Accounting and Finance Review

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Acc. Fin. Review 3 (1) 09 – 15 (2018)

Bankruptcy Prediction: SMEs Case Study in Pontianak, Indonesia

Umiaty Hamzani1*, Dinarjad Achmad2

1,2
Universitas Tanjungpura, Jl. Prof. Dr. H. Hadari Nawawi, 78124, Pontianak, Indonesia.

ABSTRACT

Objective – This study aims to examine the risk of bankruptcy among SMEs to determine whether there are any
significant differences in the financial performance between SMEs that apply accounting standard and those that do not.
Methodology/Technique – This research uses a case study method to examine SMEs in the business incubator under
the auspices of the Bank Indonesia in Pontianak. Descriptive analysis and independent sample tests are also used in this
study.
Findings – The results show that neither of the SME groups are predicted bankrupt under the financial distress model.
Furthermore, the independent sample tests show that, if using a significance level of 5%, there is no difference in the
financial performance of both groups. However, if using a significance level of 10%, there is a significant difference in
both groups.
Type of Paper: Empirical.

Keywords: Financial Distress Model; Financial Ratios; Financial Statements; Going Concern Accounting Principle;
SAK ETAP; SMES.
JEL Classification: G32; G33.
_______________________________________________________________________________________

1. Introduction

The existence and development of SMEs is very important in terms of their contribution to the reduction
of unemployment as well as their contribution to gross domestic product (GDP) (Wellalage and Locke, n.d).
However, SMEs are typically more vulnerable to bankruptcy than larger firms (Filipe et al, 2014) due to the
declining health of the economy (Wellalage and Locke, n.d), a lack of management experience, market
competition, lack of financial resources and crime (Fatoki, 2014). Fatoki (2014) found that most new SMEs
were becoming bankrupt due to their internal and external failures. This paper will focus on assessing and
analyzing the internal factors of the failure of SMEs, focusing on the aspect of management. Preparing and
providing financial statements based on accounting standards is one of indicators that SMEs have good
management skills. SMEs can be categorized as healthy and maintain their going concern accounting
principles by examining their financial performance. Therefore, the hypothesis proposed in this study

* Paper info: Revised: December 20, 2017

Accepted: February 21, 2018
*
Corresponding author:
E-mail: umiaty.hamzani@gmail.com
Affiliation: Faculty of Economics and Business, Universitas Tanjungpura, Indonesia.

ISSN 0128-2611 © 2018 Global Academy of Training & Research (GATR) Enterprise. All rights reserved.
 Umiaty Hamzani, Dinarjad Achmad

whether there is a difference in the financial performance between SMEs that apply accounting practices in
accordance with SAK ETAP and those who have not. In preparing and providing financial statements, there
is an assumption that describes the conditions under which a company can maintain its survival, namely the
going concern accounting principle. This assumption requires that economic entities have the ability to
maintain their survival both operationally and financially.
This study departs from previous studies as it uses a case study in a particular respondent of SMEs and
mixed method for the analysis of data. This paper also compares SMEs who apply accounting standards and
those who do not, while Edina (n.d) compared the level of bankruptcy risk between manufacturing SMEs and
Trading SMEs. Yazdanfar and Nilsson (2008) and Bredart (2014) use the financial ratios of liquidity,
solvability and profitability in their study, as these ratios can be used to predict the health of a SMEs
(Culterera and Bredart, 2015). The Altman’s Z-score is an accurate tool designed to predict bankruptcy
(Abouzeedan and Busler, 2004). However, previous research suggests that the financial distress model by
Altman's Z-score is less predictive for bankruptcy (Lin, 2015). Therefore, it is essential to obtain empirical
evidence regarding this issue.

2. Literature Review

Purba (2009) argues that SMEs are increasingly experiencing bankruptcy due to internal constraints within
the company itself, such as its financial condition, human resources, corporate culture, technological skills,
internal control and others. The primary issue in the development of SMEs is financial management; good
management requires good accounting skills. In terms of financial constraints, SMEs have huge opportunities
to gain credit in the form of capital loans. There are currently many financing programs for SMEs being run
by the government and the banking sector. One of the initiatives of th government of Indonesia relates to the
financing of SMEs; this is called the People's Business Credit (KUR), which is yet to reach its target because
the banks involved in the program remain cautious when lending to SMEs, due to the risk involved
(Calabrese et al, 2013).
Wellalage and Locke (n.d) claim that independent firms are more vulnerable to bankruptcy when
compared to franchised firms. Furthermore, good corporate governance mechanisms and the reduction of
agency issues are key to reducing the risk of bankruptcy among SMEs. Lin (2015) argues that predicting
bankruptcy risk using the original Altman’s Z-score model is not suitable for the consumer goods industry in
the UK. Moreover, Cultrera (2015) found that the prediction model was accurate to predict bankruptcy
among Belgian SMEs because their profitability and liquidity ratios were used as accurate predictors.
Financial ratios such as solvency, liquidity and profitability, as used in the neural network methodology, are a
good measure of bankruptcy prediction when used as explanatory variables (Bredart, 2014). Other scholars
have argued that systematic factors such as the macro economy, bank lending conditions and legal aspects
have a greater effect on micro SMEs rather than larger SMEs (Filipe at al, 2014).
Yazdanfar and Nilsson (2008) state that the determinant factors of bankruptcy are solvency, quick ratio
and profitability. However, Fatoki (2014) claims that small business failure is the result of both internal and
external factors, therefore, business management skills should be improved through personal development
such as entrepreneurship and training. Culterera et al (2017) argues that a mixed method data analysis is not
relevant to the prediction of bankruptcy risk in the sample of Belgian SMEs. Furthermore, Jahur and Quadir
(2012) found that the most important causes of financial distress are poor accounting systems, poor financial
controls, and poor productivity. Moreover, Mayr et al (2017) has identified the important factors to assist
SMEs in Austria to avoid bankruptcy.

3. Method

This research uses a case study method to examine SMEs in the business incubator under the auspices of
the Bank of Indonesia in Pontianak, Indonesia. Descriptive analysis is used to examine the risk of bankruptcy

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 Umiaty Hamzani, Dinarjad Achmad

among SMEs and an independent sample test is used to examine whether there are any significant differences
in the financial performance between SMEs that apply accounting standards (SAK ETAP) and those that do
not. The population in this study consists of SMEs in the business incubator under the auspices of the Bank
of Indonesia in Pontianak, Indonesia. This study uses 20 samples of SMEs which includes 10 SMEs that do
not apply the accounting and 10 that do. Various analytical techniques including: (1) Financial Ratio
Analysis; (2) Independent Sample Test; (3) Financial Distress Model. The following modified formula is
used for companies other than manufactures, and companies that are not publicly listed: Z = (6.56 (net
working capital/total assets)) + (3.26 (accumulated retained earnings)) + (1.05 (EBIT/total assets)) + (6.72
(book value equity/total liabilities)) (Purba, 2009).

4. Results

Table 1. Demographics of the Sample

Frequency Percentage
Type of business Service 4 20
Merchandising 10 50
Manufacturing 6 30
Gender Male 12 60
Female 8 40
Age group 0 - 14 years old - -
15 – 65 years old 20 100
> 65 years old - -
Level of education SMP 4 20
SMU/SMK 10 50
Undergraduate (S1) 2 10
Others 4 20
Age of Business < 5year 9 45
6 - 10 years 6 30
11 - 15 years 5 25

Table 2. Ratio Analysis of SMEs with SAK ETAP

Profitability Ratio
Type of SMEs Liquidity Ratio Solvability Ratio
Capital
Total Debt to
Current Cash Total Debt to
Total Assets ROA ROE
Ratio Ratio Equity Ratio
Ratio
Motorcycle service 242,58% 109,89% 58,78% 186,33% 16,85% 51,34%
Cake shop 138,66% 100,00% 62,63% 280,00% 16,10% 67,00%
Photocopy shop 267,25% 228,42% 42,96% 111,22% 17,08% 41,76%

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 Umiaty Hamzani, Dinarjad Achmad

Groceries shop 211,11% 160,00% 60,10% 220,00% 13,00% 46,00%

Material shop 392,00% 200,00% 54,93% 188,00% 9,74% 54,22%
Groceries shop 267,50% 145,00% 46,01% 125,30% 18,14% 46,98%
Groceries shop 201,25% 137,50% 63,71% 175,57% 15,84% 41,83%
convection clothes &
162,50% 125,00% 55,47% 180,48% 14,39% 44,87%
printing
Printing shop 255,00% 195,00% 51,44% 161,29% 17,48% 52,25%
Restaurant 346,00% 260,00% 31,12% 55,94% 13,69% 23,77%

Table 3. Ratio Analysis of SMEs without SAK ETAP

Profitability Ratio
Type of SMEs Liquidity Ratio Solvability Ratio
Capital
Total Debt to
Current Cash Total Debt to
Total Assets ROA ROE
Ratio Ratio Equity Ratio
Ratio
Groceries shop 153,33% 118,66% 65,57% 190,47% 10,49% 28,50%
Delivery service 194,44% 150,00% 66,41% 197,77% 10,44% 29,62%
Cake shop 250,00% 100,00% 61,89% 214,28% 9,09% 31,90%
Cafe 244,44% 140,74% 56,03% 162,50% 12,28% 33,75%
Clothes & cake shop 159,37% 125,00% 63,67% 137,50% 8,97% 30,72%
Gift shop 240,00% 160,00% 52,95% 141,66% 10,59% 25,83%
Cafe 237,93% 158,62% 53,08% 143,58% 10,66% 26,92%
Restaurant 172,00% 130,00% 50,49% 132,35% 12,06% 29,77%
Mineral water shop 178,00% 132,00% 55,27% 150,00% 8,37% 21,36%
Cake shop 210,00% 135,00% 46,72% 112,78% 12,46% 28,57%

Table 4. Going Concern Assumption Analysis of SMEs

Type of SMEs Z-Score (Financial Distress) Status
SMEs with SAK ETAP
Motorcycle service 7.293 Going Concern Assumption
Cake shop 10.000 Going Concern Assumption
Photocopy shop 6.924 Going Concern Assumption
Groceries shop 8.447 Going Concern Assumption
Material shop 7.264 Going Concern Assumption
Groceries shop 9.796 Going Concern Assumption

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 Umiaty Hamzani, Dinarjad Achmad

Groceries shop 6.202 Going Concern Assumption

convection clothes & printing 7.979 Going Concern Assumption
Printing shop 8.754 Going Concern Assumption
Restaurant 7.458 Going Concern Assumption
SMEs without SAK ETAP
Groceries shop 7.679 Going Concern Assumption
Delivery service 7.121 Going Concern Assumption
Cake shop 6.072 Going Concern Assumption
Cafe 7.804 Going Concern Assumption
Clothes & cake shop 7.242 Going Concern Assumption
Gift shop 8.371 Going Concern Assumption
Cafe 8.628 Going Concern Assumption
Restaurant 9.845 Going Concern Assumption
Mineral water shop 8.527 Going Concern Assumption
Cake shop 7.821 Going Concern Assumption

Table 5. Independent Sample Test

Levene's Test
for Equality of
Variances t-test for Equality of Means
Sig. 95% Confidence Interval
(2- Mean of the Difference
taile Differenc Std. Error
F Sig. T Df d) e Difference Lower Upper
Financial Equal
Performance variances 3.738 .082 .118 10 .909 63.45667 539.02654 -1137.56932 1264.48265
assumed
Equal
variances
.118 7.860 .909 63.45667 539.02654 -1183.39810 1310.31143
not
assumed

5. Discussion

The current ratio shows the ability of a business to meet its current liabilities. The results show that the
average current ratio of SMEs that apply the SAK ETAP standard have a higher ratio (228.28%) than the
average current ratio for SMEs that do not apply the standards (203.95%). Furthermore, SMEs that apply the
standards has average cash ratio of 116.08%, which is lower than the average cash ratio of the SME that do
not apply the standards, being 135.01%. In terms of solvency, the total debt to total assets ratio demonstrates
a company's ability to guarantee its debts with the assets it owns. The results show that the average total debt

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 Umiaty Hamzani, Dinarjad Achmad

to total asset ratio of SMEs that apply the standards is 48.41%, which is lower than total debt to total assets
ratio of SMEs do not, being 57.20%.
Moreover, the total debt to equity ratio is used to measure the liability of a company to its creditors.
According to the test results, the average total debt to equity ratio of SMEs that do apply the accounting
standards is 168.41%, which is higher than that of the SMEs that do not, being 158.28%. In terms of
profitability, return on assets (ROA) describes the results obtained from investments made by the company
on its assets. This result show that the average ROA of the SMEs that apply the accounting standards is
15.23%, which is higher than the SMEs that do not, being 10.54%. In addition, return on equity is used to
describe the performance of the company in terms of the use of profits for the benefit of the company’s
owners. The results show that the average return on equity of SMEs that apply the accounting standards is
47.00%, which is higher than SMEs that do not, being 28.96%. Therefore, the results are consistent with the
findings of Cultrera (2015) and Bredart (2014) and Yazdanfar and Nilsson (2008) which states that liquidity,
solvency and profitability are the essential factors for the prediction of bankruptcy.
As shown in Table 4, the 20 SMEs observed are all predicted to achieve going concern since the Z-score
of all respondents is above 2.90. Using the Altman Z score makes it very simple and easy to predict the risk
of bankruptcy for SMEs. These findings are not consistent with those of Lin (2015), as the results directly
contradict those findings. Furthermore, the result shows that the null hypothesis (H0) is true if using a
significance level of 5%. This means that there is no difference in the financial performance of both group
with or without SAK ETAP. However, when using a significance level of 10%, the null hypothesis (H0) is
false. This means that there is a significant difference between those SMEs using the SAK ETAP and those
who do not.

6. Conclusion

This study aims to examine the risk of bankruptcy among SMEs. The results show that, under the financial
distress model analysis, all respondents are predicted to be at a low risk of bankruptcy. In other words, all of
the respondents satisfy the going concern assumption with the Z-score of all respondents being above 2.90.
This study also examines whether there are any significant differences in the financial performance of SMEs
that apply the accounting standards and those that do not. Based on the analysis of the financial ratios, the
SMEs using the accounting standards have a profitability higher than 5% of the SMEs that have not complied
with SAK ETAP. In addition, both groups are predicted to be healthy and at low risk of bankruptcy. These
results are consistent with Cultrera (2015) and Bredart (2014) and Yazdanfar and Nilsson (2008). which
stated that liquidity, solvency and profitability are essential in predicting the risk of bankruptcy among
SMEs.

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