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The Impact of Financial Information on Organizing and Managing a Small Business

The Impact of Financial Information on Organizing and Managing a Small Business

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  • Study Level: BTech, BSc, BEng, BA, HND, ND or NCE.
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TABLE OF CONTENTS
List of Tables ........................................................................................................................................ i
Attestation of Authorship ....................................................................................................... ii
Acknowledgements ................................................................................................................. iii
Abstract ................................................................................................................................... iv
Chapter 1: Introduction ................................................................................................... 1
1.1 Background ............................................................................................................................ 2
1.2 Purpose of the Study ............................................................................................................. 5
1.3 Research Design ..................................................................................................................... 7
1.4 Proposed Contributions ........................................................................................................ 8
Chapter 2: .............................................................................................................................. 10
2.1 Literature Review on Business Organization and Management .......................... 10
2.1.1 Introduction ..................................................................................................................... 10
2.1.2 Business Organization and Management ...................................................................... 10
2.1.3 Small Business Organization .......................................................................................... 11
2.1.4 Small Business Management .......................................................................................... 13
2.1.5 Financial Management .................................................................................................... 14
2.1.6 The Role of Business Organization, and Management in the Success of a Small
Business ............................................................................................................................ 17
2.1.7 The Contribution of Financial Information in Business Organization and
Management..................................................................................................................... 19
2.1.8 Conclusion ........................................................................................................................ 19
2.2 Literature Review on Small Business Supporting Processes ................................ 21
2.2.1 Introduction ............................................................................................................ 21
2.2.2 Accounting Information System .................................................................................... 21
2.2.3 Owners-Accountants Relationship................................................................................. 23
2.2.4 Small Business Owners’ Financial Literacy .................................................................. 25
2.2.5 Conclusion ........................................................................................................................ 28
Chapter 3: Research Design ........................................................................................... 30
3.1 Introduction ............................................................................................................. 30
3.2 Methodology ........................................................................................................................ 30
3.3 Data Collection .................................................................................................................... 32
3.4 Participants .......................................................................................................................... 35
II
3.5 Data Analysis ....................................................................................................................... 36
3.6 Data Reliability and Validity .............................................................................................. 40
3.7 Ethical Issues ....................................................................................................................... 43
3.8 Conclusion ............................................................................................................................ 43
Chapter 4: .............................................................................................................................. 45
4.1 Questionnaire Findings .............................................................................................. 45
4.1.1 Introduction ............................................................................................................ 45
4.1.2 Demographic View ............................................................................................................... 45
4.1.3 Owners-Accountants Relationship .................................................................................... 47
4.1.4 Accounting Information Use .............................................................................................. 48
4.1.5 Owners Financial Literacy ................................................................................................. 49
4.1.6 Summary .............................................................................................................................. 50
4.2 Integrated Findings ................................................................................................... 51
4.2.1 Introduction ..................................................................................................................... 51
4.2.2 Use of Financial Information in Making Critical Business Decisions ........................ 51
4.2.3 Barriers to Financial Information ................................................................................. 54
4.2.4 Role of Accounting Information System ....................................................................... 56
4.2.5 Problems in Accessing an Accounting Information System 59
4.2.6 Owners-Accountants Relationship................................................................................. 60
4.2.7 Reasons for Hiring/Not Hiring External Accountants .................................................. 60
4.2.8 The Implications of Owners-Accountants Relationship ............................................... 61
4.2.9 The Implications of Owners’ Financially Literacy ....................................................... 62
4.2.10 Measuring Business Performance ................................................................................. 63
4.2.11 Other Methods of Measuring Performance ................................................................... 64
4.2.12 The Perceptions of Financial Literacy ........................................................................... 65
4.2.13 The Role Owners’ Competencies in Understanding Financial Reports ................... 66
Chapter 5: Discussion and Suggested Intervention Strategies .................................... 69
5.1 Introduction ......................................................................................................................... 69
5.2 The Use of Financial Information in Decision Making .................................................... 69
5.3 Barriers to Financial Information ..................................................................................... 73
5.4 Using an Accounting Information System ........................................................................ 77
5.5 Owners-Accountants Relationship .................................................................................... 80
5.7 Conclusion ............................................................................................................................ 87
III
Chapter 6: Conclusion .................................................................................................... 89
6.1 Introduction ......................................................................................................................... 89
6.2 Answers to the Research Questions ................................................................................... 91
6.2.1 The Use of Financial Information in Decision Making ............................................ 91
6.2.2 Barriers to Financial Information ............................................................................. 92
6.2.3 Use of Accounting Information System ..................................................................... 92
6.2.4 Owners-Accountants Relationship............................................................................. 93
6.2.5 Owners Financial Literacy ......................................................................................... 94
6.3 Contribution ........................................................................................................................ 95
6.4 Significance .......................................................................................................................... 96
6.5 Implications .......................................................................................................................... 98
6.6 Limitations and Areas of Further Research ..................................................................... 99
6.7 Conclusion .......................................................................................................................... 101
Appendix 1: .......................................................................................................................... 102
Appendix 2: .......................................................................................................................... 105
Appendix 3: .......................................................................................................................... 106
Appendix 4: .......................................................................................................................... 109
Appendix 5: .......................................................................................................................... 110
Appendix 6: .......................................................................................................................... 111
References ............................................................................................................................ 113
i
LIST OF TABLES
Table 1: Business Type, Ownership Structure, and Business Experience 46
Table 2: Annual Turnover 47
Table 3: Owners-Accountants Relationship 48
Table 4: Use of Accounting Information System 49
Table 5: Use of Financial Reports 50
Table 6: Sources of Recording Receipts and Payments 58
ii

Abstract
The small business sector plays an important role in the economic development of a country.
The contribution of financial management is considered a critical factor in the success and
survival of small businesses. However, not much is known about the extent to which small
business owners use financial management practices in making different business
management decisions. What are those practices, and how New Zealand (NZ) small business
owners use financial information in making management decisions, are questions
investigated in this study.
This dissertation examines the existing literature to find the contribution of financial
information in making organizational and managerial decisions. The literature review
suggests that the use of financial information in decision making depends on the owners’
attitude and their level of financial literacy skills. A qualitative approach was adopted to
investigate what financial information is used in making business decisions and the barriers
the small business owners face in operating their businesses. A questionnaire and semistructured
interviews were used to collect primary data from 12 New Zealand small business
owners. Using a questionnaire, this study sought to identify some basic perceptions of New
Zealand small business owners regarding the benefits of using financial information in
decision making. Semi-structured interviews were then conducted to obtain further
explanation of the responses to the questionnaire.
The study found that the majority of participants were not aware of the critical business
decisions which were significant for the success of their businesses. The low level of
financial literacy skills in the participants resulted in the use of individual practices for
measuring business performance and making business decisions. Internal and external
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barriers were the two main types of barriers preventing participants from accessing financial
information. Internal barriers included impediments emerging from the internal business
environment such as participants’ lack of financial, managerial and IT skills. External barriers
comprised barriers beyond the participants’ control. Lower level financial skills and financial
constraints prevented participants in implementing a computerised accounting system. The
study also found that external accountants were providing annual financial reports to their
small business clients without explaining the messages conveyed in these reports.
These barriers and issues that confronted small business owners, and affected the business
performance, can be overcome by the following proposed intervention strategies. The level of
financial literacy skills can be improved by educating and providing training to small
business owners about published financial management practices. External accountants need
to evaluate the financial management needs of their clients and assist them in understanding
the benefits of this information. The accountants also need to encourage the owners to
implement a computerised accounting system for better financial management. Most
importantly a strong communication link need be existed between the owners and small
business supporting organizations to formulate strategies which assist the owners in resolving
their financial and non-financial problems.
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Chapter 1: Introduction
The role of small business is recognized for its contribution to the economic and social
development of a country (Breen et al., 2003; Dyt & Halabi, 2007; Halabi et al., 2010). This
contribution is judged from providing employment to skilled and unskilled workers,
enhancing national Gross Domestic Products, and providing support to other small and large
businesses (Heenetigala & Armstrong, 2009). Recognition of small business contribution
motivates public and private organizations to support the small business sector by providing
them with a diverse range of services (Lewis et al., 2007). This support comes in different
forms such as training to improve managerial, financial, and information technology skills,
and access to external finances (Massey, 2003). The nature, quality, quantity, and delivery
mechanism of these services is different from one country to another (Evans & Volery,
2001). In New Zealand (NZ), many government agencies, non-government organizations,
and private organizations provide different services to NZ small business owners to improve
their skills and assist in resolving business problems.
There is no consensus on the definition of a small business because different countries have
different criteria to define, support and regularise the needs of the small business sector.
Some countries apply turnover or assets employed, but mostly the number of employees is
used as criteria for assessing a small business (OECD, 2004). The NZ Ministry of Economic
Development (2010) defines small business as “business which has any four basic
characteristics: They are personally owned and managed, they do not have specialist
management staff, owners make management decisions, and owners lack managerial
expertise”. The Ministry also considers a firm with 0-5 full time employees as a small
business. This definition is consistent with the definition by Street and Cameron (2007), who
considered a small business as being independently owned, organized, and operated with
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fewer resources such as limited capital, revenue, assets, and employees, and which is not
dominant in its field or industry. This current study applies the definition as described by the
NZ Ministry of Economic Development.
1.1 Background
Small businesses are organized, operated, managed and controlled by a small business owner.
The term small business owner is being used throughout this study replacing other titles such
as operator, manager, self-employed, sole-trader, and entrepreneur. For brevity, the
alternative words ‘owner/owners’ have also been used to refer to small business
owner/owners. Runyan et al. (2008), and Walker and Brown (2004) also used the term ‘small
business owner’ in their study, which implies that a small business owner is an individual
who operates a small business to enhance his or her personal goals and agendas. The owner’s
skill, experience, education management and governance style, and industry related
background encompass the strength or weakness of the type of business that he or she
operates (Parry, 2010).
1.1.1 Business Organization and Management
1. Business organization and management are usually considered two separate but
interrelated concepts that provide a roadmap of how to plan, setup, operate, control,
and direct a business organization. The functions of business organization and
management such as planning, staffing, directing, controlling are based on diversity of
processes, and each function and process is managed by different approaches. In a
small business, the role of business contribution and management is more important
for larger types of business organizations (Jarvis et al., 2000). The owners’ awareness
of organizational and managerial practices can provide them access to learn different
skills and use these skills to grow their firms and overcome organizational and
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managerial problems with confidence. Blackburn & Kovalainen (2010) maintain that
research in small business management is still expanding and every new research
contributes to the development of small business sector.
1.1.2 Role of Financial Information
Jarvis et al., (2000) found that financial management is critical to the success of any type and
size of business. This highlights the importance of financial management in small businesses.
Previous studies explored the benefits of financial reports in providing assistance to small
business owners, understanding financial literacy in small businesses, measuring business
performance, and small firms’ financial structure (Carton & Hofer, 2010; Chittenden et al.,
1996; Halabi et al., 2010). This study, on the other hand, seeks to examine NZ small business
owners’ management practices and focuses on how financial information is used in
management decision making. Investigation from this standpoint is likely to enhance the
importance of financial information in making business decisions. The study makes a
contribution to understanding the behaviours of NZ small business owners in making
business decisions. The empirical findings may also identify current and potential problems
that may impede the application of financial information in decisions making. The findings
will likely assist the owners in enhancing business growth, profitability, and overcoming
potential failure of small businesses.
1.1.3 The Contribution of Accounting Information System
Prior research has examined the application of a computerised accounting system in small
firms from different perspectives such as producing financial reports, measuring business
performance and making accurate decisions (Breen et al., 2003). Other studies examined the
role of accountants assisting owners on the adoption of computerised accounting system
(Halabi et at., 2010), alignment of small firms accounting needs with information technology
4
(Ismail & King, 2007), and the role of computerised accounting in meeting management
accounting needs (Marriot & Marriot, 2000). This study expands the scope of these studies by
specifically investigating, within the NZ context, the owners’ level of computer literacy,
financial literacy, and any financial problems that may prevent them from implementing a
computerised accounting system.
1.1.4 The Owners-Accountants Relationship
The relationship between owners and accountants has been the topic of many previous
studies (see for example, Breen et al., 2003; Halabit et al., 2010; Kirby & King, 1997;
Marriot & Marriot, 2000). The globalization of businesses, industries and services created a
great demand for professional accounting firms to provide advisory and compliance related
services. While the Big-4 accounting firms generally focus on the provision of services to the
large national and multinational, the second and third-tier accounting firms are delivering
compliance and non-compliance related services to the owners of small businesses. While the
accountants may be satisfied on the quality and delivery of services, an investigation is
required to understand whether the owners are also satisfied with the services that their
accountants are providing them. Parry, (2010) found that the owner’s criticism of the quality
of accountants’ advisory services affects the relationship between owners and accountants
(Parry, 2010). Kirby and King (1997) and Marriot and Marriot (2000), found that the
accountants did not deliver the nature and quality of services that their small clients expected
from them. This study investigates the nature of the conflict between NZ small business
owners and their external accountants. The identification of owners-accountants relationship
issues will provide an understanding to evaluate the significance of each problem and suggest
appropriate solutions.
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1.1.5 The Contribution of Owners’ Financial Literacy
The literature recognizes the contribution of owners’ financial skills and knowledge to the
success, growth, and sustainability of small business firms. For instance, Deakins et al.
(2002) examined the importance of owners’ attitude in learning financial management skills,
and other processes that assist in strategy development and decision making. Walker and
Brown (2004) found that instead of using appropriate financial management and business
organization skills, owners mostly tend to follow achieving business goals by a management
style that match with their personal life style. Similarly, Halabi et al. (2010) found that small
business owners experienced difficulty in understanding the performance of their firms. This
review indicates that the owners’ attitude plays an important role in the learning and use of
financial management skills in making business decisions. This study investigates whether
NZ small business owners understand how their businesses are performing and, if they lack
the necessary financial skills, how do they evaluate their firm’s performance. An
understanding of NZ owners’ attitudes on the role of financial information in decision
making, and other factors that impede the development of financial literacy skills, will lead to
finding relevant solutions.
1.2 Purpose of the Study
The aim of this research is to understand the problems that small business owners face in
managing and organizing their firms. Organizing and managing a small business depends on
the owners’ behaviour, skills, and prior experience (Walker & Brown, 2004). In making
organizational and managerial decisions for growth and success, and for dealing with various
business related problems, owners may not be using the knowledge and skills as suggested in
the small business organization and management literature (Weinzimmer, 1997). Financial
management makes a crucial contribution to each decision made for the organization and
operation of a small business (McMahon, 2001). These viewpoints provide a motivation for
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this study. The objectives of this study are to investigate: (1) how the NZ small business
owners organize and manage their small firms, and what financial information they use in
business management? (2) Do owners possess the knowledge, skills, and experience to apply
different financial management practices for making business decisions?
Specifically, the research questions are framed to investigate different critical business
decisions that the NZ owners use for the success of their businesses, and the description of
financial information that they use for making these decisions?
RQ-1 How does financial information facilitate decision making for small business
owners?
If owners believe that financial information helps them in sorting their organizational and
managerial issues, then how do they access this information? Are there any barriers that
restrain them from obtaining financial information? What is the nature of these barriers, and
how is this information identified? These questions lead to the formation of the next research
question:
RQ-2 What are the main barriers to accessing to financial information?
The use of AIS and owners-accountants relationship plays an important role in the
management of a small business. AIS assists owners in making swift business decisions
based on producing different financial reports. However questions may arise whether owners
are inclined to using AIS or not, what benefits they expect from it, and what problems they
face in operating and AIS. Similarly, the relationship between the owners and their
accountants sometimes create problems. For instance, are owners satisfied with their
accountants’ services, what are the issues and concerns of owners in dealing with their
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accountants? These concerns, and the questions on AIS, raise the following research
question:
RQ-3 How do AIS and accountants-owners’ relationship affect decision making
in small business environment?
Another potential area this current study seeks to empirically examine relates to owners’
competence in understanding the financial aspects of their business operations. This area also
seeks to explore the owners’ business knowledge, experience, and skills in making business
decisions. It is also desired to see how owners obtain financial literacy. Hence, the following
research question:
RQ-4 How does small business owners’ financial literacy assist them in decision
making?
1.3 Research Design
In the context of small business research approaches, Nayak and Greenfield (1991) observed
that most researchers applied quantitative research methods to investigate owners’ views on
business planing, directing and controlling a small business. These studies mostly use survey
based methods to achieve the objective of generalizability (Jarvis et al., 2000). Quantitative
studies are criticised for being unable to discover the complexities of owners’ management
strategies and their behaviour (Hill & Wright, 2001). These considerations indicate the
deficiency of qualitative studies in the extant literature. Realizing the need for qualitative
study, this dissertation also adopts a qualitative research approach.
Based on the research questions of this study, a qualitative study approach is considered most
suitable for collecting and analysing data. The qualitative approach will assist the researcher
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to examine the complexities of strategies and diversity of practices that NZ small business
owners use in the management of their firms. Consequently, a greater expectation leading to
reliable findings can be achieved.
1.4 Proposed Contributions
This study seeks to understand how NZ small business owners organize and manage their
firms, and whether they use financial information in decisions making, the empirical findings
are expected to explore specific characteristics of NZ small business owners. This finding is
expected to make contribution to practice. From a practice perspective, the study seeks to
make contribution by the findings of specific characteristics of small business owners, which
will provide an insight on NZ owner’s perceptions regarding financial and business
management. The study also seeks to make a contribution to practice by identifying areas of
improvements for small business owners, accountants, and public and private organizations.
1.5 Structure of the Dissertation
The purpose, motivation, research method and prospective contributions of this study have
been identified in this chapter. The remainder of this dissertation is organized as follows.
Chapter 2 describes the literature review. This chapter provides an outline of existing
literature on small business organization, management, and financial management practices;
and also reviews prior studies on accounting information system, owners-accountants’
relationship, owners’ financial literacy. This chapter also shows the resulting research
questions from the literature review. In Chapter 3, the research design employed in this study,
research instruments used and data analysis method involved are described. In Chapter 4, the
integrated findings drawn from the questionnaire and semi-structured interview are described.
In Chapter 5, empirical results are discussed and intervention strategies are suggested. In
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Chapter 6 the conclusion outlining the objective of study, its contribution, significance,
implication, limitations, and areas of further research, are described.

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  • Study Level: Study Level: BTech, BSc, BEng, BA, HND, ND or NCE

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