THE 10th ISLAMIC BANKING, ACCOUNTING AND FINANCE INTERNATIONAL CONFERENCE 2022
(iBAF 2022)
The Influence of Capital Structure, Information Technology, and Business Characteristics on SMEs' Performance During the COVID-19 Outbreak
Dewi Ambarwati
Department of Accounting, Universitas Muhammadiyah Semarang (UNIMUS), Jalan Kedungmundu No.18, Semarang, 50273, Jawa Tengah Indonesia
E-mail: dewiambar112233@gmail.com
Fatmasari Sukesti
Department of Accounting, Universitas Muhammadiyah Semarang (UNIMUS), Jalan Kedungmundu No.18, Semarang, 50273, Jawa Tengah Indonesia
E-mail: fatmasari@unimus.ac.id
Nurcahyono Nurcahyono*
Department of Accounting, Universitas Muhammadiyah Semarang (UNIMUS), Jalan Kedungmundu No.18, Semarang, 50273, Jawa Tengah Indonesia
E-mail: nurcahyo@unimus.ac.id
*Corresponding Author
Abstract
The COVID-19 outbreak has affected the economy, social, and politics of almost all countries worldwide, including Indonesia.
SMEs also felt the economic impact; during the pandemic, there was a decline in production and sales, resulting in a 61%
decrease in income. SMEs, on average, had capital problems. This study aims to empirically test the factors that can be used to improve the performance of SMEs. The predictors used to enhance the performance of SMEs are capital structure, information technology, length of business, location, and work experience. The population of this study was SMEs registered at the Semarang City Cooperative Service with the convenience sampling method. We surveyed 100 SMEs to find the determinants of the company's success during the pandemic. The data analysis of this research used Structural Equation Modeling Partial Least Square (SEM-PLS). The results showed that the main factor used to improve the performance of SMEs is the capital structure. A capital structure dominated by capital will survive more than a capital structure overwhelmed by debt. The use of information technology strongly supports the performance of SMEs because business activities shift to online shops. Business location, work experience, and length of business are not determinants of improving the performance of SMEs because the technological transition strongly influences business activities in the pandemic era. This research has implications for the Semarang City Cooperative Office to design policies that support the use of information technology to help SMEs survive during the pandemic.
Keywords: SMEs Performance; Capital Structure; Information Technology and SMEs Characteristics
1. Introduction
Micro, small and medium enterprises (SMEs) play an essential role in the economy in Indonesia. SMEs significantly contribute to producing goods and services in various business and life sectors (Aji and Listyaningrum, 2021). In addition, SMEs contribute to absorbing labour to reduce unemployment and poverty rates, not only during normal conditions but during crises, for example, in 1998 and 2018, when Indonesia experienced a significant crisis. The current COVID-19 also directly impacts SME business activities due to restrictions on social and economic activities with various government policies through restrictions and lockdowns.
This policy is carried out so that the virus does not spread more widely (Permenkes, 2020).
The Organization for Economic Co-operation and Development (OECD) report states that the pandemic has implications for the threat of a significant economic crisis marked by the cessation of production activities in many countries, falling levels of public consumption, loss of consumer confidence, falling stock markets which ultimately leads to uncertainty. If this continues, the OECD predicts a decline in output levels of between 20
percent and 40 percent in many countries, with consumer spending potentially falling by around 30 percent. This prediction indeed threatens Indonesia's national economy as well. Pakpahan said there were three implications for Indonesia regarding the COVID-19 pandemic: the tourism, trade and investment sectors. Indonesia, which is dominated by the existence of Micro, Small and Medium Enterprises (SMEs) as the backbone of the national economy, is also seriously affected not only in terms of total production and trade value but also by the number of workers who have lost their jobs due to the pandemic. Data from the Ministry of Cooperatives and Small and Medium Enterprises (KemenkopUKM) shows that in 2018 there were 64,194,057 SMEs in Indonesia (or around 99 percent of the total business units) and employed 116,978,631 workers (or roughly 97 percent of the entire workforce). Work in the economic sector).
However, during the pandemic, many SMEs experienced problems, especially in funding and distributing the products they produced. So that the pandemic directly impacts SMEs, which can be seen from the decline in income, so many SMEs go bankrupt and close their businesses. Based on a survey conducted by BAPPENAS in 2021, it was found that, in aggregate, SMEs in Indonesia during the pandemic experienced financial difficulties due to limited funding and bad credit due to the inability to pay debts.
Figure 1. Rate of Decrease in Income Source: (Bappenas, 2020)
Based on graph 1, a reasonably high decline in income is one of the leading causes of SMEs facing financial difficulties. It was recorded that 64.18 million SMEs in Indonesia experienced a 40-80% decrease in income. So it can be concluded that SMEs are facing enormous turbulence due to the pandemic, therefore, SMEs need to consider other strategies so that SMEs can still survive in various conditions. Based on this phenomenon in predicting the factors that affect the performance of SMEs during the pandemic, the researchers used predictors of capital structure, information technology, length of business, location, and work experience.
The capital structure is a balance structure or comparison between foreign capital or own capital (Prabowo and Sutanto, 2019). Foreign capital is short-term and long-term debt owed by the company. Own capital is divided into retained earnings and can also be included in company ownership. The capital structure is fundamental because it will determine where the company's funds will flow (Prabowo and Sutanto, 2019). A capital structure dominated by own capital with a large percentage compared to debt will keep the company from the possibility of bankruptcy. This is supported by research by Aji and Listyaningrum (2021), Prihatminingtyas (2019), and Alifiana et al (2016), explaining that capital structure has a positive effect on the performance of SMEs. Meanwhile, the studies of Iriani and Muniarty (2020), Gonibala et al (2019), and Ririn et al (2014) explain that capital structure does not affect the performance of SMEs. Capital structure has a negative effect on income, where the use of high debt has an increased risk of causing a high-interest expense Iriani and Muniarty, (2020).
Information Technology is the use of internet-based technology developments and applications provided by digital platform companies to market and sell service products with the expectation of a sustainable increase in business income Aji and Listyaningrum (2021). An accounting Information System (AIS) is part of information technology. AIS is an information system that handles everything related to accounting Mas’ut and Masrura (2018). The better the use of SIA, the company can provide, manage, and report finances easily, quickly, and accurately Mas’ut and Masrura, (2018). This is supported by research by Aji and Listyaningrum (2021), Marfuah and Hartiyah (2019), and Pratama (2018) explain that information technology appropriately used will improve the performance of SMEs. In comparison, research by Noviono and Pelitawati (2017), Putra and Jember (2019), and Mahayasa (2017) explains that information technology does not affect the performance of SMEs due to non-
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technical factors. Information technology does not affect the performance of SMEs, where technological advances will facilitate the financial reporting process Noviono and Pelitawati (2017).
The following variable is the characteristics of SMEs. Three factors are considered to affect SMEs' performance: the length of business, location, and work experience. The first factor is the length of interaction.
The longer a person pursues his company will increase his knowledge and affect his income level. The longer a business actor is in the business field, the more knowledge about consumer behaviour and market behaviour will increase Prihatminingtyas (2019). This is supported by research by Prihatminingtyas (2019), Alifiana et al (2016), and Marfuah and Hartiyah (2019), explaining that the length of business has a positive effect on income. While the research of Prihatminingtyas (2019), Polandos et al (2019), and Purnomo et al (2018) explain that length of business has a negative effect. The size of a company has a negative impact on income, where the length of business of less than one year needs to improve the skills of approaching consumers Prihatminingtyas (2019).
Business actors choose a location to get the expected income by considering ease of access, suitability of consumer segmentation, and facilities for developing a business (Aji and Listyaningrum, 2021). The more strategic the business location chosen, the higher the level of sales and affect the level of success of a business (Aji and Listyaningrum, 2021), this is supported by research by Aji and Listyaningrum (2021), Prihatminingtyas (2019), and Marfuah and Hartiyah (2019) explains that location has a positive effect on income. In comparison, the research of Pratama (2018), Prima (2019), and Meilinda and Mahmud (2020) explains that location has a negative effect. The site has a negative impact on income, where MSMEs that do not have a personal kiosk or are still setting up their business at home mainly only sell their business online so that MSMEs get orders, not from direct customers who come to their business location via online, so that wherever the site of the company does not have a positive effect on MSME income Meilinda and Mahmud (2020).
Work experience includes knowledge, skills, and abilities possessed by workers in developing responsibilities from previous jobs (Cita and Karmini, 2019). The longer a person works, the more experience with work increases.
Someone with a lot of work experience will master a job better, so they can complete the job well. This indicates that the person has good work effectiveness (Cita and Karmini, 2019) this is supported by research by Shaleha and Pahlevi (2020), Pratama (2018), and Wardana and Yuliarmi (2018) explain that work experience has a positive effect on income. While the research of Cita and Karmini (2019), Sudarsani et al (2015), and Widyastuti (2018) explain that work experience has a negative effect on income, where knowledge and the provision of entrepreneurship training are essential for business actors, so that prospective MSME actors can apply innovations and creativity in the products they produce so that they can apply sales and Income Cita and Karmini (2019).
2. Literature Review 2.1 Signal Theory
This study uses signal theory to justify the relationship between variables. This theory requires the sender to give a signal or signal in the form of information that reflects the condition of a company that is beneficial to the recipient (Spence, 1973). According to Brigham and Ehrhardt (2011), a signal theory is management's perception of the company's growth in the future, which will affect the response of potential investors to the company. Signal theory suggests how a company gives signals to users of financial statements. This signal is in the form of information about what management has done to realize the company's goals for information about the fluctuations in the company's stock price. Data released by the company is essential because it affects investment decisions outside the company. When the information is announced, and all market participants have received the information, market participants first interpret and analyze the data as a good signal (good news) or a wrong signal (news chapter) (Putri, 2021).
The relationship between signal theory and research variables is that the better the signal issued by the company to the banking sector, the better the signal will be. The bank will believe in the company and will invest in the company so that the company can develop a more significant business and attract more consumers for transactions in the company. The company will get the expected profit. Capital is sourced from its capital, and this capital structure will show a positive signal because it will make it easier for business operations. Then the second is money sourced from credit creditors of capital originating from debt can cause a negative signal because if one day the income received is not following the target, it will make it difficult to pay debts (Prabowo and Sutanto, 2019).
The information technology used in this research is an Accounting Information System (AIS). The use of AIS in recording the financial statements of SMEs will show a positive signal because the use of AIS will make it easier to record financial statements (Mas’ut and Masrura, 2018). Furthermore, the length of business can be seen from how long the company has been standing. The size of the trade shows a positive signal. The longer a business is established, the more people will recognize the industry; in other words, the company already has a name in the community (Marfuah & Hartiyah, 2019). Location is related to the establishment of the business. The area shows a positive signal because having a company with a strategic location is a great business opportunity Marfuah and
Hartiyah, 2019). Work experience can be seen from how long someone has worked. Work experience shows a positive signal because someone with work experience will make it easier to do his job (Wardana and Yuliarmi, 2018).
2.2 Capital Structure
Capital structure is equity and debt funding in a company which is often calculated based on the relative size of various funding sources (Prabowo and Sutanto, 2019). The capital structure is divided into two: the capital structure of own capital and the capital structure of debt. This study uses a capital structure sourced from its capital.
Signal theory confirms that if the capital structure comes from its capital, it will give a positive signal. This statement is supported by research by Aji and Listyaningrum (2021), Prihatminingtyas (2019), Alifiana (2021), Marfuah and Hartiyah (2019), and Wibiseno and Usman (2021), explaining that capital structure has a positive effect on SME performance. This proves that when the capital structure is sourced from its capital, it will avoid debt, and profits can be reprocessed as business capital. Based on the statement above, the proposed hypothesis:
H1: Capital structure has a positive effect on income.
2.3 Information Technology
The application of information technology, especially the Accounting Information System (AIS), helps collect and process transaction data and communicate processed financial information to parties in need (Mas’ut and Masrura (2018). Signal theory confirms that the higher the use of AIS it will give a positive signal, because the use of AIS in processing financial statements will make it easier to provide complete and relevant information to the company. This statement is supported by research by Aji and Listyaningrum (2021), Marfuah and Hartiyah (2019), Wardana and Yuliarmi (2018), Prima (2019), and Sasongko and Satrianto (2021), explaining that information technology has a positive effect on income. This proves that when using information technology, it will be easier to determine the profit or loss obtained. Based on the statement above, the proposed hypothesis:
H2: Information Technology has a positive effect on Revenue.
2.4 Length of Business Activity
The length of business is the length of time that has been carried out by business actors in running a business (Marfuah and Hartiyah, 2019). The longer a business actor carries out his line of business will affect his productivity (professional ability/expertise), so will increase business income. Signal theory confirms that if a company can stand long enough, it will give a positive signal. If a business has been established long enough, it will inform outsiders that the company can survive and is consistent with what was created. A business that can survive long enough proves the firm has sufficient income. This statement is supported by research by Alifiana (2021), Marfuah and Hartiyah (2019), Setiaji and Fatuniah (2018), Vijayanti and Murjana Yasa (2016), and Dinar et al (2021), explaining that the length of business has a positive effect on income. This proves that when a company has been around for a long time, it will affect the income level. Based on the statement above, the proposed hypothesis:
H3: Business Length has a positive effect on Income.
2.5 Business Location
The business location is where the business operates, all activities ranging from procurement of raw materials to selling products to consumers. The more strategic the business location and the easier it is to reach consumers, the business income will increase (Marfuah and Hartiyah, 2019). Signal theory confirms that a more strategic business location will give a positive signal. Because businesses that have strategic locations will have the opportunity to attract consumers, which will provide opportunities for business owners to earn income. This statement is supported by research by Aji and Listyaningrum (2021), Prihatminingtyas (2019), Marfuah and Hartiyah (2019), Setiaji and Fatuniah (2018), and Artaman et al (2016), explaining that location has a positive effect on income. This proves that when the business location is strategic, it will attract many customers and affect revenue. Based on the statement above, the proposed hypothesis:
H4: Location has a positive effect on Income.
2.6 Work experience
One's work experience strongly supports skills and speed in completing work, so the error rate will decrease (Wardana and Yuliarmi, 2018). Signal theory confirms that if you have high work experience, it will give a positive signal, because the more extended work experience or, the more work experience a person has, the more skilled
and faster he is in completing the tasks that are his responsibility so that the output produced is more and is expected. More and more income. This statement is supported by research by Cita and Karmini (2019), Shaleha and Pahlevi (2020), Wardana and Yuliarmi (2018), Gustiana and Irwanto (2017), and Giri and Dewi (2017), explaining that work experience has a positive effect on income. This proves that the more work experience you have, the more opportunities you have to earn income. Based on the statement above, the proposed hypothesis:
H5: Work experience has a positive effect on income.
3. Research Method
This study uses a quantitative approach with comparative causal research methods or causal relationships. The quantitative approach is a research method based on the philosophy of positivism, used to examine specific populations or samples, data collection using research instruments, and quantitative or statistical data analysis to test predetermined hypotheses (Sugiyono, 2013). The comparative causal method in this study is to examine the relationship between capital structure, information technology, length of business, location, and work experience on income. The population of this research is SMEs in Central Java, and the sampling technique is convenient.
And the number of samples was determined using the Slovin formula with an r rate of 5%.
3.1 Variable Measurement
Table 1. Definition of Operational Variables.
Variable Indicator Source
SMEs Performance Ø Income elements Ø Sources of income Ø Cost
Adipati (2018)
Capital Structure Ø Business size Ø Influence on income Ø Smoothness in business
Rinjaya (2020)
Information Technology Ø Cash register and inventory recording Ø Business financial reports and target planning Ø Sales budget and production costs
Patimah (2019)
Business Length Ø The length of the merchant's business is expressed in years Ø How to think in the future
Ø Doing innovation and creativity
Rohmah (2019)
Location Ø Selection with various considerations Ø Close to the crowd
Ø Easy access and affordable Ø Convenient to visit
Dewi (2019)
Work experience Ø Length of time or working period Ø Known level of knowledge and skills Ø Mastery in work and equipment
Viani (2019)
3.2 SEM-PLS Data Analysis
The data used in this study is primary data, namely data collected directly from the respondents of the research object. The data collection method used is a survey using a questionnaire. The questionnaire in this study used the indicators of previous research. The data analysis method of this research uses Structural Equation Modeling- Partial Last Square (SEM-PLS) using the WarpPLS 8.0 application. According to Meilinda and Mahmud (2020), PLS is appropriate to reduce data, namely by determining the minimum number of factors needed to calculate the maximum proportion of the total variance represented. The evaluation of the model is carried out in two stages evaluation of the measurement model (outer model) and assessment of the structural model (inner model). The measurement model was carried out to test the validity and reliability of the instrument in the research model.
An instrument is valid if it has a loading factor value above 0.70 and an AVE above 0.05 for reflective constructs and has a p-value below 0.05 and a VIF value below 3.3 for formative constructs (Ghozali, 2018). An instrument is reliable if it has Composite Reliability and Cronbach's Alpha values above 0.7 (Ghozali, 2018). Inner model testing is done to test the relationship between latent variables. The hypothesis is accepted if it has a path coefficient (β) > 0 and a p-value <0.05. Mediation hypothesis testing is done by looking at the total effect value and p-value for total effect. Job satisfaction can be said to mediate if it has a total effect value > 0 and a p-value for total effect < 0.05.
4. Results and Discussion
The sample of this research is MSMEs in Tembalang District, registered with the Cooperatives and MSMEs Service of Semarang City. The data collection technique is used in conventional sampling. This is a sampling method where anyone who coincidentally meets the researcher can be used as a sample. The following table of sample demographics in this study:
Table 2. Characteristics of Respondents.
Information Total %
Education
Primary school 4 4%
Junior High School 6 6%
Senior High School 58 58%
Diploma 1 1%
Bachelor 31 31%
100 100%
Business Life
0-5 years 52 52%
6-10 years 18 18%
11-15 years 6 6%
16-20 years 5 5%
>20 years 19 19%
100 100%
Monthly income
5-10 million 30 30%
11-20 million 13 13%
21-30 million 16 16%
31-40 million 20 20%
>50 million 21 21%
100 100%
Respondents of this study were SME owners in Central Java with a total of 100 SMEs. Based on a survey conducted by researchers describing the owners of SMEs as a sample in terms of education level, the average is dominated by high school graduates 58% and undergraduates 31%. SMEs that are the research sample have an average length of business under five years, so in the context of a pandemic, they do not yet have strong fundamentals. Judging from the income obtained by respondents, the average monthly Income of SMEs is below 20 million.
4.1 Measurement model analysis (Outer Model)
To test whether all the indicators used have good quality and can represent the variables used as predictors, it is necessary to test the validity and reliability. The validity test is used to determine the ability of the research instrument to measure what it is supposed to measure (Cooper and Donald, 2006). A reliability test is used to measure the consistency of respondents in answering the research instrument.
Table 3. Outer Loading Test Results Variable
Validity Reliability
P Value VIF AVE Outer Loading Factor
Cross Loading
AVE Square
Composite Reliability
Cronbach Alpha
Capital Structure 0.001 1.908 0.674 0.821 0.226 0.821 0.805 0.517
Information
Technology 0.001 1.884 0.606 0.843 0.140 0.779 0.86 0.782
Business Length 0.001 2.105 0.695 0.888 0.056 0.834 0.872 0.779
Location 0.001 1.851 0.695 0.879 0.105 0.834 0.919 0.89
Work experience 0.001 1.987 0.594 0.811 0.089 0.771 0.897 0.863
Capital Structure 0.001 1.715 0.641 0.841 0.199 0.801 0.915 0.887
Table 3 describes the validity and reliability of all research constructs. All research constructs have met the discriminant validity test, as evidenced by the p-value of all constructs < 0.001 (<0.005) and if the VIF is below 3.3. In contrast, for convergent validity testing, all constructs have an AVE > 0.5, the value of the outer loading factor above 0.7 and higher than the cross-loading value, so it has met the convergent validity test. The reliability of the research instrument assessed from composite reliability and Cronbach's alpha showed that the overall value of the test results was above 7, so all research constructs were reliable.
4.2 Structural Model Analysis (Inner Model)
Through the bootstrapping process, T-statistic test parameters were obtained to predict the existence of a causal relationship. A structural model (inner model) predicts the causality relationship between latent variables. The structural model (inner model) is evaluated by looking at the percentage of variance explained by the R2 value.
Table 4. Hypothesis Testing Results
Variable Direct Effect
Path Coef P Value R2
Capital Structure 0.089 0.182 0.429
Information Technology 0.203 0.017
Business Length -0.249 0.004
Location 0.342 <0.001
Work experience 0.029 0.385
4.3 Discussion
4.3.1 Capital Structure and Income
The test results show that the capital structure has no effect on income, so hypothesis H1 is rejected. Based on table 4, the capital structure has no effect on the performance of SMEs, as evidenced by the value of 0.089 and the P-value of 0.182. This shows that SMEs that use capital with their sources of money have not been able to meet operational needs and still need capital sourced from creditors for their business operations. Especially during the pandemic, SMEs experience a decline in income, so they need additional funds to continue their business.
The results of this study are relevant to the signal theory, which explains that if the capital used in conducting a business is capital sourced from its capital, this capital structure will show a positive signal. It does not cause the possibility of SME income to decrease if they only use their capital. Gonibala et al (2019)say that if capital is increased, there will be an increase in income, but if capital decreases, it will decrease in revenue. The results of this study are linear with the investigations of Gonibala et al (2019), Ririn et al (2014), and Iriani and Muniarty (2020). They say that capital structure does not affect income.
4.3.2 Information Technology and Revenue
Based on table 4, information technology improves SMEs' performance, as evidenced by the results of the path coefficient with a value of 0.203 and a P-value of 0.017. The test results show that information technology positively affects income, so hypothesis H2 is accepted. Therefore, SMEs that use AIS in operational processes, especially business financial records, will be more helpful because they can know transparently about the flow of financials in and out.
The results of this study are relevant to signal theory, which explains that the use of AIS in recording MSME financial statements will show a positive signal because the use of AIS will make it easier to record financial statements Mas’ut and Masrura (2018). According to research by Aji and Listyaningrum (2021), good use of information technology (AIS) will increase income because it will make it easier to find good and correct financial accounting. The results of this study are linear with the investigations of Aji and Listyaningrum (2021), Marfuah and Hartiyah (2019), and Pratama (2018) that Information Technology has a positive effect on income.
4.3.3 Length of Employment and Income
Based on table 4, the length of business has a negative effect on income, as evidenced by the results of the path coefficient with a value of (-0.249) and a P-value of 0.004. The test results show that the length of business does not affect income, so hypothesis H3 is rejected. During a pandemic, whether or not a company survives is not influenced by the size of the business but the ability to survive and adapt to various challenges.
Length of business is not a predictor of SME performance because companies that adapt to technology are more successful than businesses that do not apply technology in business. Purnomo et al (2018) explain that the longer you do the job, it does not guarantee to increase in your income because it depends on the skills and knowledge you have. The results of this study are linear with the investigations of Prihatminingtyas (2019), Polandos et al (2019) and Purnomo et al (2018), explaining that length of business has a negative effect on income.
4.3.4 Business Location and Revenue
Based on the results of the inner model, location has a positive effect on income, as evidenced by the results of the path coefficient with a value of 0.342 and a P-value <0.001. The results of this study are linear, with research by Aji dan Listyaningrum (2021), Prihatminingtyas (2019), and Marfuah and Hartiyah (2019)stating that location has a positive effect on income. The test results show that the business location has a positive effect on income, so hypothesis H4 is accepted, which means that the choice of business location must be considered carefully, especially concerning accessibility. Companies that choose strategic locations will quickly get consumers and make it easier for their products to be absorbed by the market (Marfuah and Hartiyah, 2019).
4.3.5 Work Experience and Income
Based on table 4, work experience has no effect on income, as evidenced by the results of the path coefficient with a value of 0.029 and a P-value of 0.385. The test results show that work experience has no effect on income, so hypothesis H5 is rejected, where work experience is not a benchmark for the business to progress and develop.
Work experience is not a predictor of SME performance. This is because the research respondents do not have long working experience with a business duration of under five years. The Cita and Karmini study (2019) explains that someone with a lot of work experience will have more control over a job to complete the job well. This indicates that the person has good work effectiveness. The results of this study are linear with the investigations of Shaleha and Pahlevi (2020), Pratama (2018), and Wardana and Yuliarmi (2018), explaining that work experience does not affect income.
5. Conclusion
Based on the results and discussion, the capital structure, which is dominated by own capital, does not affect the performance of SMEs. This is because, during the pandemic, SMEs experienced financial difficulties, thus requiring capital from banks. Information technology applied by SMEs during the pandemic is beneficial in promoting and distributing their products to improve SMEs' performance. Choosing a strategic business location will encourage SMEs to scale up to increase their performance. The work experience of business people cannot be a predictor of company performance because, during a pandemic, adaptability and use of technology are important factors.
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