After twenty-four years of reforming policy, along with the development of the national economy, Small and Medium Enterprises (SMEs) in Vietnam have remarked contributions in creating employment, increasing GDP, and raising the nation’s volume of exports. However, SMEs have been restricted development by lack of management experience and financial resources, and due to uncertainty within the business environment. As a result, SMEs often faced obstacles during their operations. This research examines the relationship between financial management and probability to grow and survive of SMEs to determine whether financial management practices impact on SMEs’ growth and survival.

In terms of structure, the report has two chapters.

Chapter one: Introduction: It reviews the research background, presents definitions of terms and scope of the study.

Chapter two: Literature Review: This chapter also reviews previous research related to financial management for SMEs in Vietnam and for SMEs worldwide.

Chapter One: Introduction

1.1. Background

In 1986, Vietnam shifted from a centrally planned and controlled economy to a market oriented economy. It is apparent that since the government introduced the series of economic reforms known as “doi moi” (renovation), the SMEs have rapidly grown in terms of the number of businesses, capital and employees. According Ministry of Planning and Investment, in 2009, the number of enterprises in Vietnam was nearly 420,000 and among of this, SMEs was account of 97%. SMEs have contributed considerably to growing GDP with occupation of 26% of GDP and creating more job opportunities for 50% of labour-age people, especially in rural areas.

In addition to achievements and contributions as mentioned above, SMEs in Vietnam are currently being faced with many serious difficulties such as shortage of capital for expanding and renovating equipment and technology, low productivity and competitiveness, lack of experience in terms of marketing, production management, and financial management. Of these difficulties, lack of financing resources and experience of financial management is currently one of the most serious issues (Ebashi, Sakai and Takada, 1997). Inefficient financial management may damage SME profitability and, as a result, the difficulties of SMEs will become greater. Conversely, efficient financial management will help SMEs to strengthen their profitability and, as a result, these difficulties can partly be overcome. Most commercial banks refuse to offer loans for SMEs because the banks have doubt about SMEs’ growth and survival. However, to date there has not been any research on SME growth and survival conducted in Vietnam. Conducting such research will enable commercial banks to evaluate SME profitability and make decisions on granting loans for SMEs. In addition, when the stock exchange is established in Vietnam, conducting research on SME profitability will help SMEs to improve their performances and reinforce financial management as a preparation to participate in stock exchange listing.

Originating from recognition of the increasingly important role and contribution of SMEs as well as the recent promotion and supporting policy on developing SMEs, this research study is considered a contribution to improvement of financial management practices to ensure for the growth and survival of SMEs in Vietnam.

1.2. Statement of Problem

In Vietnam, defining the research problem of SMEs may begin with a consideration of the typical characteristics of management. In operation of most SMEs, the position of financial manager who would be in charge of financial management of the company is empty. Usually, the owner-managers with the assistance of the chief-accountant control financial matters of the company. However, most owner-managers have no formal training in management skills, especially financial management. Moreover, the concepts of financial management have also only been recognized in Vietnam since the beginning of the 1990s when the economy was converted into a market economy. Currently, financial management is one of the challenges of SMEs. Lack of knowledge of financial management combined with the uncertainty of the business environment often leads SMEs to serious problems regarding financial performances.

Consequently, the growth and survival of SME could be restricted by inefficient financial management. SMEs have often failed due to lack of knowledge of efficient financial management. Moreover, undercapitalization and uncertainty of the business environment cause SMEs to rely excessively on equity and maintain high liquidity and these financial characteristics probably affect SME profitability (Vuong, 1998).

In summary, the problem that SMEs in Vietnam face appears to be that inefficient financial management practices have adversely affected their profitability. Therefore, the problem to be addressed in this research is to investigate the simultaneous effects of financial management practices and financial characteristics on SME growth and survival, and then, to determine the best measures for improving SME profitability in Vietnam by using efficient financial management tools.

1.3 Research questions

Research questions involve the research translation of “problem” into the need for inquiry (Zikmund, 1997, p.88). The research problem defined above leads to the following research questions:

• How important are SMEs’ growth in Vietnam?
• How have researchers in the literature review, identified the context of financial management practices and financial characteristics, and how have