Abstract
South Africa experiences surging unemployment, severe income inequality, and high levels of poverty. Small and medium-sized enterprises (SMEs) are expected to be an important vehicle for addressing the developmental challenges of poverty alleviation, equitable income distribution, job creation, and sustainable economic growth. Among the numerous financial problems faced by SMEs is proper management of trade credit, which cannot be separated from considerations about the business environment in which SMEs operate. As a result, the development of a more conducive business environment is of paramount importance for SMEs in an attempt to improve their effectiveness in managing trade credit, and thus reduce the high failure rate of South African SMEs. This study investigates the impact of the South African business environment on the management of trade credit in SMEs.
The primary objective of this study was to determine the impact of internal and external variables in the South African business environment on the management of trade credit in SMEs. A quantitative approach was followed, employing an online survey method. The questionnaire was e-mailed to a population frame of SMEs obtained from Interactive Direct Business Database. The number of distributed questionnaires totalled 10 450. Although the researcher targeted to obtain 450 completed questionnaires, the number of completed questionnaires (actual sample size) totalled n = 434, amounting to a response rate of 4.15%. Although, from this actual sample size, 422 respondents completed between 70.41% to 100% of the questionnaire and the remaining 12 respondents completed between 0% to 69.39% of the questionnaire, the calculated actual sample size equalled n = 422 questionnaires acceptable for statistical analysis.
The study found that certain internal and external business environmental variables have a statistically significant positive impact on SME management of trade credit, thereby contributing to their effectiveness in managing trade credit. In particular, one internal (managerial competencies) and one external (SME and debtor ethical performance) business environmental variable repeatedly ranked as having either the largest or the second largest significant positive impact on four SME management of trade credit variables. As expected, in the case of SME and debtor ethical performance, it is common for SMEs to conduct inter-firm transactions on the principles of honesty and trust, in order to increase their effectiveness in managing trade credit. In the case of managerial competencies, the results as well as ample previous literature support the importance of educational development to better SME sustainability, while numerous entrepreneurial indicators reveal that owner(s) of SMEs are
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prone to failure, due to their lack of education. Therefore, the result relating to managerial competencies is of value to improve not only SMEs’ effectiveness in managing trade credit, but also SME sustainability. In addition, four internal and three external business environmental variables obtained a significant positive relationship with several SME trade credit management variables. These four mentioned significant internal business environmental variables included financial information, debtor’s ethical disclosure of accurate and transparent financial and business information, networking, and collateral. In the case of the external business environmental variables, the efficiency of the legal system has a positive and significant relationship with two SME trade credit management variables, which helps understand the value in creating a more secure legal environment to improve SMEs’ effectiveness in managing trade credit. In addition, the two corruption-related variables that had a significant positive impact on SMEs’ effectiveness in managing trade credit are SME and debtor corruption through approving unviable loans and corrupt SME payment practices through forcefully delaying payments, due to creditors of the SME. The observation was made that the SME and SME debtor decide to partake in corruption as, in doing so, both intend to be better off by mutually benefiting from a joint alliance, due to these acts of corruption. The results showed that such acts of corruption result in increased effectiveness for SMEs’ and SME debtors’ trade credit management.
The contribution of the study is invaluable in providing the needed understanding of how a set of internal and external business environmental variables can contribute to effective management of trade credit in SMEs. This improvement to SMEs’ effectiveness in managing trade credit relates specifically to the provision of activities for the management of trade credit; mechanisms and insurance to assist with the collection of, or protection against the risk of outstanding debt; the application of trade credit management principles and aspects, and the application of credit policy components when granting credit. Lastly, the study further contributed by explaining how these significant internal and external business environmental variables contribute towards addressing the three primary reasons for business exit in the case of South African SMEs. In doing so, the study broadens the understanding related to the impact of SMEs’ business environmental variables on SMEs’ management of trade credit. Such understanding should help mitigate the realities of SME failure, as those indicators can be used to strengthen SMEs’ position in fostering the economic developmental challenges faced by South Africa