The Impact of Economic and Financial Management Practices on the Performance of Mexican Micro-Enterprises: A Multivariate Analysis/O impacto das praticas de gestao economico-financeira no desempenho de microempresas mexicanas: uma analise multivariada/El impacto de las practicas de gestion economica y financiera en el desempeno de microempresas.
| Autor | Ramirez-Urquidy, Martin |
I Introduction
One of the main explanations for the diversity of entrepreneurship patterns across countries is their level of economic development (Acs & Amoros, 2008). Thus, Latin American countries, which face development challenges, display a corresponding business structure that is biased toward micro-enterprises. This is also the case for Mexico, where micro-enterprises represent the vast majority of businesses according to Economic Census data: on average, 95.4% of established businesses and 97.3% new start-ups are micro-enterprises, employing 39.7% of the total workforce.
Despite efforts to provide technical and financial assistance to micro-enterprises through government and non-government business development programs, many business management problems such as debt, liquidity, and profitability still persist, which threaten business growth and survival (Mungaray & Ramirez, 2000). Moreover, the lack of managerial and financial controls and deficient planning--among others--associated with economic and financial management (EFM) are the main factors leading these businesses to failure (Rodriguez, 2010).
Empirical studies related to the economic and financial dimensions of management applied to Latin American countries include the analysis of financial problems and liquidity constraints (Leon & Schreiner, 1998), the development of models to measure economic performance in small and medium enterprises (Escobar, Arias, & Portilla, 2009), and research on strategic operational planning (Sierra & Madriz, 2012; Velasquez, 2003). These studies have contributed to the subject of EFM in micro-enterprises, filling some of the gaps in economic and financial management. The goal of this paper is to characterize the EFM practices in Mexican micro-enterprises and determine their impact on business performance under the hypothesis that EFM practices focused on achieving the optimal level of liquidity and profitability positively affect the performance of micro-enterprises.
The study applies factor analysis, including both exploratory and confirmatory techniques, as well as linear regression models to determine the impact of the main EFM factors on business performance. The data was obtained from the Mexican National Micro-Enterprise Survey (ENAMIN) (INEGI, 2012). The econometric analysis shows that both economic and financial management are statistically significant in explaining micro-enterprise performance, although only the effect of the latter is positive, whereas that of the former is negative. The paper's findings could guide training programs focused on micro-enterprise owners in developing countries and should enrich the stock of literature on micro-enterprises, which may support further research.
2 The Role of EFM in Micro-Enterprise Performance
The goal of the economic management of enterprises is to achieve profitability, and that of financial management is to obtain sufficient liquidity to fulfill short-term liabilities and develop residual business opportunities. Therefore, the essential functions of the management of successful organizations are economic and financial in nature, and are achieved by controlling the key variables affecting the organization. At the same time, economic management is responsible for carrying out the activities of an organization efficiently and effectively, thus ensuring expected results. In relation to this, Drucker (1973) states that efficiency is the key to the success of an organization: "Before we dedicate ourselves to doing something efficiently, we have to be sure that we have found something right to do".
Profitability, according to Gitman and Zutter (2012), is the result of the relationship between income and expenses generated by the use of the organization's assets in production. It may be considered as a short-term goal required for healthy performance, where all the material, human, and financial resources are combined and mobilized. Accordingly, profitability may also be considered as one of the goals of micro-enterprises, toward which a combination of planning and control activities should be directed, not only to manage the required economic resources, but also to guarantee that these resources generate the expected returns on investment.
Stoner, Freeman, & Gilbert (1996) define planning as a process of setting goals and determining the means to achieve such goals. Planning, according to Anzola (2002), covers all the departments of an enterprise and contributes to answering questions such as what and how to produce, how to distribute products to customers, how to keep accounting records, what prices to set, or what sales strategies to implement. Therefore, planning is crucial to achieving an efficient organization of resources, reducing the costs arising from uncertainty and constant change, and maximizing the potential effects of economic management.
Economic management includes the control of essential resources. The purpose of controls is to achieve results that are consistent with the organization's objectives. There are economic controls to make sure that transactions are registered meticulously, ensuring that the employees are unable to disrupt the management system. On the other hand, controls can also help the decision-making process through more accurate financial projections. Good decision-making requires reliable accounting records that provide basic information that reflects all the commercial, financial, and fiscal transactions executed over a period of time. The execution of these controls will contribute to generating positive profits, thus increasing the likelihood of the organization's survival.
Economic management cannot be separated from financial management. Paramasivan and Subramanian (2009) suggest that financial management is the application of the general principles of management for financial decision-making and the execution of certain practices for the effective procurement and application of the funds required for the business to operate. Brealey, Myers, and Allen (2008) claim that financial managers face two problems: first, deciding how much and in which assets to invest; second, deciding how to raise the necessary funds to make such investments. The common element in these perspectives is that financial management refers to investment and financing decisions as the leading elements, including the selection of funding sources.
Thus, EFM can be defined as a set of processes concerned with planning, procuring, and controlling economic and financial resources, which implies timely decisions to achieve the required profitability and liquidity for a healthy business operation. Therefore, strengthening EFM dynamics is required to ensure the sustainability and survival of businesses in the context of strong market competition.
It is important to highlight that although most of the micro-enterprises in less developed niche markets operate with reduced capital, they can still benefit from performing EFM activities, e.g. accounting procedures, such as keeping records of operations, establishing controls, and generating basic information for the decision-making process. In addition, micro-enterprises are required to carry out a series of short-term actions to seek efficiency and differentiation from the competition to guarantee a required level of production and sales, as well as to maintain or increase their customer base. These strategies will impact the performance of micro-enterprises, as has been analyzed by some authors, such as Quinn and Rohrbaugh (1983), Benett, Ketchen, and Schultz (1998), Hill and Jones (2005), Hitt, Ireland, and Hoskisson (2008), and Porter (1980), who suggests that some competitive factors may increase firm value and profitability, and improve outcomes.
Within the financial dimension, meeting the asset investment requirements of micro-entrepreneurs, such as in equipment, tools, machinery, or commercial properties, among others, is critical to supporting business endurance. However, it is not enough to simply identify the investment needs; it also requires deciding the amount of investment, and the financing source and cost. Interest rates are of particular importance and must be taken into account since they could be excessively high for the micro-entrepreneur's income, thus affecting profitability and business survival.
Most of the empirical studies referring to the EFM in micro-enterprises focus on liquidity constraints; others focus on financing issues (Leon & Schreiner, 1998). For example, Correa and Jaramillo (2007) address financial management in small businesses in Colombia by outlining guidelines for the development of this process and tools for planning, controlling, and financial decision-making. Also for Colombia, Escobar et al. (2009) recommend the use of models to measure the financial situation of small and medium enterprises; Marino and Medina (2009) analyze the gap between theory and practice for financial management in the wholesale business and automotive and manufacturing sectors in this country. Some interesting results were found in this research: e.g. 47.8% of micro, small, and medium enterprises do not use financial instruments for decision-making, arguing that they do not have the knowledge or that these practices are not important for their enterprises. Also, 45% of the businesses keep accounting records and issue sales and purchase invoices, while only 2% have accounting software. Finally, for Venezuela, Vera-Colina (2011) introduces a tool to evaluate financial management practices in small and medium enterprises. This tool consists of a survey for the diagnosis of financial management based on a non-experimental, cross-sectional, and correlational field design, which includes 62 items with scale-type responses, with an interval measurement and score scale.
The literature provides some evidence regarding the use of economic and financial management practices in Mexican...
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