Global Journal of Management and Business Research, A: Administration and Management, Volume 22 Issue 8

Finally, this article may help fill the gap in the literature pertaining to financial performance measurement. The researchers investigated the financial performance measures used by manufacturing SMEs in Pretoria, which, as one of the country’s three capital cities, serves as the executive and de facto national capital of South Africa. II. L iterature B ackground a) The importance of successful SMEs SMEs are defined differently across regions or countries. In South Africa, manufacturing SMEs are defined by the National Small Business Act No 102 of 1996, as amended in 2003, as those businesses employing a maximum of 200 full-time employees, with a turnover of a maximum of 51 million rand and a maximum total asset value of 19 million rand (Olawale, Olumuyiwa & George, 2010). As SMEs play an important role in global economies, governments focus on the development of SMEs to promote economic growth. South African SMEs contribute 56% of private sector employment and 36% of the gross domestic product (Olawale & Garwe, 2010). The imp ortance of SMEs in the economy naturally raises the question of their success and failure. According to Statistics South Africa (2012), the number of insolvencies in South Africa ranged from around 120 in 2008 to 700 in 2009, and dropped again to just over 100 in 2012. The number of liquidations was in the region of 150 in 2008, rising to just under 500 in 2009 and dropping again to 200 in 2012. Before they are able to contribute to the economy, SMEs must sustain themselves and grow. This sustainability and growth is generally measured by their financial performance, hence the importance of SME financial performance measurement. Financial performance management forms an important part of business management, and it is also crucial for the survival of businesses. The question in this regard is whether manufacturing SMEs in Pretoria are using the appropriate tools (financial ratio analysis and bankruptcy prediction models), which have been available for many years. b) Financial management and performance measurement Financial management focuses on the decision regarding the quantities and types of assets to acquire, how to raise the capital needed and how to run the firm so as to maximise its value (Brigham & Houston, 2012). Jacobs (2001) notes that this is an area that requires knowledge, skills and experience and whose goals include maximising profits and sales, capturing a particular market share, minimising staff turnover and internal conflicts, survival of the firm, and maximising wealth. According to Codjia (2010), a statement of financial performance is an accounting summary that details a business’s revenues, expenses and net income. He goes on to say that “a statement of financial performance is also referred to as statement of profit and loss or statement of income; and a corporation may prepare a statement of financial performance on a monthly, quarterly or annual basis”. As part of business management ( Business Dictionary , 2010), financial performance measurement can be one of the biggest challenges faced by businesses in the SME sector, especially with regard to their survival if management is not trained in how to manage finance and measure performance. Performance measures are the lifeblood of organisations, since without them no decisions can be made (Mosalakae, 2007 ). Performance measurement can be split into financial and non-financial measures. Financial performance measurement generally looks at firms’ financial ratios (derived from their financial statements) such as liquidity ratios, activity ratios, profitability ratios, and debt ratios. Non-financial performance measurement is more subjective and may involve customer service, employee satisfaction, perceived growth in market share, perceived change in cash flow, and sales growth (Haber & Reichel, 2005). A business needs to assess whether or not it has performed well over a certain period. From its profit and loss account, analysts can observe the profit it has generated. It is also necessary to know whether a business is in a good short-term financial position, and whether it is in a good financial position for long-term growth. One of the most common means of analysing accounts is the use of financial ratios. According to Jacobs (2001), a ratio is the simplest mathematical expression of two magnitudes which are meaningfully related, and which are expressed in relation to each other (as a quotient). Ratio analysis and interpretation can be used by many different stakeholders, especially those outside the organisation who want to invest. Ratios can also be used to compare an enterprise’s current position with its past. Roberts (2012) identifies the four basic types of financial ratios as liquidity ratios, activity ratios, profitability ratios and leverage ratios. c) Financial ratio analysis Financial ratio analysis is defined by Lasher (2010) as a general technique based on some relatively standard methods used to analyse information, and developed by people who make judgements about businesses by reading their financial statement. Enterprises measure their financial performance differently, but financial ratio analysis is the traditional approach to analysing and interpreting the financial position of an enterprise (Jacobs, 2001). Ratios are derived from the financial statements of an enterprise and enable analysts to develop a picture of the financial position of an enterprise. Financial Performance Measurement of Manufacturing Small and Medium Enterprises in Pretoria, South Africa: A Multiple Exploratory Case Study 34 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals