Financial Management For Small And Medium-Sized Enterprises In Construction: Case Study In Thailand And Indonesia

Southeast Asia is now developing the small and medium sized enterprise which becomes the backbone of the economy of the particular country. In Thailand and Indonesia, construction industry influences the economic growth. The interesting fact is that in Thailand, construction relies more on small and medium-sized enterprises or “SMEs” which construction plays significant role in influencing the GDP of the country. Indonesia has more or less similar circumstances as that in Thailand where small and medium contractors have an important role in process of growth domestic product. As the major part of construction industry in Indonesia, the development of construction SMEs will be essential.

Ms. Vivi Megawati made a case study to understand how the entrepreneurs manage their construction SMEs and the fundamental system they adopt for the financial management.

Her study mainly aims to investigate and assess operational factors that affecting the financial capability of the Construction Small and Medium-sized Enterprises. Identifying the key operational point will help the construction SMEs to enhance their financial capability. To accomplish her study’s the main objective, she outlined three sub-objectives to (1) identify key operational parameters affecting financial management in construction SMEs; (2) investigate the existing financial management practices affecting the financial outcome of construction SMEs; and (3) propose recommendation for financial management that are appropriate for construction SMEs in handling with the key operational parameters

Her conclusions based on the result of her survey.

1. Financial management in construction SMEs - it is found that construction SMEs is vulnerable to financial crisis due to the misconduct of financial management. Improper management practices have brought some construction SMEs to financial difficulties and even bankruptcy. It is can actually be avoided through appropriate financial management according to the character of construction SMEs itself.

2. Indonesian and Thai SMEs practice in financial management - construction SMEs both in Indonesia and Thailand exhibit the misconduct in financial management. However, some companies involved in the study are seen to have adequate financial management to sustain the business. The size of the firm usually determines the properness of financial management although in some parts, decision maker structure does.

Her recommendations for Thai and Indonesian construction SME owners in managing the financial management in securing long-term competitiveness are the following:
1. Thai SMEs can consider decentralization in purchase authority to expand the business since centralized purchase authority is cumbersome for some extent. Decentralization allows prompt purchasing which can affect the productivity especially when the size of the project is big.

2. Indonesian SMEs can be more professional in financial management. If the company wants to expand the business, Indonesian SMEs can raise long term debt for higher capital to be able to bid higher project.

3. Improve inventory management. The construction SMEs must properly and promptly update and record any changes made in inventory especially in balance sheet. Stock card may become the good instrument to monitor the flow of inventory. Depreciation can be applied to formalize all the inventory purchasing made by the company. For the second-hand equipment which is usually used until it has no salvage value, the depreciation can still be applied to the value of zero.

4. Construction SMEs must have good and competent estimators. Without the owners involvement in the technical operation (as estimator or project manager) it is necessary to have good and competent estimator which is accompanied by project manager or site manager for more accurate estimation.

5. Construction SMEs must consider other ratio analysis. Bank as the loan provider examine the company based on their financial performance shown in their financial ratios. Thus it is necessary for the owners or managers to recognize the important ratio analysis such as liquidity ratio, Debt/Equity ratio and debt service coverage ratio (DSCR) which is produced from reliable and exact financial statement. It will help construction SMEs to get access to loan from formal sources.

Her thesis abstract is copied and posted.

ABSTRACT

Construction SMEs are the backbone of the construction industry both in Indonesia and in Thailand. However, the management is seldom maintained properly to achieve the optimal outcome. The study focused on the financial management of construction SMEs which affect the whole operational and determine the success of the firms. The study aims to investigate the financial factors and the interrelation between each factor which influence the financial outcome and financial capability and recommend the effective operational method for financial management.

The study uses case study as a research design. The processes begin with factor identification which consists of preliminary factor and verification of the factors. It is the continued with the data collection using the abovementioned factors to design the case study question. Data analysis is conducted toward the evidences using explanation building method in which all the important evidences are revealed and explained.

Results from factor identification shows that financial function in construction SMEs can be divided into four major parts namely: 1) money management, 2) accounting, 3) financial controlling and 4) financial advisory. The money management itself is the integration of three sub-parts: financing decision, working capital management, and investment decision. Accounting consists of recording and reporting process. Financial controlling concern both project and organization financial control. Eventually, financial advisory concern the advisory process which base the decision taken within the company regarding financial control system, dividend and retained earnings, income diversification, and tax planning. The framework shows the interrelation between each factor is developed. The causes, consequences, and recommendation for handling with all the factors mentioned above were discussed in this study.