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

that they did not use them, and that they did not use any of the measures given to them as other options either. All the participant SMEs, irrespective of whether they used financial ratios or not, were familiar with many of the ratios mentioned in the literature and regularly used, such as current ratio, net operating margin and cash flow to total debt. Although familiar with a large number of ratios, those SMEs that used financial ratios made use of just a few of them. Table 2 shows the ratios used by the participants. Table 2: Financial ratios used by participants Financial ratios Number of respondents using them Cash flow to total debt 6 Current ratio (current assets to current liabilities) 5 Cash flow to total current liabilities 5 Gross profit margin ratio (gross profit to net sales) 4 Inventory turnover (inventory to sales) 4 Operating profit to operating assets 3 Net working capital to total assets 2 Earnings after tax (PAT) to total assets 2 Return on equity (ROE) 1 Net profit ratio 1 Inventory, debtors, creditors’ days 1 Times interest earned (income before interest and taxes [EBIT] to interest expense) 1 Net working capital (NWC) 1 Total assets turnover (sales to total assets) 1 Debt ratio (total debt to total assets) 1 In addition to the traditional ratios, one of the SMEs used a further ratio that it had found very useful in maintaining its financial performance, and computed as (sale costs – throughput)/sales where throughput = sale costs – (materials + direct costs). For the business not to be in financial trouble, this ratio should be 50% or more. The business also carefully monitored what it called gross turnover (sales – cost of sales) tendency. If this ratio was constant or showed an increase, management was happy. On the other hand, if it decreased, the business had to consider other alternatives to improve its financial performance by broadening the product range and market segment. The business examined financial ratios once a year with auditors as well to see how to improve its financial performance. Another participant SME also used other ratios, such as the solvency ratio (total assets to total debt), the supplier days’ ratio [(accounts payable*30*period/cost of sales)] and the customer days’ ratio [(accounts receivable *30*period/sales)]. In one of the participant SMEs, PASTEL software was used as a financial measuring tool. The owner was very confident about its use and efficiency, and indicated that everything was done with the software. In another participant SME, a complete computer software package called PRO ACC 5 was used to manage the business’s assets and financials results. The software uses most of the ratios used by the respondents and provides all the information needed, such as sales, materials required, customer base and orders and inventory holding. Two of the participant SMEs did not use any of the tools given to them as options to choose from, and used specific tools for measuring their financial performance. One interviewee said that financial ratios were briefly discussed by auditors and top management every month. However, no recommendation was given, suggesting that certain ratios were favoured, but not in fact used to measure the business’s financial performance. Only the rand per ton (RPT) method was used by this SME to make sure that the business’s financial performance remained satisfactory. In terms of this method, an order from a client is considered, but before being accepted, the rand per ton value of the material to be used to make the product is calculated. Knowing from its database that a ton of material can produce a certain number of boxes of the specified dimensions, the SME is able to determine whether the order is profitable or not. The order is then either accepted or rejected. By following this method, the business makes sure that its cash flow is always good and its financial performance is maintained daily. Thus the business never worries about ratios, bankruptcy prediction models or any other tool. The interviewee went on to explain that auditors gave the business a monthly breakdown of all ratios, the following in particular: total asset turnover (sales to total assets), cash flow to total debt, cash flow to total current liabilities, debt to equity ratio (total liabilities/ Financial Performance Measurement of Manufacturing Small and Medium Enterprises in Pretoria, South Africa: A Multiple Exploratory Case Study 38 Global Journal of Management and Business Research Volume XXII Issue VIII Version I Year 2022 ( ) A © 2022 Global Journals