Impact of Financial Management Practices on SMEs Profitability with Moderating Role of Agency Cost

Saqib Muneer,Rao Abrar Ahmad,Azhar Ali

doi:10.22610/imbr.v9i1.1593

Abstract

The importance of Small and medium enterprises (SMEs) towards economic development and growth is considerable. Some SMEs are facing difficulties to their development due to the lack of financial resources and management experience. The objective of this study is to check the relationships of financial management practices on profitability of small and medium enterprises and also to check the impact of agency cost on this relationship. This study consists of data analysis of two hundred SMEs from Faisalabad Pakistan. The study used primary data predominantly. SPSS 23 is used for descriptive analysis and Structural Equation Model (SEM) through Partial Least Square (PLS) 3 for hypothesis testing. The findings of this study indicate the presence of positive relationship between financial management practices and SMEs profitability but agency cost as a moderator has no effect on this relationship. The study strongly recommends higher adherence to financial management practices. Policy makers, developments partners, owners, and managers of SMEs may use these findings for sustainability of their business in Pakistan.

Highlights

Small and medium enterprises (SMEs) have significant contribution toward creating employment and toward the economic development and growth (International Labor Organization, 2013, p. 1; Ratten, 2014; ulHaq, Usman, Hussain, and Anjum, 2014; Karadag, 2015)
The data analysis shows that financial management practices have significant impact of SMEs profitability
Tendency to use computer for accounting information system was low in small size business but in medium size businesses accounting system was strong. 80 % of the total firms followed cash management practices which include cash budget, review of cash budget on monthly or weekly basis

Summary

Introduction

Small and medium enterprises (SMEs) have significant contribution toward creating employment and toward the economic development and growth (International Labor Organization, 2013, p. 1; Ratten, 2014; ulHaq, Usman, Hussain, and Anjum, 2014; Karadag, 2015). Small and medium enterprises (SMEs) have significant contribution toward creating employment and toward the economic development and growth The main question is that how small and medium businesses measure their performance 247) said that failure of SMEs is inappropriate scale of measurement of the performance. Effective use of finance much emphasized by modern research (Gitman, 2011). This scholarly effort will help to identify the financial management practices effect on the profitability of SMEs and identify the agency cost effect. Good corporate governance is necessary for improving the performance and profitability of businesses (Braga-Alves & Shastri, 2011; Price, Rountree & Roman, 2011). Corporate governance are rules under which the relationship of manager and owner is over looked and it is make sure that the manager is working for best interest of the owner

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Conclusion