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Financial Risk Management: Comparison between Men and Women

Entrepreneurs’ Involvement towards Business Success

Working Paper · November 2014

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Nurulhasanah Abdul Rahman

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 FINANCIAL RISK MANAGEMENT: COMPARISON BETWEEN MEN AND WOMEN
ENTREPRENEURS’ INVOLVEMENT TOWARDS BUSINESS SUCCESS

Nurulhasanah Abdul Rahman

hasanah.rahman89@yahoo.com

Keywords: Financial risk management, gender, Malaysia.

INTRODUCTION
Small business in Malaysia falls under SME (Small Medium Enterprise) industry. Development of SME provides
job opportunity, improves economic growth and also helps the poverty eradication programs (Al-Mamun,
Wahab & Malarvizhi, 2010). Despite of the growing number of small business expansion, the failure rate is
alarmingly high for the first five years. According to a study by Chong (2012), the survival rate of SME is
relatively low and it is estimated that 50 percent of all start-ups fail in their first year. Besides, findings from
a study by Berry (2002), the entrepreneurs are often ignore the importance of financial management and only
aware it after some time. However, it is probably too late to rectify this matter. Compared to large
companies, financial risk management is well implemented and communicated to the staffs. In contrary to
the small firms, it should be less complicated and applied to their business but it is rarely adopted (Panigrahi,
2011). Furthermore, Nartisa (2012) also highlights that small business owners should not only solve problems
but need to foresee it beforehand which makes financial risk management is critically needed to be
implemented in business. Fatoki (2012) also clarifies that business without proper financial planning leads to
poor financial control. Thus, it leads to the business failure or closure. That is why, the knowledge of financial
risk management is required in small business as it will leads them to the ultimate business success. Other
than that, the involvement between men and women entrepreneurs’ may differ in terms of the extent to
which they adopt financial risk management in business. In short, that is an urgency to study the comparison
between men and women entrepreneurs’ involvement in financial risk management to ensure the company’s
survival.

SIGNIFICANT OF STUDY
1. Findings from this paper may shed some lights on how to educate men and women entrepreneurs to
implement proper financial risk management in their business. Financial risk management helps to improve
business survival as it emphasize on risk mitigation. Risk mitigation is important because small business will
always need to face risk from business transaction to business growth. If these risks are not well handled,
then additional cost need to be spent for risk solution.

2. Government and non-government bodies may take into consideration the results from this paper especially
the in terms of risk definition in business. The entrepreneurs need to know how severe risk can be for their
business failure. Moreover, the involvement of entrepreneurs in adapting financial risk management is crucial
because they are the one who holds the key of business success. So, the relevant bodies can include these
findings as part of their policy on gender and small business development programs.

RESEARCH OBJECTIVE
1. To identify the difference between men and women entrepreneurs’ involvement in financial risk
management
2. To study the relationship between financial risk management and business success

LITERATURE REVIEW
This section explains the definition of small business in Malaysia and its challenges. Later, the importance of
financial risk management is been discussed comprehensively. To date, there is no exact consensus among
researchers on how to define financial risk management among small business. There is a limited literature
review on this matter which makes it quite challenging to provide a solid definition of financial risk
management for small business. Yet, its importance towards the survival of small business is undeniable. Not
to mention, there is no discussion has been done regarding financial risk management and gender differences.
Therefore, there is an urgency to place financial risk management as well as comparison between men and
women entrepreneurs’ involvement as the focus of this paper.

In Malaysia, 99 percent of the total business establishments are SME. There are three main sectors in Malaysia
namely; Services, Agriculture and Manufacturing. SMEs contribute 31 percent of the nation’s GDP and share 56
percent of the total employment (SMEinfo, 2011). The definition of small business from SME Corporation
Malaysia (2013) stated that it depends on the sectors. For instance, small business across all sectors, the sales
turnover must be less than RM300,000 to RM15 million or full-time employees not exceeding five to 75 full-
time employees (revised 1 January 2014). Regardless of this fact, small business still needs improvement
especially in terms management and financial issues.

Doing business, particularly a small business is always been misinterpret as the ultimate source of income to
the poor household. This statement is not totally wrong but its establishment alone is not sufficed. Among the
most discussed risks involved in SME are establishment of business entity, low collection in account
receivables, incapacity to go for technological advancement and high employee turnover (Panigrahi, 2011).
Similar with a study conducted by Aziz, Awang and Zaiton (2012), financial constraint, high taxes, lack of
state government support and the successor replacement as the common challenges faced by SME. The
structural weaknesses in terms of technology utilization, research and development activities, technical,
professional and management expertise prevented full realization of SME potential (Radam, Abu & Abdullah,
2010). Studies done in the United Kingdom and the United States have shown that weak financial management
– particularly poor working capital management and inadequate long-term financing – is a primary cause of
failure among small business (Harif & Osman, n.d.). Having this information, it is necessary to know the
definition of financial risk management in detail as to be discussed later.

According to Dionne (2003), researchers are trying to find exact definition of risk management but there is no
well-accepted framework that practitioners can rely on when formulating risk management strategies. Every
definition is different according to countries, business setting and environment. Nevertheless, Fatoki (2012)
had summarized the definition of financial management from Gitman (2007), Oduware (2011) as well as
Brinkmann et. al. (2011) and Management Study Guide (2012). Gitman (2007) had come out with definition of
financial management as the area of business management, devoted to a judicious use of capital and a
careful selection of sources of capital, in order to enable an organization to move in the direction of reaching
its goals. Meanwhile, Oduware (2011) stated financial management entails planning for the future of a
business enterprise to ensure a positive cash flow. In addition to that, Brinckmann et al. (2011) and
Management Study Guide (2012) define financial management as managerial activities that concern the
acquisition of financial resources and the assurance of their effective and efficient use.

On the other hand, Mehmood (2010) defined financial risk management as the quality control of finance. It is
a broad term used for different senses for different businesses or things but basically it involves
identification, analyzing, and taking measures to reduce or eliminate the exposures to loss by an organization
or individual. Besides of the good ingredients of financial risk management, there are still issues that small
business owners need to be handled. As such, the factors that prevent them from practicing sound financial
management practices were; qualified accountants are too expensive to maintain (93%), accounting records
are too difficult to understand (87%) and lack of internal accounting staff (73%). Kawame (2010) highlighted in
the study that a careless financial management practices are the main cause of failure for business
enterprises in Ghana (as cited in Lakew, n.d.). Supported by Berryman (1983) has also indicated that poor or
careless financial management is a major cause of small business failure (refer to Agyei-Mensah, 2010).

With regards to gender, the findings from Nawai and Shariff (2012) shows that women borrowers have higher
probability of being in the delinquent category. The result is contradicted with the most previous result that
found women borrowers are more creditworthy than men borrowers such as Sharma & Zeller (1997), Papias &
Ganesan (2008), Derban et al., (2005), and Roslan & Mohd Zaini (2009). Thus, there is a difference between
men and women attributes in managing finance but not much can be concluded from the limited resources. In
fact, the Malaysia Labor Force Report (Department of Statistics, 2004) documents that out of the total
working women population in 2003, 77.5% were paid employees, 11.7% were own-account workers and 9.6%
were unpaid family workers. Only 1.2% was categorized as employers while, for men the percentages were
higher for the employers and own-account workers categories but lower for employees. A recent report noted
that, Malaysian women make 50% of total population of the workforce in Malaysia, but only 15% of the women
have their own business enterprise in Malaysia (Alam, Jani & Omar, 2010). According to The SME Survey 2014,
a small business owned by women has a better chance of being profitable (Small Enterprise Development
Agency, 2014).

Harner (2011) indicated that financial risk management will help small business to identify potential fatal
risks or uncertainty in sufficient time, secure alternative financing, alter marketing or production schedules,
or even successfully utilize the federal bankruptcy process or other insolvency. Similar with another study
that mentioned a good financial risk management adoption can save money against risky events such as
financial crisis and fluctuation market price (Daud & Yazid, 2009). By identifying risks, the SME can easily gain
benefits by having lower insurance premiums, reduced chance that the business may be the target of legal
action, reduced losses of cash or stock and reduced business down time. Other than that, findings from
different paper found a set of seven critical success factors which can be used as a guideline on how to
increase the effectiveness of risk management procedures. These factors are commitment and support from
top management, communication, culture, information technology, organization structure, training and trust
(Ranong & Phuenngam, 2009).

THEORETICAL FRAMEWORK

Leadership

Decision Making Business Success

Use of Technology

References: Roomi & Harrison, 2011; Harif & Osman, n.d.; Okudan, 2006; Acar & Goc, 2011; Berry, 2002;
Davis, Dunn & Boswell, 2009; Nartisa, 2012; Fadhil & Fadhil, 2011 and Jahur & Quadir (2012).
After analyzing the previous literature review, these three variables are the most discussed and suitable for
small business which is leadership, decision making and use of technology. Leadership in this study refers to
transformational and transactional leadership. Generally, entrepreneurial leadership is a fusion two
constructs: having and communicating the vision to engage teams to identify, develop and take advantage of
opportunity in order to gain competitive advantage (Roomi & Harrison, 2011). Gupta, MacMillan and Surie
(2004) look at entrepreneurial leadership not as a collection of traits (i.e. who one is), but as a set of
behaviors (i.e. what one does). They suggest that entrepreneurial leaders are those who enact the challenges
of communicating a vision and influencing others to help them realize it. Transformational leadership is
considered a more appropriate model for an entrepreneurial context. Transactional leadership is based on the
legitimate power given to the leader within the bureaucratic structure of the organization. It heavily
emphasizes the end-result: for example, work tasks and outcomes, rewards and punishments.

Surie and Ashley (2007) stated that entrepreneurial leadership is defined as “ability to evoke extraordinary
effort” in others, which is in turn founded in the context of the firm’s need to adapt to emerging
environmental contingencies (refer Roomi & Harrison, 2011). A study by Fong (1990) found that most SMEs in
Malaysia were managed by the owners themselves. Therefore, the quality of management depends on the
education, experience, and training of the entrepreneurs themselves (Harif & Osman, n.d.). It shows that the
leaders are extremely important in defining directions for the business towards their performance and
success. While entrepreneurship requires an attitude towards risk taking and using one’s gut feeling, it is
widely accepted that many aspects of entrepreneurship can be taught. That is why, most entrepreneurship
programs aspire to stimulate independent small business ownership or opportunity-seeking behavior in
managers within companies (Okudan, 2006).

Decision making in this study refers to the democratic or autocratic style of decision making. Democratic style
of decision making is reflecting how cooperative the small business owners decide on business transactions
and prefer discussion with subordinates. On the other hand, autocratic decision making is when the
entrepreneurs prefer to decide on their own but not necessarily depends on them but also can be through
readings, experiences and research. Mitchell et al. (2000) argued that accounting information is important
because it can help companies solve short term problems and assist in decision making. Accounting
information is also viewed as relevant and very important to assist owner managers to reduce uncertainty
(risk) in decision-making. Accounting information can be obtained from proper financial statements which
come from effective financial management. Damand (2003) argued that financial statements should be
counted in, to enable managers to make decisions. According to Smallman (1996), there is sufficient empirical
evidence to suggest that managers with a higher risk propensity take business decisions more quickly (see
Acar & Goc, 2011). The key must be with the owner-managers themselves being prepared to understand the
different techniques and then using them to help to guide their decision making (Berry, 2002).

Use of technology denotes between IT literate and IT illiterate. IT literate refers to the extent to which
technology benefits small business whereas IT illiterate refers to the small businesses that do not use the best
of technology. A study of McClelland et al. (2005) showed that the female entrepreneurs in Canada, Singapore
and Ireland utilized networking as a means of business development. The findings stated that there is a need
of paradigm change to promote openness and free knowledge flow instead of secrecy (Nartisa, 2012). This
outcome permits additional attention should be given to the use of technology especially in terms of
networking thru the internet. Internet is the robust source of information that spreads to all over the world
with just a click. Another issue need to be highlighted is regarding the record keeping. There is evidence that
many small businesses may not be keeping records as well as they should and that those who keep records do
so only to meet minimal reporting requirements. This study found that of the small businesses that did not
computerize record keeping (Deakins, Logan & Steel, 2001).
Cost, lack of accounting knowledge, limited functionality and the absence of user friendly interfaces are
among reason why the manual system users did not convert to a computerized system. Indeed, inhuman speed
and efficiency were the factors that kept the ‘facts machine’ of financial risk management running smoothly
(Davis, Dunn & Boswell, 2009). An effective risk management process is based on a successful IT security
program. This does not mean that the main goal of an organization’s risk management process is to protect its
IT assets, but to protect the organization and its ability to perform their missions. Shahwan and Al-Ain (2008)
also mentioned that most small companies have improper financial management. In addition, the researchers
pointed out that only a very small percentage of the companies prepare accounting information internally
using accounting software (refer Fadhil & Fadhil, 2011.).

In business studies, the concept of success is often used to refer to a firm’s financial performance. However,
there is no universally accepted definition of success, and business success has been interpreted in many ways
(Foley & Green 1989). There are at least two important dimensions of success: 1) financial vs. other success;
and 2) short- vs. long-term success (refer Islam et. al., 2011). Besides, Masuo et al. (2001) found that business
success is commonly defined in terms of economic or financial measures which include return on assets, sales,
profits, employees and survival rates; and non-pecuniary measures, such as customer satisfaction, personal
development and personal achievement (see Alam, Jani & Omar, 2010). In recent study prepared by Jahur &
Quadir (2012), the causes of financial distress identified are lack of financial planning, cost structures, poor
management, poor accounting records, lack of access to credit and low financial control. Instead, effective
record keeping, financial planning, introduction of internal audit and good management are among
suggestions to the government for better SME development.

SUGGESTION FOR FUTURE RESEARCH

Based on the findings from this paper, it is necessary to conduct the same study in different settings such as
different countries or for large business. It is encouraged to conduct more research on this matter as the
literature regarding financial risk management and gender is still scarce and limited in Malaysia context. The
theoretical framework is also required to be tested empirically to assess its reliability in defining effective
financial risk management for small business. Besides, it is an urgency to create new definition of financial
risk management because present definition is quite ambiguous and often mislead to another concept. Its
overlapping definition warrants future research to be done for a clearer definition.

CONCLUSION
The objective of this paper is achieved as the comparison between men and women involvement is being
discussed in terms of financial risk management towards business success. By reviewing the previous
literature, it showed that it is a limited pool of resources on this issue and needs more research to be done.
Besides, financial risk management and gender is still new for Malaysian studies especially in terms of small
business. The importance of recognizing financial risk need to be highlighted more in the literature review so
that small business can improve their performance.

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