FINANCIAL RISK MANAGEMENT: COMPARISON BETWEEN MEN AND WOMEN ENTREPRENEURS’ INVOLVEMENT TOWARDS BUSINESS SUCCESS Nurulhasanah Abdul Rahman
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Keywords: Financial risk management, gender, Malaysia.
INTRODUCTION Small business in Malaysia falls under SME (Small Medium Enterprise) industry. Development of SME provides job opportunity, improves economic growth and also helps the poverty eradication programs (Al-Mamun, Wahab & Malarvizhi, 2010). Despite of the growing number of small business expansion, the failure rate is alarmingly high for the first five years. According to a study by Chong (2012), the survival rate of SME is relatively low and it is estimated that 50 percent of all start-ups fail in their first year. Besides, findings from a study by Berry (2002), the entrepreneurs are often ignore the importance of financial management and only aware it after some time. However, it is probably too late to rectify this matter. Compared to large companies, financial risk management is well implemented and communicated to the staffs. In contrary to the small firms, it should be less complicated and applied to their business but it is rarely adopted (Panigrahi, 2011). Furthermore, Nartisa (2012) also highlights that small business owners should not only solve problems but need to foresee it beforehand which makes financial risk management is critically needed to be implemented in business. Fatoki (2012) also clarifies that business without proper financial planning leads to poor financial control. Thus, it leads to the business failure or closure. That is why, the knowledge of financial risk management is required in small business as it will leads them to the ultimate business success. Other than that, the involvement between men and women entrepreneurs’ may differ in terms of the extent to which they adopt financial risk management in business. In short, that is an urgency to study the comparison between men and women entrepreneurs’ involvement in financial risk management to ensure the company’s survival.
SIGNIFICANT OF STUDY 1. Findings from this paper may shed some lights on how to educate men and women entrepreneurs to implement proper financial risk management in their business. Financial risk management helps to improve business survival as it emphasize on risk mitigation. Risk mitigation is important because small business will always need to face risk from business transaction to business growth. If these risks are not well handled, then additional cost need to be spent for risk solution. 2. Government and non-government bodies may take into consideration the results from this paper especially the in terms of risk definition in business. The entrepreneurs need to know how severe risk can be for their business failure. Moreover, the involvement of entrepreneurs in adapting financial risk management is crucial because they are the one who holds the key of business success. So, the relevant bodies can include these findings as part of their policy on gender and small business development programs.
RESEARCH OBJECTIVE 1. To identify the difference between men and women entrepreneurs’ involvement in financial risk management
2. To study the relationship between financial risk management and business success
LITERATURE REVIEW This section explains the definition of small business in Malaysia and its challenges. Later, the importance of financial risk management is been discussed comprehensively. To date, there is no exact consensus among researchers on how to define financial risk management among small business. There is a limited literature review on this matter which makes it quite challenging to provide a solid definition of financial risk management for small business. Yet, its importance towards the survival of small business is undeniable. Not to mention, there is no discussion has been done regarding financial risk management and gender differences. Therefore, there is an urgency to place financial risk management as well as comparison between men and women entrepreneurs’ involvement as the focus of this paper.
In Malaysia, 99 percent of the total business establishments are SME. There are three main sectors in Malaysia namely; Services, Agriculture and Manufacturing. SMEs contribute 31 percent of the nation’s GDP and share 56 percent of the total employment (SMEinfo, 2011). The definition of small business from SME Corporation Malaysia (2013) stated that it depends on the sectors. For instance, small business across all sectors, the sales turnover must be less than RM300,000 to RM15 million or full-time employees not exceeding five to 75 fulltime employees (revised 1 January 2014). Regardless of this fact, small business still needs improvement especially in terms management and financial issues.
Doing business, particularly a small business is always been misinterpret as the ultimate source of income to the poor household. This statement is not totally wrong but its establishment alone is not sufficed. Among the most discussed risks involved in SME are establishment of business entity, low collection in account receivables, incapacity to go for technological advancement and high employee turnover (Panigrahi, 2011). Similar with a study conducted by Aziz, Awang and Zaiton (2012), financial constraint, high taxes, lack of state government support and the successor replacement as the common challenges faced by SME. The structural weaknesses in terms of technology utilization, research and development activities, technical, professional and management expertise prevented full realization of SME potential (Radam, Abu & Abdullah, 2010). Studies done in the United Kingdom and the United States have shown that weak financial management – particularly poor working capital management and inadequate long-term financing – is a primary cause of failure among small business (Harif & Osman, n.d.). Having this information, it is necessary to know the definition of financial risk management in detail as to be discussed later.
According to Dionne (2003), researchers are trying to find exact definition of risk management but there is no well-accepted framework that practitioners can rely on when formulating risk management strategies. Every definition is different according to countries, business setting and environment. Nevertheless, Fatoki (2012) had summarized the definition of financial management from Gitman (2007), Oduware (2011) as well as Brinkmann et. al. (2011) and Management Study Guide (2012). Gitman (2007) had come out with definition of financial management as the area of business management, devoted to a judicious use of capital and a careful selection of sources of capital, in order to enable an organization to move in the direction of reaching its goals. Meanwhile, Oduware (2011) stated financial management entails planning for the future of a business enterprise to ensure a positive cash flow. In addition to that, Brinckmann et al. (2011) and Management Study Guide (2012) define financial management as managerial activities that concern the acquisition of financial resources and the assurance of their effective and efficient use.
On the other hand, Mehmood (2010) defined financial risk management as the quality control of finance. It is a broad term used for different senses for different businesses or things but basically it involves identification, analyzing, and taking measures to reduce or eliminate the exposures to loss by an organization or individual. Besides of the good ingredients of financial risk management, there are still issues that small
business owners need to be handled. As such, the factors that prevent them from practicing sound financial management practices were; qualified accountants are too expensive to maintain (93%), accounting records are too difficult to understand (87%) and lack of internal accounting staff (73%). Kawame (2010) highlighted in the study that a careless financial management practices are the main cause of failure for business enterprises in Ghana (as cited in Lakew, n.d.). Supported by Berryman (1983) has also indicated that poor or careless financial management is a major cause of small business failure (refer to Agyei-Mensah, 2010).
With regards to gender, the findings from Nawai and Shariff (2012) shows that women borrowers have higher probability of being in the delinquent category. The result is contradicted with the most previous result that found women borrowers are more creditworthy than men borrowers such as Sharma & Zeller (1997), Papias & Ganesan (2008), Derban et al., (2005), and Roslan & Mohd Zaini (2009). Thus, there is a difference between men and women attributes in managing finance but not much can be concluded from the limited resources. In fact, the Malaysia Labor Force Report (Department of Statistics, 2004) documents that out of the total working women population in 2003, 77.5% were paid employees, 11.7% were own-account workers and 9.6% were unpaid family workers. Only 1.2% was categorized as employers while, for men the percentages were higher for the employers and own-account workers categories but lower for employees. A recent report noted that, Malaysian women make 50% of total population of the workforce in Malaysia, but only 15% of the women have their own business enterprise in Malaysia (Alam, Jani & Omar, 2010). According to The SME Survey 2014, a small business owned by women has a better chance of being profitable (Small Enterprise Development Agency, 2014).
Harner (2011) indicated that financial risk management will help small business to identify potential fatal risks or uncertainty in sufficient time, secure alternative financing, alter marketing or production schedules, or even successfully utilize the federal bankruptcy process or other insolvency. Similar with another study that mentioned a good financial risk management adoption can save money against risky events such as financial crisis and fluctuation market price (Daud & Yazid, 2009). By identifying risks, the SME can easily gain benefits by having lower insurance premiums, reduced chance that the business may be the target of legal action, reduced losses of cash or stock and reduced business down time. Other than that, findings from different paper found a set of seven critical success factors which can be used as a guideline on how to increase the effectiveness of risk management procedures. These factors are commitment and support from top management, communication, culture, information technology, organization structure, training and trust (Ranong & Phuenngam, 2009).
THEORETICAL FRAMEWORK
Leadership Decision Making
Business Success
Use of Technology References: Roomi & Harrison, 2011; Harif & Osman, n.d.; Okudan, 2006; Acar & Goc, 2011; Berry, 2002; Davis, Dunn & Boswell, 2009; Nartisa, 2012; Fadhil & Fadhil, 2011 and Jahur & Quadir (2012).
After analyzing the previous literature review, these three variables are the most discussed and suitable for small business which is leadership, decision making and use of technology. Leadership in this study refers to transformational and transactional leadership. Generally, entrepreneurial leadership is a fusion two constructs: having and communicating the vision to engage teams to identify, develop and take advantage of opportunity in order to gain competitive advantage (Roomi & Harrison, 2011). Gupta, MacMillan and Surie (2004) look at entrepreneurial leadership not as a collection of traits (i.e. who one is), but as a set of behaviors (i.e. what one does). They suggest that entrepreneurial leaders are those who enact the challenges of communicating a vision and influencing others to help them realize it. Transformational leadership is considered a more appropriate model for an entrepreneurial context. Transactional leadership is based on the legitimate power given to the leader within the bureaucratic structure of the organization. It heavily emphasizes the end-result: for example, work tasks and outcomes, rewards and punishments.
Surie and Ashley (2007) stated that entrepreneurial leadership is defined as “ability to evoke extraordinary effort” in others, which is in turn founded in the context of the firm’s need to adapt to emerging environmental contingencies (refer Roomi & Harrison, 2011). A study by Fong (1990) found that most SMEs in Malaysia were managed by the owners themselves. Therefore, the quality of management depends on the education, experience, and training of the entrepreneurs themselves (Harif & Osman, n.d.). It shows that the leaders are extremely important in defining directions for the business towards their performance and success. While entrepreneurship requires an attitude towards risk taking and using one’s gut feeling, it is widely accepted that many aspects of entrepreneurship can be taught. That is why, most entrepreneurship programs aspire to stimulate independent small business ownership or opportunity-seeking behavior in managers within companies (Okudan, 2006).
Decision making in this study refers to the democratic or autocratic style of decision making. Democratic style of decision making is reflecting how cooperative the small business owners decide on business transactions and prefer discussion with subordinates. On the other hand, autocratic decision making is when the entrepreneurs prefer to decide on their own but not necessarily depends on them but also can be through readings, experiences and research. Mitchell et al. (2000) argued that accounting information is important because it can help companies solve short term problems and assist in decision making. Accounting information is also viewed as relevant and very important to assist owner managers to reduce uncertainty (risk) in decision-making. Accounting information can be obtained from proper financial statements which come from effective financial management. Damand (2003) argued that financial statements should be counted in, to enable managers to make decisions. According to Smallman (1996), there is sufficient empirical evidence to suggest that managers with a higher risk propensity take business decisions more quickly (see Acar & Goc, 2011). The key must be with the owner-managers themselves being prepared to understand the different techniques and then using them to help to guide their decision making (Berry, 2002).
Use of technology denotes between IT literate and IT illiterate. IT literate refers to the extent to which technology benefits small business whereas IT illiterate refers to the small businesses that do not use the best of technology. A study of McClelland et al. (2005) showed that the female entrepreneurs in Canada, Singapore and Ireland utilized networking as a means of business development. The findings stated that there is a need of paradigm change to promote openness and free knowledge flow instead of secrecy (Nartisa, 2012). This outcome permits additional attention should be given to the use of technology especially in terms of networking thru the internet. Internet is the robust source of information that spreads to all over the world with just a click. Another issue need to be highlighted is regarding the record keeping. There is evidence that many small businesses may not be keeping records as well as they should and that those who keep records do so only to meet minimal reporting requirements. This study found that of the small businesses that did not computerize record keeping (Deakins, Logan & Steel, 2001).
Cost, lack of accounting knowledge, limited functionality and the absence of user friendly interfaces are among reason why the manual system users did not convert to a computerized system. Indeed, inhuman speed and efficiency were the factors that kept the ‘facts machine’ of financial risk management running smoothly (Davis, Dunn & Boswell, 2009). An effective risk management process is based on a successful IT security program. This does not mean that the main goal of an organization’s risk management process is to protect its IT assets, but to protect the organization and its ability to perform their missions. Shahwan and Al-Ain (2008) also mentioned that most small companies have improper financial management. In addition, the researchers pointed out that only a very small percentage of the companies prepare accounting information internally using accounting software (refer Fadhil & Fadhil, 2011.).
In business studies, the concept of success is often used to refer to a firm’s financial performance. However, there is no universally accepted definition of success, and business success has been interpreted in many ways (Foley & Green 1989). There are at least two important dimensions of success: 1) financial vs. other success; and 2) short- vs. long-term success (refer Islam et. al., 2011). Besides, Masuo et al. (2001) found that business success is commonly defined in terms of economic or financial measures which include return on assets, sales, profits, employees and survival rates; and non-pecuniary measures, such as customer satisfaction, personal development and personal achievement (see Alam, Jani & Omar, 2010). In recent study prepared by Jahur & Quadir (2012), the causes of financial distress identified are lack of financial planning, cost structures, poor management, poor accounting records, lack of access to credit and low financial control. Instead, effective record keeping, financial planning, introduction of internal audit and good management are among suggestions to the government for better SME development.
SUGGESTION FOR FUTURE RESEARCH Based on the findings from this paper, it is necessary to conduct the same study in different settings such as different countries or for large business. It is encouraged to conduct more research on this matter as the literature regarding financial risk management and gender is still scarce and limited in Malaysia context. The theoretical framework is also required to be tested empirically to assess its reliability in defining effective financial risk management for small business. Besides, it is an urgency to create new definition of financial risk management because present definition is quite ambiguous and often mislead to another concept. Its overlapping definition warrants future research to be done for a clearer definition.
CONCLUSION The objective of this paper is achieved as the comparison between men and women involvement is being discussed in terms of financial risk management towards business success. By reviewing the previous literature, it showed that it is a limited pool of resources on this issue and needs more research to be done. Besides, financial risk management and gender is still new for Malaysian studies especially in terms of small business. The importance of recognizing financial risk need to be highlighted more in the literature review so that small business can improve their performance.
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