wide circumstances is indicated to be a
vital step in evaluating a borrowing proposal. Also most important is information that will allow the
lender to ascertain certain financial ratios for an applicant which are then compared to industry and
institutional benchmarks to ascertain competitiveness and creditworthiness. Other information that
could be sought includes a statement of Directors’ loans and assets, a statement of future capital
expenditures, and relevant personal and company taxation returns. As suggested earlier, the ready
availability and reliability of all such financial information is apparently taken as a key indicator of
managerial competence in the borrowing enterprise.
Research Data and Method
A valuable opportunity to obtain new evidence on financial reporting practices of Australian
manufacturing SMEs has been provided by the availability, through the federal government’s
Australian Industrial Property Organisation, of data from an Australian Manufacturing Council study
which led to its publication Practising Balance: Integrating Best Financial Practice Into Your Business
(Australian Manufacturing Council, 1996). Cross-sectional research for the Best Financial Practice
study involved a postal survey in late 1995 of a random sample, stratified disproportionately over
enterprise size and manufacturing industry categories, of approximately 5,500 Australian
manufacturing enterprises that are predominantly SMEs in employment terms. The survey used a
self-administered, structured questionnaire containing 53 essentially closed questions focused on
enterprise characteristics and performance, and financial management characteristics and practices.
Responses were received from 1,763 enterprises, representing a response rate of 32 per cent. The
Australian Manufacturing Council (1996, p. 78) indicates that ‘Responses were sufficient in each of
the 48 cells (industry by size) to be taken as reflecting the full population’. Some marginal differences
6
exist between the nature of respondents and non-respondents to the survey, but no significant nonresponse bias was discovered in relation to the matters presently of interest.
Over 1,100 responses to Best Financial Practice survey were from SMEs with the equivalent of
300 or fewer full-time employees and legally organised as proprietary companies.2,3 Ultimately, 1,050
responses could be used in this research. In terms of enterprise size, manufacturing sub-sector and
geographical location in particular, the study sample finally employed is not strictly representative of
the population of manufacturing SMEs legally organised as proprietary companies in Australia.
However, it cannot be considered poor and/or unusable by contemporary business research
standards in this country. In fact, the sample and data obtained appear very suitable given the stated
purposes of this research. The sample approximates the larger end of the manufacturing SME
spectrum and seems to include business concerns for which the extent and frequency of historical
and future-oriented financial reporting could be important prevailing issues, and in which financial
reporting practices may impact upon achieved growth and performance outcomes.
The research instrument produced data for 10 or so variables reflecting, in some way, financial
reporting to financiers by respondents to the Best Financial Practices survey. Descriptions of the
financial reporting variables are provided in the following section of the paper. All variables used in
this research are categorical (nominal or ordinal) in nature and/or have irregular distributional
properties. Thus, non-parametric/distribution free techniques of statistical analysis are employed
exclusively.
Research Findings
Reliance Upon External Finance
This sub-section of the paper documents the reliance apparently placed upon external financing by
manufacturing SMEs responding to the Best Financial Practice survey. How recently, if at all,
respondents have sought external debt and/or equity finance is revealed in Figure 1.
–––––––––––-–
Take in Figure 1
–––––––––––-–
In all, 783 respondents indicate that they have sought external debt and/or equity finance at some
stage since their formation. The modal response category is ‘in last year’ and the median response
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category is ‘1 to 5 years ago’ – together suggesting relatively recent experience of seeking external
finance in the study sample.
A Kruskal-Wallis one-way analysis of variance indicates that larger enterprises in employment
terms are statistically more likely to have recently sought external financing (n=969, H=15.843, df=4,
p=0.003). A Mann-Whitney test reveals a statistically significant difference in incidence of seeking
external finance between small enterprises and medium-sized enterprises in the study sample, with
the latter tending to have had more recent experience (n=969, U=28,858.500, p=0.050).
The financing practices of businesses over time are ultimately reflected in the structure of their
balance sheets – specifically the relative proportions of debt and equity funds cumulatively used. This
relativity can be seen as proxying, in some senses, for the amount of influence lenders may have over
the affairs of indebted businesses, possibly including their financial reporting practices. The ratio of
debt to equity in the balance sheets of respondents to the Best Financial Practice survey is revealed
in Figure 2 (the debt to equity ratio is borrowings, including overdrafts, as a percentage of owners’
equity, with loans from owners being regarded as debt).
–––––––––––-–
Take in Figure 2
–––––––––––-–
The modal response category is 0 to 25 per cent and the median response category is 26 to 50 per
cent – together reflecting relatively moderate or conservative gearing in the study sample. A KruskalWallis one-way analysis of variance suggests that debt to equity ratios tend to be statistically higher
for those enterprises that have raised external finance more recently (n=917, H=104.853, df=3,
p<0.000).
A Kruskal-Wallis one-way analysis of variance indicates that debt to equity ratio is higher with
statistical significance for larger enterprises in employment terms (n=990, H=23.785, df=4, p<0.000).
A Mann-Whitney test reveals a statistically significant difference in debt to equity ratio between small
enterprises and medium-sized enterprises in the study sample, with the latter tending to be more
highly geared (n=990, U=29,991.500, p=0.024).
Formal Financial Reporting to Financiers
This sub-section of the paper presents new evidence on actual financial reporting to finance providers
by manufacturing SMEs responding to the Best Financial Practice survey. Table 3 indicates the types
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of financial reporting to their financiers apparently undertaken by enterprises in the study sample (to
facilitate interpretation of Table 4, names for the relevant nominal study variables are indicated in
Table 3).
––––––––––––
Take in Table 3
––––––––––––
Note that business plans normally contain both historical and future-oriented financial statements,
often covering several years. Future-oriented financial statements are most likely to be part of annual
budgets. Periodic historical financial statements are those prepared at least quarterly. Clearly, there is
an high incidence of provision of annual historical financial statements to financiers; and futureoriented financial reporting to financiers also seems relatively commonplace.
Associations between the various forms of financial reporting to financiers identified in the
previous paragraph are shown in Table 4.
––––––––––––
Take in Table 4
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These associations range from weak through to moderate, and all are statistically significant. This
suggests a tendency for some financiers to be reasonably demanding across the range of financial
information that might be requested by them from those SMEs seeking financing support.
A series of Mann-Whitney tests suggests that a statistically significant relationship exists in the
study sample between enterprise size in employment terms and provision to financiers of business
plans (n=700, U=44,672.000, p=0.001) or future-oriented financial statements (n=682, U=38,965.000,
p<0.000) or annual historical financial statements (n=728, U=18,372.500, p<0.000) or periodic
historical financial statements (n=668, U=38,208.000, p<0.000). In each case, larger enterprises are
more likely to provide the financial information indicated to their financiers. A series of Chi-Square
tests indicate that a statistically significant difference exists between small enterprises and mediumsized enterprises in terms of their provision to financiers of business plans (n=700, 2=5.045, df=1,
p=0.025) or future-oriented financial statements (n=682, 2=8.577, df=1, p=0.003) or annual historical
financial statements (n=728, 2=4.568, df=1, p=0.033) or periodic historical financial statements
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(n=668, 2=18.692, df=1, p<0.000). In each case, medium-sized enterprises are more likely to provide
the financial information indicated to their financiers.
It is interesting to note that, of 312 manufacturing SMEs claiming to have experienced some
type of external financing problem, only four report that they have been refused finance because they
have submitted insufficient financial information. This could reflect that SMEs are generally
forthcoming with financial information when applying for finance and/or, more plausibly, that lenders
can ultimately insist that such information is provided. Including the four already referred to in this
paragraph, 162 respondents to the Best Financial Practice survey report having been asked to supply
more financial information than they initially provided in support of their most recent loan application.
This amounts to 23.2 per cent of those who considered the question relevant to their circumstances
and answered it. Curiously, a series of Chi-Square tests reveals that no statistically significant
difference exists between the likelihood of being asked to provide more financial information by a
potential financier and reported provision to financiers of business plans (n=584, 2=0.528, df=1,
p=0.468) or future-oriented financial statements (n=574, 2=1.217, df=1, p=0.270) or annual historical
financial statements (n=609, 2=1.243, df=1, p=0.265) or periodic historical financial statements
(n=563, 2=0.126, df=1, p=0.723).
A Mann-Whitney test suggests that no statistically significant relationship exists in the study
sample between enterprise size in employment terms and the likelihood of being asked to provide
more financial information by a potential financier (n=697, U=42,258.500, p=0.618). Furthermore, a
Chi-Square test indicates no statistically significant difference between small enterprises and mediumsized enterprises in terms of their likelihood of being asked to provide more financial information by a
potential financier (n=697, 2=0.003, df=1, p=0.953).
As a precursor to initial support, or as a condition of on-going assistance, external providers of
finance to SMEs often require that their financial systems and reports be audited by an independent
professional auditor. This helps to overcome the information asymmetry typically existing between
those within and those outside such concerns. It also provides some assurance as to the veracity of
information submitted in justification of an application for finance. Furthermore, the Australian
Corporations Law can, in specified circumstances, require a financial audit of proprietary companies.
This is particularly so for larger private companies and/or those that have sought external financing.
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From the viewpoint of this research, the incidence of financial audits may be significant in that they
make it more likely that:
 Systems exist which facilitate at least historical financial reporting on a timely and relevant
basis.
 Generally accepted accounting principles, and possibly promulgated accounting standards, are
applied in historical financial reporting.
 Information contained in historical financial reports is reliable as a basis for sound financial
decision-making.
Financial audits are apparently undertaken for 34.9 per cent of just over one thousand
respondents to the Best Financial Practice survey answering the relevant question. A Mann-Whitney
test reveals that median enterprise size in the study sample varies with statistical significance
between those audited and those not audited, with the former typically being larger (n=1,028,
U=89,123.000, p<0.000). Amongst small enterprises in the study sample, 32.9 per cent have financial
audits; whereas, amongst medium-sized enterprises, 59.5. per cent have financial audits. A ChiSquare test comparing the proportions of those with and without financial audits amongst small
enterprises and medium-sized enterprises in the study sample suggests that the proportions are not
similar (n=1,028, 2=22.734, df=1, p<0.000).
Financier Relationships
This sub-section of the paper further examines the potential influence of financiers upon the financial
reporting practices of respondents to the Best Financial Practice survey. Findings in the previous subsection suggest that the level of financial reporting to financiers undertaken is quite substantial.
Consideration is now given to the closeness of the relationship in other respects, and to respondents’
views on how well their financiers understand their businesses. The more familiar the relationship
between a business and its financier, and the better the financier’s grasp of the intricacies of the
business, the less might be the external financial reporting required – because information asymmetry
between those managing the business and the financier is less pronounced.
The closeness of the relationship beyond financial reporting that exists between businesses in
the research sample and their external financiers is reflected in two study variables detailed as
follows:
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 Whether or not financiers have visited the factory premises of businesses they financially
support has been ascertained. Such visits are reported to have occurred by 88.1 per cent of
those who considered the question relevant to their circumstances and answered it.
 Whether or not financiers are kept informed of significant issues by those within the businesses
they financially support has also been determined. Such information sharing is reported to
occur by 80.6 per cent of those who considered the question relevant to their circumstances
and answered it.
There appears to be a weak to moderate, statistically significant association between being visited by
financiers and keeping them informed on significant issues (n=689, Phi coefficient=0.441, p<0.000).
Together, these findings suggest that relations beyond just formal financial reporting do exist between
respondents to the Best Financial Practice survey and external finance providers.
Mann-Whitney tests reveal that a statistically significant relationship exists in the study sample
between enterprise size in employment terms and incidence of financier visits (n=732, U=18,261.500,
p<0.000) or informing financiers on significant issues (n=713, U=27,458.500, p<0.000). Larger
enterprises seem more likely to have had visits from financiers, and they are apparently more inclined
to keep financiers informed on significant issues. Chi-Square tests suggest that a statistically
significant difference exists between small enterprises and medium-sized enterprises in terms of the
incidence of financier visits (n=732, 2=4.133, df=1, p=0.042) or informing financiers on significant
issues (n=713, 2=5.124, df=1, p=0.024). Medium-sized enterprises appear more likely to have had
visits from financiers, and they are evidently more inclined to keep financiers informed on significant
issues.
While relations beyond just financial reporting appear to exist between businesses in the study
sample and external finance providers, this does not necessarily imply a high degree of
understanding of these manufacturers’ affairs amongst their financiers. Beliefs amongst respondents
to the Best Financial Practice survey about whether lenders tend to have a good understanding of
operational aspects (that is, operational management) of manufacturing businesses are revealed in
Figure 3.
–––––––––––-–
Take in Figure 3
–––––––––––-–
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The modal and median response category is ‘neither agree, nor disagree’. Although responses are
very slightly skewed towards disagreement with the question, they reflect an essentially neutral
opinion amongst businesses in the study sample on financier understanding of manufacturing
operations.
Beliefs amongst respondents to the Best Financial Practice survey about whether lenders tend
to have a good understanding of financial aspects (that is, financial management) of manufacturing
businesses are revealed in Figure 4.
–––––––––––-–
Take in Figure 4
–––––––––––-–
The modal and median response category is ‘neither agree, nor disagree’. However, responses are
noticeably skewed towards a negative opinion on financier understanding of financial management.
There appears to be a strong, statistically significant association between beliefs on lenders’
understanding of operational aspects of manufacturing businesses and beliefs on their understanding
of financial aspects of such concerns (n=1,032, Kendall’s tau b=0.763, p<0.000). Overall, the view on
these matters amongst respondent SMEs seems to be somewhat unfavourable towards lenders –
perhaps not an unexpected result.
Mann-Whitney tests indicate no statistically significant relationship in the study sample between
the incidence of financier visits and beliefs about lenders’ understanding of operational aspects of
their clients’ businesses (n=728, U=26,142.500, p=0.402) or lenders’ understanding of financial
aspects of their clients’ businesses (n=728, U=25,052.500, p=0.142). Similarly, Mann-Whitney tests
reveal no statistically significant relationship in the study sample between informing financiers on
significant issues and beliefs about lenders’ understanding of operational aspects of their clients’
businesses (n=711, U=36,832.000, p=0.227) or lenders’ understanding of financial aspects of their
clients’ businesses (n=710, U=36,760.000, p=0.222).
Kruskal-Wallis one-way analyses of variance suggest no statistically significant relationship
between enterprise size in employment terms and beliefs about lenders’ understanding of operational
aspects of their clients’ businesses (n=1,035, H=2.159, df=4, p=0.706) or lenders’ understanding of
financial aspects of their clients’ businesses (n=1,033, H=1.343, df=4, p=0.854). Furthermore, MannWhitney tests indicate no statistically significant differences between small enterprises and medium-
13
sized enterprises in terms of beliefs about lenders’ understanding of operational aspects of their
clients’ businesses (n=1,035, U=37,351.000, p=0.866) or lenders’ understanding of financial aspects
of their clients’ businesses (n=1,033, U=37,384.000, p=0.901).
Notwithstanding the previous evidence, amongst businesses in the study sample there appears
to be no substantial dissatisfaction with the banks they use, leading to their dismissal and
replacement. Only 95 respondents to the Best Financial Practice survey report having changed their
bankers within the preceding two years. This amounts to just 10.2 per cent of those who answered
the relevant question. Chi-Square tests reveal that no statistically significant difference exists between
the likelihood of changing bankers and the incidence of financier visits (n=656, 2=1.301, df=1,
p=0.254) or informing financiers on significant issues (n=637, 2=0.787, df=1, p=0.375). Furthermore,
Mann-Whitney tests suggest no statistically significant relationship in the study sample between the
likelihood of changing bankers and beliefs about lenders’ understanding of operational aspects of
their clients’ businesses (n=917, U=37,892.000, p=0.620) or lenders’ understanding of financial
aspects of their clients’ businesses (n=915, U=38,244.000, p=0.760).
A Mann-Whitney test indicates that median enterprise size in the study sample does not vary
with statistical significance between businesses that have changed bankers and those which have not
(n=930, U=39,156.000, p=0.832). A Chi-Square test comparing the proportions of businesses that
have and have not changed bankers amongst small enterprises and medium-sized enterprises in the
study sample reveals that the proportions are not dissimilar (n=930, 2=1.368, df=1, p=0.242).
Summary and Conclusions
The findings of this research suggest that, compared to other Australian SME studies, formal and
informal financial reporting to financiers by the collaborating manufacturing SMEs is evidently very
comprehensive. If there is a certain inevitability to financial reporting regulation for SMEs in Australia
in the foreseeable future, a rational response by their owner-managers would be to seek additional
benefits accruing mainly to their businesses from whatever financial reporting is unavoidably
undertaken for taxation and corporate regulatory authorities. For SMEs in financially challenging
circumstances such as growth, these benefits could include better financial control and easier access
to external financial support. Thus, the net cost of mandated financial reporting may be reduced quite
significantly.
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The incentive for more comprehensive financial reporting created by a need for better financial
control in SMEs need not be laboured here. Nevertheless, it must be acknowledged that, based on
available empirical evidence (McMahon & Davies, 1991a, 1991b, 1994), it is difficult to demonstrate a
strong nexus between the presumed outcomes of better financial control – possibly higher achieved
growth and/or improved financial performance – and more comprehensive financial reporting.
However, the persistence of claims that a finance gap exists for SMEs seeking external medium- to
long-term funding logically lends support to suggestions for improving their access to such finance, of
which more timely and relevant financial reporting to non-managing owners, creditors and lenders
must be considered a real opportunity (Hutchinson, 1989; Marsden Jacob Associates, 1995;
Australian Manufacturing Council, 1996; Ernst & Young and Centre for Innovation and Enterprise,
1997). It should be recognised that the latter incentive has a linkage with that associated with better
financial control. Other things being equal, debt providers are more likely to lend to SME ownermanagers who can demonstrate superior financial control, possibly through procuring and themselves
using timely and relevant financial reporting on their concerns.
Notes
1
Because of possible differences in institutional and regulatory frameworks between countries, no
attempt is made to review relevant empirical evidence from other countries. Overseas research
studies such as those conducted by Falk et al. (1976), Pace & Collins (1976), Abdel-Khalik (1983),
Stanga & Tiller (1983), Carsberg et al. (1985) and Hiltebeitel (1985) suggest that the initial and
on-going information an SME might be required to provide in order to obtain and maintain debt
financing is considerable, and that it may not be markedly different from that required from larger
concerns for the same purpose.
2
Businesses with up to 100 employees are considered to be small, with the remainder being
designated as medium-sized.
3
The focus in this research is upon growing SMEs, and it is more likely that these will be found
amongst businesses legally organised as proprietary companies (Hughes & Storey, 1994).
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Business Management, vol. 32, no. 1, pp. 9-17.
16
Pace, E.A. & Collins, F. 1976, ‘Bankers-accountants-financial statements: their relationship to smallbusiness loans’, Journal of Small Business Management, vol. 14, no. 4, pp. 16-22.
Stanga, K.G. & Tiller, M.G. 1983, ‘Needs of loan officers for accounting information from large versus
small companies’, Accounting and Business Research, vol. 14, no. 53, pp. 63-70.
17
Table 1: Types of Financial Reports Supplied to External Users
Per Cent Respondents
Statutory
Accounts
Taxation
Returns
Detailed Profit
& Loss
Statement
Other
Bank lending
officer
9
82
6
3
Non-managing
owner
-
40
-
60
Other
-
-
-
100
Report
Recipient
18
Table 2: Types of Financial Reports Provided to Financiers
Financial Report
Per Cent
Respondents
Previous year’s financial statements
94
Updated management reports
17
Cash-flow projections
17
19
Figure 1: Recency of External Financing
More than 5 yrs ago
11.0%
1 to 5 years ago
Never sought finance
21.1%
17.7%
Not answered
7.7%
In last year
42.4%
20
Figure 2: Debt to Equity Ratios
26 to 50%
23.6%
51 to 75%
12.8%
76 to 100%
9.0%
Over 100%
9.2%
Not answered
0 to 25%
39.6%
Debt As Percentage Of Owners' Equity
5.7%
21
Table 3: Financial Reporting to Financiers
Financial Report
(VARIABLE NAME)
Yes
No
Total
No.
Per
Cent
No.
Per
Cent
No.
Per
Cent
Business plan
(BUSPLFIN)
482
68.9
218
31.1
700
100.0
Future-oriented financial
statements (FOSTMFIN)
465
68.2
217
31.8
682
100.0
Historical financial statements
- annual (ANSTMFIN)
648
89.0
80
11.0
728
100.0
Historical financial statements
- periodic (PRSTMFIN)
358
53.6
310
46.4
668
100.0
22
Table 4: Associated Financial Reporting to Financiers
BUSPLFIN FOSTMFIN ANSTMFIN PRSTMFIN
BUSPLFIN
1.000
FOSTMFIN
.466
1.000
ANSTMFIN
.309
.403
1.000
PRSTMFIN
.344
.419
.247
BUSPLFIN
.
FOSTMFIN
Statistical
significance (p) ANSTMFIN
.000
.
.000
.000
.
PRSTMFIN
.000
.000
.000
BUSPLFIN
700
FOSTMFIN
654
682
ANSTMFIN
655
664
728
PRSTMFIN
632
632
627
Phi coefficient
Number of
enterprises
1.000
.
668
23
Figure 3: Financier Understanding of Manufacturing Operations
Disagree
29.7%
Strongly disagree
5.7%
Not answered
1.4%
Strongly agree
Not agree/disagree
2.5%
37.2%
Agree
23.4%
Lenders understand manufacturing operations?
24
Figure 4: Financier Understanding of Financial Management
Disagree
34.8%
Strongly disagree
6.3%
Not answered
1.6%
Strongly agree
2.5%
Not agree/disagree
36.3%
Agree
18.6%
Lenders understand manufacturing financial management?