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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

CHAPTER 1

THE PROBLEM AND ITS SETTING

Introduction

Working capital management is important because of its effects on the firm’s

profitability and risk, and consequently its value (Smith, 2008). Since working capital

stand as the life-blood of any business, it is very important that each company has

established strong policies and regulations for their working capital. Working Capital

Management deals with management of current assets and current liabilities and directly

affect profitability and market valuation of firms (Sunday, Abiola and Lawrencia 2012).

Funds coming from the working capital are required for the day-to-day operation of the

firm. In financial literature, there exist two concepts of working capital namely: gross and

net. According to gross concept, working capital refers to current assets, such as, cash,

marketable securities, inventories of raw materials, work-in-process, finished goods and

receivables. According to net concept, working capital refers to the difference between

current assets and current liabilities.

Working capital is a vital aspect of any business, so even SMEs should have

established and strong policies in managing it. In the previous study conducted, it

resulted that some SMEs do not have a stable policy in terms of managing their working

capital since they believe that in having a small capital there is no more need in putting

such policies. Which is opposed by the standards as they say it is a must to establish

policies to regulate and manage working capital. There should be a balance between

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liquidity and organization’s operation while conducting its day to day operation. Liquidity

is a condition to meet its short-term obligations which only can be guaranteed when

there is a profit. Cash is very important in indicating the firm’s financial health, if it is

stable and it should not be too large. Current assets and current liabilities should have a

well and good management for they are relevant in the financial matters of every

company. This requires that business must be run both efficiently and profitably.

The major problem of working capital management in a profit-making

organization is its matter of balancing each component and which is needed to be

managed carefully to maintain low working capital, to fund product development, make

and deliver products and offer high levels of customer services.

Working capital management amongst Small and Medium Scale Enterprises

(SMEs) appears to have been relatively neglected even though a high proportion of

failures in businesses are due to poor decisions concerning their working capital

(Tewolde, 2012). This study is about the assessment of Working Capital Management of

Small and Medium Enterprises. It concerns about the implementation of working capital

management practices within these small and medium enterprises compared to the big

firms. In this study, different areas with regards to working capital of SMEs were

assessed to know if there are policies and standards being implemented within the

organization. This study aims to assess how well these SMEs manage their working

capital as it is the source of everyone’s means of living. The study is to prove the fact

that the working capital management is important to the enterprise's development no

matter how small the enterprise is.

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Theoretical Framework

Theory is used as a background to decide on what research approaches to follow

and what data to collect to analyze the research and to arrive at a conclusion about the

study. Given that a business must continually adapt to the changing external

environment, and determine the appropriate level and mix of the investment in current

assets and the financing of the current assets, the matching, conservative and

aggressive, which serve as theories or policies useful in the management of working

capital of firms vis-à-vis Small and Medium Scale Enterprises (Beaumont-Smith, 2007;

Gitman, 2007; Schnee, 2011; McMenamin, 2015). The type of theory, approach or policy

relates to the firm’s general network to the investing and financing of its working capital

needs.

According to Bhattacharya (2009), the matching or hedging, conservative, and

aggressive approaches to working capital management were propounded by Karl Marx

in 1914 while the aggregate approach to working capital management was propounded

by David Ricardo in 1931.

Maturity Matching or Hedging Approach to Working Capital Financing

Maturity matching or hedging approach is a strategy of working capital

financing wherein short term requirements are met with short-term debts and long-term

requirements with long-term debts. The underlying principal is that each asset should be

compensated with a debt instrument having almost the same maturity.

These concepts are best understood with the help of a diagram. In the diagram,

we can see three levels, each of fixed assets, permanent working capital and temporary

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working capital. The red vertical line with white spaces represents the type of financing.

The bigger line which stretches till permanent working capital is long-term financing and

a smaller line is the temporary working capital. The line from where the temporary

working capital starts, and the line of a hedging strategy is the same. Any strategy below

this line will be an aggressive strategy and a strategy above it will be a conservative

strategy.

Figure 1.1 Maturity Matching or Hedging Approach

Rationale behind maturity matching or hedging approach

Knowing why to apply maturity matching strategy is very important. It suggests

financing permanent assets with long-term financing and temporary with short-term

financing. Now let us suppose opposite situations and see. There can two such

situations.

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A. Permanent Assets Financed with Short Term Financing:

In this situation, the borrower must renew or refinance the short-term loan every

time simply because the duration for which money is required is higher, say 3 years,

than the available loan is of, say 6 months only. The firm needs to renew the loan 6

times. This firm is exposed to refinancing risk.

If the lender for any reason denies for renewal, what will the firm do? In such a

situation for paying off the loan, either the firm will sell the permanent assets which

effectively means closing the business or file for bankruptcy.

B. Temporary Assets Financed with Long Term Financing:

In this situation, firstly, the borrower has to pay interest on long term loans for

that period also when the loan is not getting utilized. Secondly, the interest rate of long-

term loans is normally dearer to short term loans due to the concept of term premium.

These two additional costs hit the profitability of the firm.

After all the discussion, in situation A, we learned that costs may be low, but the

risk is too high and situation B concludes high with low risk. Situation A is not acceptable

because of such a high risk and situation B hits the profitability which is the primary goal

of doing business and basis of survival. Therefore, the hedging or matching maturity

approach to finance is ideal for effective working capital management.

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Conservative Approach to Working Capital Financing

Conservative approach is a risk-free strategy of working capital financing. A

company adopting this strategy maintains a higher level of current assets and therefore

higher working capital also. The major part of the working capital is financed by the long-

term sources of funds such as equity, debentures, term loans etc. So, the risk

associated with short-term financing is abolished. In the conservative approach, fixed

assets, permanent working capital and a part of temporary working capital is financed by

long-term financing sources and the remaining part only is financed by short-term

financing sources. Thus, the primary objective of working capital management is

ensured.

To explain the approach with more clarity, let us use the following diagram. The

dotted lines horizontal line indicates the point till which the long-term funds will be

utilized. The dotted vertical lines indicate the sources of finance and they are tagged as

‘long-term financing’ and ‘short term financing’.

Figure.1.2 Conservative Approach

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We can easily make out that long term funds are financing total fixed assets, total

permanent assets and a part of the temporary or seasonal working capital also.

Seasonal requirement or temporary working capital has peaks and troughs. The two

areas of troughs below the long-term financing line indicate that there are idle long-term

funds incurring unnecessary interest cost.

The advantages of conservative strategy of working capital financing are Smooth

operations with no stoppages and no insolvency risk. Smooth operations with no

stoppages means that the level of working capital and current assets (inventory,

accounts receivables and most importantly liquid cash or bank balance) is high. A Higher

level of inventory absorbs the sudden spurt in product sales, production plans, any

abnormal delay in procurement time etc. This achieves the higher level of customer

satisfaction and smooth operations of the company. Higher levels of accounts

receivables are due to relaxed credit terms which in turn attract more customer and

thereby higher sales and higher sales mean higher profits in normal circumstances.

While in no insolvency risk the most important part and highly relevant to financing

strategy are the higher levels of cash and working capital. Higher working capital avoids

the risk of refinancing which exists in case it is financed by short-term sources of

finance. Not only the risk of refinancing but also the risks of adverse change in the

interest rate while getting the short-term loans renewed are avoided. This is how the

insolvency risk is avoided as at any time company has sufficient capital to pay off any

liability.

The disadvantages of conservative strategy of working capital financing are

higher interest cost, idle funds, higher carrying cost and inefficient working capital

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management. Higher interest cost employs long-term sources of finance and hence

there are all the chances that the rate of interest will be high. The theory of term

premium says that the long-term funds have higher interest rate compared to short-term

funds as risk perception and uncertainty is high in case of longer terms. While in idle

funds long term loans cannot be paid off when wished and if paid cannot be easily

availed back. As we noted in the diagram, the long-term funds remain unutilized in the

times when seasonal spurt in activity is not there. Idle funds have an opportunity cost of

interest attached to it. In higher carrying cost, a higher level of inventory and debtors

implies higher carrying and holding cost which has a direct impact on profitability. Lastly,

inefficient working capital management happen if the margins of the firm are low for a

year, a reasonable part of it will be attributed to working capital management. In such a

situation, the conservative approach of financing may be called with another name of

‘inefficient working capital management’.

Aggressive Approach to Working Capital Financing

The aggressive approach is a high-risk strategy of working capital

financing wherein short-term finances are utilized not only to finance the temporary

working capital but also a reasonable part of the permanent working capital. In this

approach of financing, the levels of inventory, accounts receivables and bank balances

are just sufficient with no cushion for uncertainty. There is a reasonable dependence on

the trade credit.

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Fixed assets and a part of permanent working capital are financed by long-term

financing sources and the remaining part of permanent working capital and total

temporary working capital is only financed by short-term financing sources. It is for better

and clear understanding, following diagram is utilized. The dotted lines horizontal line

indicates the point till which the long-term funds will be utilized. The dotted vertical lines

indicate the sources of finance and they are tagged as ‘long-term financing’ and ‘short

term financing’.

Figure 1.3 Aggressive Approach

We can easily make out that long term funds are financing total fixed assets and

a part of permanent assets. A major part of seasonal requirement or temporary working

capital is financed by short term source of finance. In this approach, the difficult area is

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the part of permanent working capital which is financed by short-term sources. It can

pose problems of liquidity and bankruptcy to the firm.

The advantages of aggressive strategy of working capital financing are lower

financing cost, high profitability, lower carrying and handling cost and highly efficient

working capital management. Lower financing cost, high profitability, cost of interest is

low because of the maximum usage of short term finances. There are two reasons of

this. Firstly, the rate of interest is cheaper and secondly, in the off seasons, the loan can

be repaid and hence, no idle funds. If the operating cycle is moving smoothly, it is called

most effective working capital management. Lower carrying and handling cost mean

lower level of inventory makes the carrying and holding cost also go down and that

directly affect the profitability. And highly efficient working capital management in which

the task of working capital manager is to smoothly run the operating cycle of the

company with the lowest level of working capital. Precisely, that is what this strategy is

all about. If the strategy is successful with no dissatisfied stakeholders, there is nothing

better than this.

The disadvantages of conservative strategy of working capital financing are

insolvency risk and lost opportunities and unexpected shocks. Conservative strategy

faces the high level of insolvency risk because the permanent assets are financed by the

short-term financing sources. To maintain those permanent assets, the firm would need

to be repeated refinancing and renewals. It is not necessary that all the time the

refinancing is smooth. For any reason, if the financial institution rejects the renewal, the

firm will not be able to maintain those permanent assets and will have to forcibly sell

them. If failed in realizing those assets, the options is left will be liquidation. Liquidating

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the permanent working capital is very difficult as it consists of accounts receivables and

inventory. While and lost opportunities and unexpected shocks, there is no cushions or

margin in this strategy of financing, sudden big contracts of sales are not possible to

execute. On the other hand, if there are other uncertainties like delay in an abnormal raw

material acquisition, machinery break downs etc., the firm will disturb the business

operating cycle and therefore will face sustainability problems.

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Figure 1.4 The Paradigm of the Study

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The paradigm of the study is show in Figure 1.4. System Approach or Input-

Process-Output Framework is used to show the flow of the study that the researchers

underwent in attaining the goals of the research.

The input frame displays the variables of the study that the researchers obtained

in the survey which containing the (1) the profile of the respondents (2) profile of the

business (3) the level of implementation of working capital management practices. The

process that the researchers underwent includes the presentation, analysis, and

interpretation of the data gathered through survey questionnaire statistical analysis. The

output of the research is the assessment of working capital management of the SMEs

and as well as the recommendations on SMEs improving their policies in managing their

working capital.

Statement of the Problem

This study aimed to assess the level of implementation of working capital

management practices of small and medium enterprises in 2nd district of Manila.

In line with the purpose of the study, the following research questions were answered:

1. What is the profile of respondents in terms of the following:

a) Name

b) Sex

c) Age

d) Type of Business

e) Position held in the company

f) Number of years in the company

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g) Number of trainings/seminar attended about working capital

management?

2. How do the respondents assess the level of implementation of working

capital management practices of small and medium enterprises in terms of

the following aspects:

a) Sources of financing working capital

b) Investment management

c) Cash management

d) Accounts receivable management

e) Inventory management

f) Accounts payable management?

3. Is there a significant difference on the assessment on the level of

implementation when the respondents are grouped according to profile?

Hypothesis

There is no significant difference between the mean responses of Chief Operations

Officer (COO), Cashier/Fund/Custodian/Treasurer, Accountant and Operations Manager

on the sources of financing working capital, investment management, cash

management, account receivables management, inventory management and accounts

payable management.

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Scope and Limitations

There are many factors that affect the effective operations of business

organizations from achieving their set objectives. Generally, the study focused on the

assessment of working capital management practices of small and medium scale

enterprises in 2nd district of Manila City. Specifically, the study also focused on the

following areas of working capital management: sources of financing working capital,

cash management, accounts receivable management, accounts payable management,

investment management and inventory management.

The study is delimited to only Chief Operations Officer (COO),

Cashier/Fund/Custodian/Treasurer, Accountant and Operations Manager who are part of

the working capital management of small and medium enterprises in 2nd district of Manila

City, because it is highly urbanized district. The population was determined by

requesting the total population of SMEs in 2nd district from the licensing office of Manila

City Hall as of July 31, 2017.

The questionnaire served as the instrument for gathering data and out of 88

respondents, only 42 respond to it through emails, company visits and through call.

Significance of the Study

The importance of this study is to relate the working capital management

practices to the operations of small and medium enterprises about how the

implementation of these practices affects the operations like planning and management

of the current assets and liabilities that it improves the profitability and performance of

the enterprises.

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The importance of working capital management to effective operation especially

among small and medium enterprises by providing empirical evidence on the effects of

working capital management on the profitability of small and medium-sized firms.

Managers can improve profitability by shortening the cash conversion cycle through

inventory reduction and reduction in the outstanding number of day’s receivables.

Its significance on the firms’ financial performance is emphasized in this study to

bring attention of business leaders to the obvious but is often neglected effect of these

working capital management practices. The next step is to consider the best practices of

top performing companies. Then determine what working capital management strategies

may be qualified to be implemented to minimize investment in current asset (Effect of

Working Capital Management and Financial Leverage on Financial Performance of

Philippine Firms).

Working Capital Management towards firm’s achievement was considered as a

traditional concept that highlights in all standard corporate finance textbooks. Above all,

efficient management of working capital is a fundamental part of the overall corporate

strategy and is expected to contribute positively to the creation of a firm’s value. Thus,

the importance of managing the working capital (WC) efficiently is irrefutable in certifying

each component of working capital are at the best level of efficiency to successfully

operate and is highly desirable for firms’ growth and sustainability because of its effects

on profitability.

Recently, short-term assets and liabilities, which are considered as important

components of total assets, are now gaining more interest across the different industry

by converging towards working capital management practices’ efficiency. Accordingly,

efficient WCM also revolves on monitoring of current assets and existing liabilities in a

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way to minimize the potential debt and to keep the firms from too much spending on the

asset. In addition, efficient WCM will allow firms to redeploy underutilized of firm’s

resources to higher-valued use in which could heighten of firm’s performance.

Working capital management ensures the sustainability of the companies to keep

growing to compete with others (Working Capital Management Efficiency: A Study on

the Small and Medium Enterprise in Malaysia, 2015).

Definition of Terms

Accounts payable management refers to the set of policies, procedures, and

practices employed by a company with respect to managing its trade credit

purchases.

Account receivables management incorporates is all about ensuring that

customers pay their invoices. Good receivables management helps prevent

overdue payment or non-payment. It is therefore a quick and effective way to

strengthen the company's financial or liquidity position.

Aggressive approach is a high-risk strategy of working capital financing wherein

short-term finances are utilized not only to finance the temporary working capital

but also a reasonable part of the permanent working capital. In this approach of

financing, the levels of inventory, accounts receivables and bank balances are

just sufficient with no cushion for uncertainty.

Asset-based financing is a secured long-term loan that uses such assets as

marketable securities, accounts receivable, inventories, fixed assets (plant,

equipment and real estate) as collateral for loans. Asset-based financing may

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involve several options such as pledging assets, selling assets, and leases,

mortgaging, loan-option-agreements, pensions and factoring assets.

Cash management is the corporate process of collecting and managing cash,

as well as using it for (short-term) investing. It is a key component of ensuring a

company's financial stability and solvency.

Conservative approach is a risk-free strategy of working capital financing. A

company adopting this strategy maintains a higher level of current assets and

therefore higher working capital also.

Corporate strategy is the direction an organization takes with the objective of

achieving business success in the long term.

Current Assets are balance sheet accounts that represent the value of all

assets that can reasonably expect to be converted into cash within one year.

Current liabilities are a company's debts or obligations that are due within one

year, appearing on the company's balance sheet and include short term debt,

accounts payable, accrued liabilities and other debts.

Financial Management refers to the efficient and effective management of

money (funds) in such a manner as to accomplish the objectives of the

organization. It is the specialized function directly associated with the

top management.

Gross domestic product (GDP) is the monetary value of all the finished goods

and services produced within a country's borders in a specific period.

Insolvency Risk is the risk that a firm will be unable to satisfy its debts, also

known as bankruptcy risk.

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Liquidity describes the degree to which an asset or security can be quickly

bought or sold in the market without affecting the asset's price.

Interest Rate is the amount charged, expressed as a percentage of principal, by

a lender to a borrower for the use of assets. Interest rates are typically noted on

an annual basis, known as the annual percentage rate (APR).

Inventory management is the supervision of non-capitalized assets (inventory)

and stock items. A component of supply chain management, inventory

management supervises the flow of goods from manufacturers to warehouses

and from these facilities to point of sale.

Investment management is the professional asset management of various

securities (shares, bonds and other securities) and other assets (e.g., real estate)

to meet specified investment goals for the benefit of the investors.

Long term financing or debt consists of loans and financial obligations lasting

over one year. Long-term debt for a company would include any financing or

leasing obligations that are to come due in a greater than 12-month period. Long-

term debt also applies to governments: nations can also have long-term debt.

Manufacturing Industry it is the branch of manufacture and trade based on the

fabrication, processing, or preparation of products from raw materials and

commodities.

Merchandising Industry refers to the variety of products available for sale and

the display of those products in such a way that it stimulates interest and entices

customers to make a purchase.

Off-balance sheet financing includes unfunded pension liabilities, leases, and

unconsolidated subsidiary debt, in-substance defeasance of debt and project

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financing with unconditional commitment arrangements, and the sales of

accounts receivable and inventory.

Operating cycle is the average period required for a business to make an

initial outlay of cash to produce goods, sell the goods, and receive cash from

customers in exchange for the goods. This is useful for estimating the

amount of working capital that a company will need to maintain or grow its

business.

Permanent Current Assets borrower must renew or refinance the short-term

loan every time simply because the duration for which money is required is

higher, say 3 years, than the available loan is of, say 6 months only. The firm

needs to renew the loan 6 times. This firm is exposed to refinancing risk.

Profitability is the ability of a company to use its resources to generate revenues

more than its expenses. In other words, this is a company's capability of

generating profits from its operations.

Service Industry a business that does work for a customer, and occasionally

provides goods, but is not involved in manufacturing.

Small-Medium Enterprises (SMEs) are non-subsidiary, independent firms

which employ less than a given number of employees.

Solvency is the ability of a company to meet its long-term financial obligations.

Solvency is essential to staying in business as it asserts a company’s ability to

continue operations into the foreseeable future.

Temporary Current Assets borrower must pay interest on long term loans for

that period also when the loan is not getting utilized. Secondly, the interest rate of

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long-term loans is normally dearer to short term loans due to the concept of term

premium.

Working Capital is the capital of a business that is used in its day-to-day trading

operations, calculated as the current assets minus the current liabilities.

Working Capital Management refers to a company's managerial accounting

strategy designed to monitor and utilize the two components of working capital,

current assets and current liabilities, to ensure the most financially efficient

operation of the company.

Short-term financing is a concept that refers to holding an asset for a year or

less, and accountants use the term “current” to refer to an asset expected to be

converted into cash in the next year or a liability coming due in the next year.

Sources of financing working capital can be spontaneous, short term and long

term.

Trade-off balance is achieved between two desirable, but incompatible features

will compromise.

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CHAPTER 2

REVIEW OF RELATED LITERATURE

Introduction

This chapter presents the foreign and local literature and studies reviewed for

the topic of the thesis arranged thematically. The following literature and studies

provided the researchers a wider viewpoint and an adequate background about

Working Capital management of Small and Medium Enterprises.

SMEs: Existence and Significance

SMEs are important to almost all economies in the world, especially to countries

like Philippines with major income discrepancies between the rich and the poor, and with

a headache of unemployment. On what we may call the “static” front, SMEs contribute to

output by participating in the mainstream economy and to the creation of some “decent”

jobs especially to the few that runs the SMEs. They also contribute directly and often

significantly to aggregate savings and investment for any nation, and they are involved in

the development of appropriate technology also.

SMEs have the potential to contribute substantially to the economy and can

provide a strong foundation for the growth of new industries as well as strengthening

existing ones; they are drivers of wealth creation and productivity in the economy. It is

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also known from research that high-growth firms, many of which are small businesses,

are crucial in terms of driving innovation.

SMEs with high turnover and adaptability play a major role in removing regional

and sector imbalances in the economy. Easy entry and exit of SMEs make economies

more flexible and more competitive. SMEs are important for poverty reduction; they tend

to employ poor and low-income workers. It has been seen that a large share of the

unemployment reduction in many countries around the world in recent times, has been

due to SMEs. These businesses are sometimes the only source of employment in poor

regions and rural areas and SMEs play an important role in developing countries where

poverty is most severe. These companies provide for boosting the level of economic

growth in the country due to the extra revenue and employment that they generate.

SMEs are also attractive for their clients as they provide special offers to encourage

repeat business that contribute significantly to GDP growth around the world and ensure

that there is proper flow of money across the economy. In fact, it is these SMEs that

governments rely upon to boost growth in their economies. And so, SMEs bring

innovation into the economy. And this allows SMEs to be pioneers in emerging

technologies, paving the way for bigger and braver investments.

SMEs: Statistical Data

As of 2008, the Philippines had a little over 761,000 registered enterprises with

91.6% being micro enterprises. Small enterprises had a share of 7.7% while medium

enterprises accounted for a share of only 0.4%. The wholesale and retail trade sector

dominated the total with a share of almost 50%, followed by manufacturing and hotels

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and restaurants, with shares of 14% and 12%, respectively. Total employment of around

5.54 million was registered during the same year with micro enterprises accounting for a

share of 30%. SMEs contributed roughly the same with a share of 31.2%. Wholesale

and retail trade generated 35% of the total; manufacturing followed with a share of 19%.

Within the manufacturing industry, a total of 112,377 enterprises in the District II were

registered in 2008. Micro enterprises accounted for about 90% of the total, while SMEs

had a share of 9.5%. Total employment was about 1.4 million, with SMEs contributing

28% of the total, while micro enterprises had a share of around 17.8%. In ASEAN, small

and medium-sized enterprises (SMEs) account for more than 90% of all enterprises,

employ 50-99% of the domestic workforce and contribute around 32-77% of total

domestic output in their respective countries. In the Philippines, the number of SMEs

grew by 66% from 492,510 in 1995 to 816,759 in 2011. Similarly, the numbers of those

employed by these firms have grown by 45.7% from 2.7 million in 1995 to 3.9 million in

2011.

These growth figures mask a wide array of challenges faced by these firms,

notably with the onset of economic integration in ASEAN. Many Philippine SMEs remain

too small, only insufficiently increase household incomes, and are unable to take

advantage of opportunities brought about by ASEAN integration.

Overall, SMEs face numerous constraints to further growth and productivity,

including credit constraints, cumbersome registration procedures and strict regulatory

environments, and other challenges related to an economic playing field that is not level

between large and small firms. SMEs, especially start-ups, have lower probabilities of

survival than larger firms, leading to high rates of market entry and exit across nearly all

economic sectors. To go beyond survival and compete, SMEs will need to undergo

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successful business transformation in various dimensions of their operations—spanning

enhanced entrepreneurial skill, innovation in process and product development, more

successful collaboration across SMEs and with larger firms, and improved crisis

resilience among other factors.

SMEs: Challenges and Opportunities

Small businesses face a wide range of problems daily both internally and

externally. Small manufacturers have a small client base and are therefore highly

dependent on the expected revenue from each client. If anything goes wrong with one of

these clients, it can seriously jeopardize the business. Retirement is an issue of concern

into smaller manufacturers. There are no mechanisms in place for transferring

knowledge from retiring to new employees. Another alarming issue facing small

manufacturers is the lack of education of entry-level production personnel who graduate

from high school without basic reading and writing skills required for the jobs. Another

major trend is forcing small manufacturers to change from being component suppliers to

being systems suppliers. Previously, a large company would purchase several types of

brackets from different companies.

According to Sarah Walts, small companies face numerous problems on a day to

day basis. External problems are countless and include the state of the economy, the

high cost of insurance, taxes, health, safety and lack of bank lending. Finding and

managing the cash flows is one of the issues facing of SMEs. If a fast-growth company

can rapidly outgrow the available sources, then underperforming company can’t use it.

Most of companies do not manage it well. Most of the business experiencing some

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problems by getting paid on time by their customers and debt recovery. Good credit

control helps to prevent this becoming a serious problem. A surprisingly large proportion

of firms have a bad credit rating. Having a good credit score is not only important to

enable the firm to borrow funds, but also affect the ability to secure good terms on trade

credit.

Another issue facing of SMEs is the lack of clear plan. It may worsen the cash

problem by waiting cash-chasing tempting diversions and throwing money at problems.

Ineffective leadership may take in many forms. It is frequently in the form of depth of

leadership. This eventually causes the company to stop growing and could eventually

lead to failure. Directors should always remember their core role and responsibilities.

Sales and marketing effectiveness may lead back to planning and leadership.

Many businesses do not take enough time to decide what their unique selling point is.

They try to compute in conflicting areas such as lowest price and highest service. The

lack of execution may be the biggest problem of all because strategies that are

developed may never executed. The improvement projects fail because employees don’t

know their company’s strategy because communicating with employees is crucial. Other

common problems facing SMEs is on how they find and keep their clients and/or

customers, how to prevent their clients from eating away their profits, how to manage

time immediately, how they will price their services correctly to achieve their goal to end

up into a profit and how they will write bids and proposals.

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Significance of Working Capital Management in SMEs

Working capital management is very fundamental to the liquidity and profitability

of any organization and the two variables are vital in evaluating the performance and

ultimately deciding the survival of any organization.

Management of working capital refers to management of current assets and

current liabilities. Firms may have an optimal level of working capital that maximizes their

value. Prior evidence has determined the relationship between working capital and

performance. The performance was measured in terms of profitability by return on total

assets and return on investment capital as dependent financial performance

(profitability) variables. The working capital was determined by the cash conversion

period, accounts receivable period, inventory conversion period, accounts payable

period, and investment purchasing period are used as independent working capital

variables. Moreover, the traditional measures, current ratio are used as liquidity

indicators, firm size as measured by logarithm of sales, firm growth rate as measured by

change in annual sales and financial leverage as control variables.

It is necessary to understand the meaning of current assets and current liabilities

for learning the meaning of working capital. It is rightly observed that “Current assets

have a short life span. These types of assets are engaged in current operation of a

business and normally used for short– term operations of the firm during an accounting

period i.e. within twelve months. The two important characteristics of such assets are: (i)

short life span and (ii) swift transformation into other form of assets. Cash balance may

be held idle for a week or two, account receivable may have a life span of 30 to 60 days,

and inventories may be held for 30 to 100 days.” (Parasanna, 2008 p.) At one given time

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both the current assets and current liabilities exist in the business. The current assets

and current liabilities are flowing round in a business like an electric current. However,

“The working capital plays the same role in the business as the role of heart in human

body. Working capital funds are generated and these funds are circulated in the

business. As and when this circulation stops, the business becomes lifeless.” (Agarwal,

2007:171-172) Management has a dual interest in the analysis of financial performance

such as to assess the efficiency and profitability of operations and to judge how

effectively the resources of the business are being used (Erich A. Helfert, D.B.A, 2011).

Since Smith (2009) suggested that working capital management is important

because of its effects on the profitability, risk, and consequently, value of a firm, the

literature on investment in working capital requirement (WCR) has enjoyed extensive

growth. While Chiou et al. (2008), Baños et al. (2010) and Hill et al. (2010) analyze the

determinants of WCR for firms, the influence of investment in WCR on firm performance

is also demonstrated by many publications (Deloof 2008; Lazaridis and Tryfonidis 2009;

Kieschnick et al. 2013; and Baños et al. 2014; among others). Investment in WCR,

however, might not be the only important concern for firms when making working capital.

Essentially, working capital management (WCM) is one of the most vital

segments in firm’s financing decisions as an important stimulus towards firm’s

performance. The importance of WCM towards firm’s achievement was considered as a

traditional concept that has highlights in all standard corporate finance textbooks (Aktas,

&Croci, &Petmezas, 2015). Above all, efficient management of working capital is a

fundamental part of the overall corporate strategy (Padachi, 2009) and is expected to

contribute positively to the creation of a firm’s value (Nazir &Afza, 2009). Thus, the

importance of managing the working capital (WC) efficiently is irrefutable in certifying

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each component at the best level of efficiency to successfully operate and is highly

desirable for firm’s growth and sustainability because of its effects on profitability and

risk (Stage, Aripin& Ishak ,2014).

According to the International Research of Journal Granthaalayah, the liquidity

and profitability trade-off has become an important aspect for all the organizations and

the most important issue for any firm to tackle in the modern world. These liquidity and

profitability decisions are contradictory to each other for finance managers. The

managers of the firm should formulate proper policies on working capital management to

achieve the desired goal. Basically, there are few concepts on working capital. They are

the balance sheet and operating cycle concept. Balance sheet concept includes the

gross and net working capital and operating cycle concept is to support the operational

activities of the firm.

It is imperative for every business to have sufficient liquid resources to maintain a

daily cash flow. This is not only essential in the short run, but it is much necessary to

keep a business as a going concern (BPP, 2009). It therefore implies that it is a vital

element of an organization. However, as important as that is, care must be taken so that

balance is maintained in the level of liquidity of a firm since “cash pays no interest”

(Uremadu, Egbide and Enyi, 2012). The short-term solvency of a firm is a function of

how liquid a firm is and crucial to the working capital. Furthermore, Pass and Pike’s

study (as cited in financial, n. d.) suggests that working capital management is to

increase the profitability of a company and to ensure that it is liquid enough to meet its

obligations in the short-term. Also, working capital has a lot to do with how risky a

business is and therefore managing it properly can improve the performance of an

organization. According to Sen and Oruc (2009), working capital management is

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consequential to a firm and this is usually explained by the relationship between working

capital management and profitability. Before the wake of the global recession, working

capital management has been an important subject matter to ensuring the stability and

hence the survival of a business and after the economic meltdown it became much more

important. According to a study carried out by the Royal bank of Scotland (RBS, 2011), it

was found that because of the last economic recession that hit the world, companies

around the world especially in North America, Europe, and Asia have tried to improve on

their efficiencies and one of their strategies is the management of their working capital.

This study investigates if the statement is also true for Nigeria based companies, using

Nestle Nigeria Plc and Cadbury Nigeria Plc as case studies. In addition, what defines

how an organization manages its working capital is consequent on the policies adopted

by it. In this paper, working capital management was examined in the light of two policies

which are the aggressive and conservative policies.

Working Capital Management: Challenges and Opportunities

Management of working capital is also a complicated task, since there are many

factors that need to be considered and balanced. For example, companies must make

decisions whether to make small orders and keep low inventory levels to avoid tying up

working capital, or to take advantage of discounts and purchase in bigger quantities.

(Lind, 2011). Higher inventory levels reduce the risk of stock outs and enable

uninterrupted, which increase the customer satisfaction, but large inventories also tie up

working capital and increases costs. Granting credit to customers can be part of

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marketing and may lead to higher sales, but at the same time working capital is tied up

in the accounts receivable.

When dealing with accounts payable, it must be considered if the discounts of

early payments should be taken advantage of or should the companies use the long

credit periods and decrease the need for financed working capital (Lind, 2011).

Working capital meets the short-term financial requirements of a business

enterprise. It is a trading capital, not retained in the business in a form for longer than a

year. The money invested in it changes form and substance during the normal course of

business operations. The need for maintaining an adequate working capital can hardly

be questioned. Just as circulation of blood is very necessary in the human body to

maintain life, the flow of funds is very necessary to maintain business. If it becomes

weak, the business can hardly prosper and survive. Working capital starvation is

generally credited as a major cause if not the major cause of small business failure in

many developed and developing countries.

The challenge of working capital management is finding the right balance

between the management of each working capital component. Working capital should be

managed in cooperation within a company even if the management of its different

components can be considered as individual tasks. To achieve the most efficient ways to

manage working capital, the managers responsible for purchasing, inventories, sales,

and production should together find the optimal level for firm’s working capital.

The purpose of working capital is to ensure the effective and efficient utilization of

the business's investment in assets. The main advantages of maintaining adequate

amount of working capital according to Buchmann (2009) are as follows: (i) Solvency of

the business: Adequate working capital helps in maintaining solvency of the business by

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providing uninterrupted flow of production. (ii) Goodwill: Sufficient working capital

enables a business concern to make prompt payments and hence helps in creating and

maintaining goodwill. (iii)Easy loans: A concern having adequate working capital, high

solvency and good credit standing can arrange loans from banks and other on easy and

favorable terms. (iv) Cash Discounts: Acceptable working capital also enables a concern

to avail cash discounts on the purchases and hence it reduces costs. (v) Regular supply

of raw materials: Sufficient working capital ensures regular supply of raw materials and

continuous production. (vi) Regular payment of salaries, wages and other day-to-day

commitments: A company which has ample working capital can make regular payment

of salaries, wages and other day-to-day commitments which raises the morale of its

employees, increases their efficiency, reduces wastages and costs and enhances

production and profits. (vii) Exploitation of favorable market conditions: Only concerns

with adequate working capital can exploit favorable market conditions such as

purchasing its requirements in bulk when the prices are lower and by holding its

inventories for higher prices. (viii) Ability to face Crisis: Adequate working capital enables

a concern to face business crisis in emergencies such as depression because during

such periods, generally, there is much pressure on working capital. (ix)Quick and

Regular return on Investments: Every investor wants a quick and regular return on his

investments. Sufficiency of working capital enables a concern to pay quick and regular

dividends to its investors as there may not be much pressure to plough back profits. This

gains the confidence of its investors and creates a favorable market to raise additional

funds i.e., the future. (x) High morale: Adequacy of working capital creates an

environment of security, confidence, high morale, and overall efficiency in a business.

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Impact of Sources of Financing Working Capital Management Practices of SME’s

Working capital or current assets are those assets, which unlike fixed assets

change their forms rapidly. Due to this nature, they need to be finance through short-

term funds. Short-term funds are also called current liabilities.

According to Hill, Kelly &Highfield (2010), short-term sources identifies two

main sources of short-term funds, spontaneously generated sources such as accounts

payable, provisions and accruals, and non-spontaneously generated sources such as

unsecured and secured short-term borrowings and financing instruments.

Pfohl, Elbert & Hofmann (2003) stated that the following are the major sources of

raising short-term funds: (i) Supplier’s Credit: Business gets raw material on credit from

the suppliers. The cost of raw material is paid after some time, i.e. upon completion of

the credit period. Thus, without having an outflow of cash the business can use raw

material and continue the activities. The credit given by the suppliers of raw materials is

for a short period and is considered current liabilities. (ii) Bank Loan for Working

Capital: This is a major source for raising short-term funds. Banks extend loans to

businesses to help them create necessary current assets to achieve there required

business level. (iii) Promoter’s Fund: These are long-term funds and, therefore do not

require immediate repayment. These funds increase the liquidity of the business. The

short and long-term financing sources have differing effects on the trade-off between

profitability and liquidity risk (Block and Hirt, 2007). For working capital financing, the

profitability of short and long-term debt is considered from the point of interest cost. The

higher the interest cost the lesser the profitability and vice-versa. Short-term loans are

riskier from borrowers’ point of view, because of the problem to get cash in the short-

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term, and the higher variability of interest rates compared to that of the long-term loans

(Moyer, Mcguigan &Kretlow, 2004). To the borrower, long-term loans are more

expensive but less risky, while short-term loans are riskier but less expensive. Therefore,

management must get an optimum point between the two.

The financing logic is that, temporary current assets are financed with

short-term loans and the permanent current assets with long term debt or equity capital.

However, the actual investment and financing mix match-up depends on management’s

approach towards risk and profitability (Van Horne and Wachowicz 2000; Moyer,

Mcguigan and Kretlow, 2004). (iv) Long-term Sources: There are four main sources of

long-term funds, which may be used to fund working capital, namely equity, long term

debt, off-balance sheet financing and asset-based financing.

Aldaba found that access to finance issues confronting Philippine SMEs based

on a survey of firms and commercial banks. The firm survey covering the garments,

textiles, automotive, electrical and electronics, and food manufacturing industries

highlights the difficulties faced by small and medium enterprises (SMEs) in accessing

finance. Financing obstacles posed one of the top four most serious problems for the

growth of their businesses. The survey indicates the continued dependence of SMEs on

internal sources of financing, not only during their start-up phase but also in the ongoing

operations of the business.

The present survey illustrates the experiences of MSMEs in seeking bank credit

financing, capital leases, equity financing, and Government and trade supplier credit.

Overall, the results reflect the difficulties faced by SMEs in accessing finance.

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In conclusion, 67% said that internal funds alone are not sufficient to finance the

expansion, with the same proportion of firms indicating that they would seek to finance

their expansion using a loan. Previous surveys had also showed a substantial proportion

of firms that planned to borrow in the future. However, the continuing dependence of

firms on internal sources of financing seems to suggest a gap between the plans of firms

to borrow and the actual amount of funding made available by banks.

Therefore, to improve small and medium enterprises, these enterprises need to

have accesses to finance whether by investment, loan, etc. To improve micro, small and

medium enterprises’ (MSMEs’) access to finance, the paper suggests the

implementation of a Central Credit Information Corporation to address informational

asymmetries. Changing the mindsets of banks and introducing non-traditional

approaches to SME lending would also be important, along with training and capacity

building programs for SMEs to improve their financial literacy and management capacity.

Impact of Investment Management Practices on SME’s

Unlike investments in fixed assets which generate cash inflows over long periods

of time, current assets have a cash-to-cash conversion cycle of less than twelve months

(Scheer, 2004). Nonetheless, an investment must be made in current assets, and as

with all investments the returns should exceed the required rate of return, otherwise the

business's success will be jeopardized. Moreover, in the interests of efficiency and

productivity, this investment needs to be carefully managed. The investment in current

assets should comprise the best possible combinations of cash, debtors, inventory, and

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prepayments, which enable the effective and efficient utilization of the investment in

fixed assets.

Small and Medium Scale Enterprises are obliged to hold cash and marketable

securities because of the need to satisfy financial agreements (the contractual motive),

make planned expenditure (the transactions motive), protect the business against

unexpected short-term cash demands (the safety motive), and invest in unexpected

short-term opportunities that may arise (the speculative motive). The consequences of

having inadequate liquid resources can be severe, primarily by impacting on liquidity, but

also by dislocating business decisions towards short payback low profit operations to

survive.

According to Padachi (2006), the classic traditional approach to cash

management stresses that idle cash is necessary to prevent liquidity problems.

However, idle cash carries with it an opportunity cost in either lost income revenue or

excess interest payments on the lines of credit. In contrast, the contemporary approach

contends that the investment in cash should be subject to the same criteria as

investments in other types of assets, namely, the required rate of return.

Impact of Cash management practices to SME’s

Cash management is one of the key areas of working capital management. Cash

is the common denominator to which all current assets can be reduced because the

other major liquid assets, i.e. receivable and inventory get eventually converted into

cash. The need for cash management according to The Institute of Cost Works

Accountant of India (2011) assumes significance for the following reasons: (i) Cash

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planning - Cash is the most important as well as the least unproductive of all current

assets. Though, it is necessary to meet the firm’s obligations, yet idle cash earns

nothing. Therefore, it is essential to have sound cash planning neither excess nor

inadequate. (ii) Management of cash flows - Synchronizations between cash inflows and

cash outflows rarely happen.

Sometimes, the cash inflows will be more than outflows because of receipts from

customers and cash sales in huge amounts. At other times, cash outflows exceed

inflows due to payment of taxes, interest and dividends etc. Hence, the cash flows

should be managed for better cash management. (iii) Maintaining optimum cash balance

- Every firm should keep optimum cash balance. The management should also consider

the factors determining and influencing the cash balances at various point of time.

(iv)Investment of excess cash - The firm must invest the excess or idle funds in short

term securities or investments to earn profits as idle funds earn nothing.

The basic objectives of cash management are (Institute of Cost Works

Accountant of India, 2011): (1) Meeting the payments schedule - The basic objective of

cash management is to meet the payment schedule. In the normal course of business,

firms must make payments of cash to suppliers of raw materials, employees and so on

regularly. At the same time firm will be receiving cash on a regular basis from cash sales

and debtors. Thus, every firm should have adequate cash to meet the payments

schedule. In other words, the firm should be able to meet the obligations when they

become due. (2) Minimizing funds committed to cash balances - In minimizing the cash

balances two conflicting aspects must be reconciled. A high level of cash balances will

ensure prompt payment together with all advantages, but at the same time, cash is a

non-earning asset and the larger balances of cash impair profitability. On the other hand,

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a low level of cash balance may lead to the inability of the firm to meet the payment

schedule. Thus, the objective of cash management would be to have an optimum cash

balance.

Proper cash management depicts effective operations of Small and

Medium Scale Enterprises. This is because losses from fraud or theft will be minimized.

To maintain a sufficient amount of cash, profitability of the business will increase, and

consistency with the nature of the Small and Medium Scale Enterprise objectives can be

easily attained.

In conclusion, the study of Astudillo, et. Alfound and proved that there was an

established significance by highlighting factors that matter to the SMEs' decision and

identify the effects of the determinants especially Cash Management System.

While some variables, in the end, are proven to be insignificant, the model has

been proven to be a good identifier of an SME’s decision to engage or not to engage in

cash management solutions. Empirically, the study proves the significance of usefulness

and cost based on fees per CMS. SMEs allocate their budgets to avail of and/or invest in

products that would increase their competitive advantage. This is exhibited by the SMEs’

willingness to spend on CMS they deem advantageous to them. It is noteworthy to

emphasize how they strategize so that the amount they spend would contribute to the

achievement of their many objectives. Perhaps, a small increase in cost does not

discourage SMEs from engaging in CMS because such increase also makes them

expect more benefits that they could not get elsewhere at such quality level.

The results show that cost obtained using estimated transaction fees, and

usefulness have significant effects on SME’s decision on online banking. The chosen

research and sampling design may pose problems regarding accuracy, generalizability,

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and reliability of results. Cash Management Solutions (CMS) which gave such

improvement in the achievement of their goals cover different areas of cash

management such as payables, receivables, cash flows, and access to necessary

information. (BDO Unibank, Inc., 2012) It also includes forecasting, cost balancing,

ordering, supervising, auditing, and expense tracing, among others. (NCR Corporation,

2013)

Impact of Accounts Receivable Management Practices to SME’s

Due to factors like trade policies, prevailing marketing conditions, etc.,

businesses are compelled to sell their goods on credit. In certain circumstances, a

business may deliberately extend credit as a strategy of increasing sales. Extending

credit means creating a current asset in the form of ‘Debtors’ or ‘Accounts Receivable’

that needs proper and effective management as it gives rise to cost of carrying

receivable (payment of interest etc.) and cost of bad debt losses.

Credit terms specify the debtor's repayment schedule and comprise

issues such as the cash discount, the cash discount period, and the credit period.

Any changes in these three variables may affect sales, the investment in account

receivable, bad debts, and profits. For example, a decision to increase the cash

discount should be evaluated by comparing the profit increases attributable to the added

sales, the reduction in accounts receivable investment and the reduction in bad debts to

the cost of the discount. On the other hand, a decision to decrease the cash discount

should be evaluated by comparing the profit decreases attributable to the added sales,

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the increase in accounts receivable investment and the increase in bad debts to the cost

of the discount (Sherr, 2004).

The goal of collection management's goal is to ensure that payments are

received according to schedule, otherwise a greater investment in accounts receivable

will be needed. If receipts from accounts receivable can be speeded up, without

prejudicing sales or customer goodwill, less capital will be needed to fund accounts

receivable, and less money will be spent on recovery, because of administration,

investigation, collection and bad debt costs.

Impact of Inventory Management Practices to SME’s

A good inventory management is important to the successful operations of most

organizations, unfortunately the importance of inventory is not always appreciated by top

management. This may be due to a failure to recognize the link between inventories and

achievement of organizational goals or due to ignorance of the impact that inventories

can have on costs and profits. Working capital requirements are influenced by inventory

holding hence, the need for effective and efficient management of inventories. According

to Breuer (2009), inventory includes all types of stocks. For effective working capital

management, inventory needs to be managed well. The level of inventory should be

such that the total cost of ordering and holding inventory is the least. Simultaneously,

stock out costs should also be minimized. Small and Medium Scale Enterprises,

therefore, should fix the minimum safety stock level, re-order level, and ordering quantity

so that the inventory cost is reduced, and its management becomes efficient.

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According to Scherr (2004), inventory planning helps to match inventory

requirements to sales and production needs. It also helps to know inventory acquisition

and usage during lead-time, quantity on hand and on order as well as the levels of safety

stock. The accuracy of inventory planning depends on whether the forecast is made in

conditions of relative certainty or uncertainty.

In a manufacturing firm, it is assumed that inventories represent half of current

assets. Inventory is also the component of working capital that can be best affected by a

firm itself. Typically, the more finished the product is, the more working capital is tied up

in the inventory and increases additional storage and insurance costs. Also, the risk of

obsolescence and deterioration is higher. On the other hand, by holding larger stocks, a

company can ensure that its production is not disturbed because of lack of materials,

which keep their customers satisfied. In addition, gaining remarkable discounts through

purchasing in large quantities is attractive to some companies and leads to higher level

of inventories. Through this procedure, a firm can increase its profits if the costs of

holding larger inventories are less than the amount of discount.

When inventory level is held low, orders need to be done more often, which leads

to higher administration costs and more physical handling of the goods. Administration

costs come from extra work, such as typing and checking ordering forms, accepting and

checking arrived goods, and checking of the invoices.

There is also a risk of stock-outs, which may cause losses of sales and profits in

short period, and loss of goodwill in the long-run. In fact, many small businesses cannot

absorb the types of losses arising from poor inventory management. Unless inventories

are controlled, they are unreliable, inefficient and costly.

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Onglao, et. alstudy generally aimed to describe the existing drug inventory

practices of 30 health centers in Quezon City. He proved that in the results in his

research show that only 2 of 26 independent variables (7.6% of all variables) have been

found to be significantly related to the dependent variable, the type of health center.

These variables are the person who conducted rechecking being the same of different

person who conducted initial checking of inventory for general medicines and person

who conducted initial checking of inventory for TB kits. The samples contained in the

control and experimental groups are generally the same in terms of demographics,

inventory checking, storage conditions and record keeping. Most of the independent

variables were proven to be significant across the enterprises’ operations and may be a

source of confounding in the future study. (a descriptive study of inventory management

practices among health centers in Quezon City, 2008).

Impact of Accounts Payable Management Practices on SME’s

The management of accounts payable is the other side of the management of

accounts receivable. Management of accounts payable in working capital cycle deals

with debts owed to customers from goods and services, and the logic of payment terms.

From the perspective of an individual company, the best way to deal with their accounts

payable is to take the full credit period if no financial incentives are offered. If a firm

makes payments earlier than required, it loses profits, because the need for financed

working capital increases. If cash discounts are offered, the situation should be analyzed

by calculating the effective annual rate of interest earned by the discount. If it is more

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than the cost of capital used up by the early payment, the discount should be taken

(Mott, 2005).

From another point of view, delaying payments to the supplier, the quality of

product bought can be assessed before paying. A firm can also use it as an inexpensive

and flexible source of financing. But then again, paying late may become costly if the

supplier offers discounts for early payment. The traditional view on accounts payable

has been that more profitable firms when they pay their bills faster. On the other hand,

speeding up the payments to the suppliers may lead to increase of profitability because

of the substantial discounts offered for prompt payment (Deloof, 2003).

Accounts payable, a current liability, refers to the credit, which has been

extended to a business by its suppliers. The decision to make use of supplier credit

needs should be carefully assessed in terms of alternative sources of finance, discounts,

credit limits, public image with respect to its credit rating, transaction costs,

administrative costs, information costs, control costs, the value of the relationship with

creditors, buying power of the purchasers, the credit terms, stability and general

practices of suppliers, and risk factors.

The basic phases of an accounts payable process are: (i) Ensure that the

process provides for an analysis of accounts payable. (ii) Establish policies and

procedures for the authority to commit funds and segregate duties while maintaining

maximum efficiency. (iii) Optimize the use of cash by coordinating with receivables,

investments, purchasing, and other departments to maximize profitable cash flow and

disbursement float. (iv) Ensure that the system properly records and reports payables.

(v) Monitor and reevaluate the system.

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Accounts payable has four objectives: (i) Provide reliable data to management (ii)

Ensure efficient and effective management of disbursements to maximize disbursement

float (iii) Minimize unnecessary or premature expenditures (iv) Ensure the accurate

recording and reporting of payables. Generally, a good disbursement system will

minimize the amount of cash on hand and make sure that all assets are working for the

entity.

In a study of Cadsawan, et. all of the Banco De Oro Unibank, Inc. (BDO) which is

for a bank, it is usual to have extraordinary debts compared to assets or liabilities

because a bank’s liabilities mainly come from deposits of customers. In this case, the

great positive change in debt related ratios are good.

Through the years, BDO found is improving on its debt ratio and debt to equity

ratio and it suggest that more and more consumers (individuals and corporate) are

trusting their savings with the bank. However, the ratios suggest that BDO is

experiencing a steady, if not great, growth despite inefficiency of managing their

resources. For instance, the bank’s return on equity in 2013 suggests that the money of

company stockholders was efficient and effective in utilizing investments. It can also be

implied that the bank’s management was able to control its expenses to generate profit,

as seen in the gross profit margin and the net profit margin.

Overall, the researchers conclude that BDO has a strong financial standing given

that its resources, gross customer loans, deposit liabilities, capital funds and net income

are increasing. BDO can use this as its competitive advantage against other banks.

However, it should also improve in managing its resources to further remain sustainable

in the long run (A Financial and Operational Analysis of Banco De Oro, 2015).

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Effect of Working Capital Management and Financial Leverage on Financial

Performance of Philippine Firms

According to Corazon Magpayo, one of the most common measure of working

capital is the current ratio. It gives a measure of the available current assets for every

peso of current liability. There were also studies prepared to determine effect of financial

leverage on profitability. Aquino, R. (2010) studied the capital structure of listed and

unlisted Philippine firms. Results indicated that higher debt is associated with high

growth rates and profitability in unlisted firms. His study showed that high debt ratio is

positively associated with the firm’s growth rate and profitability, although he observed

the opposite among the listed firms, which he attributed to the cautiousness of large

listed firms on the effect of reliance on debt financing on their share prices. Joshua

Abor’s (2010) research paper revealed significant relationship between financial

leverage and profitability. His study demonstrated that the use of short-term debt

improved the companies’ profitability. Results of the study showed a significantly positive

relation between the ratio of short-term debt to total assets and return on equity (ROE),

as well as a significantly positive association between the ratio of total debt to total

assets and ROE. Past studies have also shown that firm size is one of the factors to be

considered when interpreting financial ratios. Lee Huff, et. al. (1999) found that

systematic differences exist among liquidity and solvency measures for small companies

versus large companies listed in the Disclosure, Inc. database for December 31, 1996.

Wajahat Ali and Syed Hammad Ul Hassan (2010) study revealed that the size of the firm

has inverse relationship with profitability. On the other hand, Amarjit, G., et.al (2010)

found no significant relationship between firm size and gross operating profit ratio. The

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

study of Falope and Ajilore (2009) also found no significant variations in the effects of

working capital management between large and small firms in Nigeria using a sample of

50 quoted companies. With these conflicting results on firm size and profitability, this

study examined the effect of firm size on profitability of Philippine corporations. The

measure of financial performance used in the studies varied. Garcia-Teruel and Marinez-

Solano (2007), Falope and Ajilore (2009) used return on assets (ROA). Eljely, A. (2004)

used net operating income plus depreciation divided by net sales. Aquino (2010) used

the ratio of net income after taxes to stockholders’ equity (ROE). This study used net

income, ROA, and ROE to measure financial performance of Philippine firms. From the

seventies to the present, overall SME policies and programs in the Philippines have

evolved, with their focus shifting from inward-looking towards a more externally-oriented

approach. In the 1990s, government policy on SMEs concentrated 93 on improving

market access, export expansion, and increasing competitiveness. In 1991, the Magna

Carta for Small Enterprises was passed to consolidate all government programs for the

promotion and development of SMEs into a unified framework. The Magna Carta also

mandated all lending institutions to set aside 8% of their total loan portfolio to SMEs.

Finance is a critical factor for competitiveness and the ability to exploit and participate in

the global economy, as well as taking opportunities arising from regional integration. The

paper focuses mainly on the access to finance issues confronting SMEs in the

Philippines. A survey of both firms and commercial banks was conducted for an in-depth

understanding of the issues. The paper is divided into five sections. After the

introduction, section two reviews SME performance and structure. Section three

discusses the policies and programs of the government for SMEs, current sources of

SME finance, and the finance issues and constraints faced by SMEs. Section four

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analyzes the survey results and supplements this by incorporating the results of similar

SME access to finance surveys conducted by other organizations in the past. The final

section presents the policy implications of the paper.

Tugas, CISA, CPA saw most financial statement analyses focus on firms

belonging to industries that either contribute significantly to economic figures or suggest

in a highly competitive business environment. In the Philippines, there are only three

listed firms in the education subsector. These are Centro Escolar University (CEU), Far

Eastern University (FEU), and iPeople, Inc. (Malayan Colleges). This research paper

aims to analyze the financial statements of these three firms for three periods (2009,

2010, and2011) using liquidity ratios, activity ratios, leverage ratios, profitability ratios,

and market value ratios. For liquidity, the following ratios were used: current ratio; quick

or acid-test ratio; cash flow liquidity ratio; average collection period; and day’s payable

outstanding. For activity, the following ratios were used: accounts receivable turnover;

accounts payable turnover; fixed assets turnover; and total assets turnover. For

leverage, the following ratios were used: debt ratio; debt to equity ratio; and times

interest earned. For profitability, the following ratios were used: operating profit margin;

net profit margin; return on total assets; return on equity; and basic earning power ratio.

For market value, the following ratios were used: price-earnings ratio; market-book ratio;

and dividend yield.

He found results which showed that in terms of liquidity, FEU ranked first,

followed by Malayan, then CEU; in terms of activity, FEU ranked first, followed by CEU,

then Malayan; in terms of leverage, Malayan ranked first, followed by CEU, then FEU; in

terms of profitability, FEU ranked first, followed by Malayan, then CEU; and in terms of

market value, CEU and FEU tied for first and then Malayan followed.

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Synthesis of the Reviewed Literature and Studies

This chapter reviewed pertinent related literature in working capital management

practices of small and medium enterprises. The literature disclosed that SMEs have the

potential to contribute substantially to the economy and can provide a strong foundation

for the growth of new industries as well as strengthening existing ones; they are drivers

of wealth creation and productivity in the economy. Although small and medium

companies face a wide range of problems daily both internally and externally, which is

working capital management practices is involved.

Management of working capital refers to management of current assets and

current liabilities. Firms may have an optimal level of working capital that maximizes their

value. Prior evidence has determined the relationship between working capital and

performance. Working capital or current assets are those assets, which unlike fixed

assets change their forms rapidly. Due to this nature, they need to be finance, and the

evidence from literature revealed that the two major sources of financing working capital

management are: short term sources (suppliers credit, bank loans, promoters fund,

account payables and accruals) and long-term sources (equity finance, long term debt,

off-balance sheet financing and asset based financing). Also, the various components of

working capital management which includes; cash management, accounts receivable

management, inventory management, accounts payable management, and investment

management were thoroughly reviewed. The reviewed literatures showed that; Cash is

one of the most important components of current assets. Every Small and Medium

Enterprise should have adequate cash, neither more nor less; that the management of

accounts receivable is largely determined by the business's credit policy; that investment

in accounts receivable, debtors, as with all investment decisions, must earn a rate of

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return in excess of the required rate of return; that a good inventory management is

important to the successful operations of most organizations; that management of

accounts payable in working capital cycle deals with debts owed to customers from

goods and services, and the logic of payment terms; and that investment has to be

made in current assets, and as with all investments the returns should exceed the

required rate of return, otherwise the business's success will be jeopardized.

Therefore, to improve small and medium enterprises, these enterprises need to

have accesses to finance whether by investment, loan, etc. The paper suggests the

implementation of a Central Credit Information Corporation to address informational

asymmetries will improve the small and medium enterprises access to finance will be a

way of changing the mindsets of banks and introducing non-traditional approaches to

SME lending would also be important, along with training and capacity building programs

for SMEs to improve their financial literacy and management capacity.

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Chapter 3

RESEARCH METHODOLOGY

Introduction

This chapter presents in detail the methodologies used by the researchers to

obtain the needed information for this study. It presented the method of research, the

population, sample size, and the sampling technique, description of the respondents,

the research instrument, the data gathering procedures, and statistical treatment of data

used.

Method of Research

This study made use of descriptive research method which is designed to

answer the “what” questions. This method describes the population being studied. It

measures the existing event without inquiring into why it exists.

Descriptive method uses all the data gathered to answer what is being depicted

in the population or phenomenon studied. It aims to gather and interpret data without

any control or manipulation of the researcher. It is non-intrusive and deals with naturally

occurring phenomena.

The researchers made use of this method because it entitles the researchers to

interpret the theoretical meaning of the findings and hypothesis development for further

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studies. Also, it allows the researchers to explore questions that could not be examined

with experimental procedures

Data gathered on respondents are name of industry, type of business, sex, age,

length of working experience, position held in the firm, number of trainings/seminar

attended about working capital management and their assessment of the level of

implementation of the working capital management practices in their organization.

Population, Sample Size, and Sampling Technique

The population of the study is the Small and Medium Enterprises in 2nd district of

Manila City by requesting in the licensing office of Manila City Hall, the population

gathered was 112 SMEs.

The sample size was 88 of any of these positions held; Chief Operations Officer

(COO), Cashier/Fund Custodian/Treasurer, Accountant, and Operations Manager who

are part of working capital management per SMEs. The sampling technique used to

establish this amount was the Slovin’s Formula. This formula is used to consider

confidence levels and margins of error. Slovin's formula is written as:

𝑵
𝒏=
(𝟏 + 𝑵𝒆𝟐 )

n = Number of samples N = Total population e = Error of tolerance

The error of tolerance was determined first. Plug the population size and

required margin of error into the formula. The result will be the number of samples. The

computation is as follows:

112
𝑛=
[1 + 112(0.05)2 ]

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𝒏 = 𝟖𝟕. 𝟓 𝒐𝒓 𝟖𝟖

The said respondents were chosen using random sampling and purposive

sampling. Random sampling was used in choosing small and medium enterprises in 2nd

district of Manila City. A sample chosen randomly is meant to be an unbiased

representation of the total population. If for some reasons, the sample does not

represent the population, the variation is called a sampling error.

While the chief operations officer (COO), cashier/fund custodian/treasurer,

accountant, and operations manager are selected using purposive sampling. A

purposive sample is where a researcher selects a sample based on their knowledge

about the study and population. The participants are selected based on the purpose of

the sample.

Description of the Respondents

The respondents of this study are the Chief Operations Officer (COO),

Cashier/Fund Custodian/Treasurer, Accountant, and Operations Manager who is part of

working capital management practices in Small and Medium Enterprises in District II of

Manila.

Research Instrument

The research instrument used in this study is the questionnaire. The

researchers designed the survey questionnaire in the most simplified form to gather

sufficient and relevant information required from the respondents.

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A Working Capital Management Practices Questionnaire (WCMPQ) was used

as the instrument for this study. It was developed by the researcher and it is a 37-item

questionnaire containing two (2) parts (I and II). It was structured on a five-point rating

scale as follows: “Fully Implemented” (5); “Implemented” (4); “Somewhat Implemented”

(3); “Less Implemented” (2); and “Not Implemented” (1).

Part I contained 7 items, which elicited responses on the general information of

respondents; while Part II dealt with the six (6) variables of the study. It contained six

(6) sections (A-F), which elicited responses on factors of working capital management

practices implemented in Small and Medium Scale Enterprises.

Section A dealt with research question 1. It contained five (5) items, which

elicited responses on sources of financing capital of Small and Medium Scale

Enterprises.

Section B dealt with research question 2. It contained five (5) items, which

elicited responses on investment management practices needed for the effective

operations of Small and Medium Scale Enterprises.

Section C dealt with research question 3. It contained five (5) items, which

elicited responses on cash management practices needed for the effective operations

of Small and Medium Scale Enterprises.

Section D dealt with research question 4. It contained five (5) items, which

elicited responses on account receivable management practices implemented in Small

and Medium Scale Enterprises.

Section E dealt with research question 5. It contained five (5) items, which

elicited responses on inventory management practices implemented in Small and

Medium Scale Enterprises.

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Section F deals with research question 6, it contained five (5) items, which

elicited responses on accounts payable management practices implemented in Small

and Medium Scale Enterprises.

Data Gathering Procedure

The thesis paper was introduced at the start of the semester SY 2017-2018.

Researchers were told to group themselves according to their preference with a

maximum of 6 members each group. After having a group, the researchers have

exchanged their ideas and proposed 3 thesis topics to the professor. That day, after the

thesis topic was approved they are asked to do the first chapter of the thesis paper, and

collect and find additional references for the chapter 2 of the study and this information

will help them to support the data gathered for the study. The researchers obtain the

data though different sources such as internet, published thesis, books, journals,

dissertations and dictionary.

Small and medium enterprises in 2nd district of Manila City are sought by the

researchers from the Local Government of Manila. From there, the population of the

small and medium enterprises registered on the municipality was gathered and the

sampling size which is 88 has been computed.

A letter of permit was prepared first asking for a permission to conduct a survey

at 2nd district of Manila this letter is signed by the thesis adviser and issued to different

small and medium enterprises on the said location. The researchers conducted their

survey on the 7th to 12th days of November 2017.

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Surveys were used to gather data to be used in the study. It was designed in a

way for the characteristics of the respondents to portray their level of awareness in the

topic. In this study walk-in method of surveying is used the researchers sent an e-mail

asking for permission to conduct survey in their enterprise. After the confirmation, the

hard copy of the survey has been handed in, replicated, distributed, and answered by

the respondents.

The researchers collected the survey questionnaire on the day it was given to the

different enterprises. Since the questionnaire was issued and waited by the researchers

they observed that the respondents answered it thoroughly. During the walk-in, some

enterprises can’t answer the survey questionnaire on the day it was given because it

was the peak hours/day where more customers are expected than the regular days are

having transactions. So, they just asked for an e-mail where they can send their

response to the survey. Some companies are being called through their landline

numbers that is available on the internet. They were asked about the survey and the

purpose, luckily some companies responded.

The result will be tallied and tabulated. After the tabulation, researchers

interpreted the data gathered using different statistical tools based on the result of the

technique used in the data gathering.

Scale of level of implementation

Scale Verbal Interpretation


4.50 – 5.00 Very Implemented
3.50 – 4.49 Implemented
2.50 - 3.49 Somewhat Implemented
1.50 – 2.49 Less Implemented
1.0 – 1.49 Not Implemented

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Statistical Treatment of Data

The data collected in this study were organized and classified based from the

research design and the problems formulated. The data were coded, tallied, and

tabulated to facilitate the presentation and interpretation of the results using the

following:

1. Frequency and Percentage

A percentage and frequency distribution are a display of data that specifies the

percentage of observations that exist for each data point or grouping of data points. It is

a particularly useful method of expressing the relative frequency of survey responses

and other data.

These were used to classify the respondents according to profile such as age,

sex, civil status, length of working experience, rank in the firm and number of hours of

trainings attended in a year.

The frequency also presented the actual response of the respondents to a specific

question or item in the questionnaire. On the other hand, the percentage item is

computed by deciding with the total number of respondents who participated in the

survey. The formula used for the application of this statistical treatment is:

f
% = 𝑥 100
𝑛

where: % = percentage

f = frequency

n = total sample

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2. Rank

It is used to transform the data in which their numerical or ordinal values are

replaced by their rank when the data are sorted. The ranks are assigned to values in

ascending order. If two or more values are of the same rank, add the rank places and

dived it by the values count to determine their rank.

3. Weighted Mean

Weighted means are commonly used in statistics, especially when studying

populations. It is a kind of average wherein instead of each data point contributing

equally to the final mean, some data points contribute more ‘weight’ than others.

Σ = the sum of (in other words…add them up!).


w = the weights.
x = the value.

4. Analysis of Variance (ANOVA)

ANOVA test is a way to find out if the survey results are significant. The

researchers used this method to determine if there is significant difference in the level of

implementation of Working Capital Management practices of SMEs when grouped into

according to profile. The one-way ANOVA formula is:

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4.1 ANOVA Coefficient

MST
𝐹 =
𝑀𝑆𝐸

ANOVA Coefficient Notation


Term Description

total number of
nT
observations

number of factor
r
levels

4.2 Sum of Squares (SS)

Sum of Squares Notation


Term Description
mean of the
y̅i . observations at
the i th factor level
mean of all
y̅..
observations
value of
yij the j th observation at
the i th factor level

4.3 Degrees of Freedom

df1= k -1

df= nT – k

Total = nT

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Chapter 4

PRESENTATION, ANALYSIS, AND INTERPRETATION OF DATA

Introduction

This chapter shows the presentation, analysis, and interpretation of data which

were relevant to the study. The data were presented in tabular form and analyzed to

answer to the specific questions given in the statement of the problem as indicated in

Chapter 1 treated using appropriate statistical tools, which were discussed in Chapter 3,

and was analyzed to answer the specific questions in the statement of the problem.

1. Profile of the Respondents

Table 4.1

Distribution of Respondents According to the Type of Business

Type of Frequency Percentage Rank


Business
Services 9 21.4 2
Merchandising 29 69.0 1
Manufacturing 4 9.5 3

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Table 4.1 shows that the majority respondents in terms of the type of business are

which is Merchandising 69%. Second is Services which is 21.4%. Lastly, Manufacturing

which represents 9.5%

According to Philippines Statistic Authority (PSA) 2014, wholesalers and retailers

has the highest percentage which is 46.5% while the Manufacturing Industry represents

12.7% and Services which is 9.3%.

Table 4.2

Distribution of Respondents According to Sex

Sex Frequency Percentage Rank

Male 25 59.5 1

Female 17 40.5 2

As shown in Table 4.2 most of the respondents are male which 59.5% of the

sample size is, while the female is 40.5% of the sample size.

As provided by the Philippine Statistics Office (2013), there were approximately

38.5 million employed persons in the country in October 2013. Of the total employed,

57.6 percent or 22.2 million were wage and salary workers. Of this number, 8.3 million or

37.5 percent were women while 13.9 million or 62.5 percent were men. These findings

are based on the October 2013 Labor Force Survey. Wage and salary workers refer to

those who work with pay in private households, private establishments, government and

government-controlled corporations and those who work with pay in their own family-

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operated farm or business. Males outnumbered females in the age groups 0 to 14 years

and 30 to 39 years. On the other hand, there were more females than males in the age

groups 15 to 29 years and 40 years and over.

Table 4.3

Distribution of Respondents According to Age

Age Frequency Percentage Rank

18 to 30 years 18 42.9 1
old
31 to 40 years 9 21.4 3
old
41 to 50 years 3 7.1 4
old
51 to 60 years 12 28.6 2
old

Table 4.3 shows that the dominating ageof the respondents is from the age

bracket of 18 years old to 30 years old which is 42.9% of the sample size and is ranked

first. Second is from the age bracket of 51 years old to 60 years old which is 28.6% of the

sample size. Third is from the age bracket of 31 years old to 40 years old which is 21.4%

and last, is from the age bracket 41 years old to 50 years old of which is 7.1% of the

sample size.

According to the Philippine Statistics Authority (2012), in 2010, the median age of

the population of the city was 25.3 years, which means that half of the population was

younger than 25.3 years. This is higher than the median age of 24.1 years that was

recorded in 2000. Moreover, 28.5 percent of the household population was under 15 years

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old. Persons aged 20 to 24 years (10.7 percent) comprised the largest age group, followed

by those in the age groups 15 to 19 years (10.1 percent) and 0 to 4 years (9.9 percent).

Table 4.4

Distribution of Respondents According to Position Held in the company

Position Held Frequency Percentage Rank

Chief Operations

Officer (COO) 2 4.8 4.5

Cashier/Fund

Custodian/ 2 4.8 4.5

Treasurer

Accountant 3 7.1 3

Operations 6 14.3
2
Manager

Others: Staff 29 69.0 1

In terms of Position held in SMEs, most of our respondents are others which

composed of staff, sales representative, and area supervisor it is 69% of the sample size.

Second is Operations manager representing 14.3% of our sample size. Third is

Accountant which represents7.1%. Fourth are Chief Operations Officer (COO) and

Cashier/Fund Custodian/ Treasurer which is both4.8% of the sample size.

Based on the result of Table 4, we can infer that majority of respondents are

others which composed of staff, sales representative and area supervisors. Because

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most of the time they are the one who interact with the customers and available to

respond quickly and able to entertain the proponents. Yet, it is still reliable though they

are not the top management because they are knowledgeable enough about the

company’s policies with regards to working capital management.

Table 4.5

Distribution of Respondents According to Length of Working Experience

Length of Frequency Percentage Rank


Working
Experience
1 to 5 years 19 45.2 1
6 to 10 years 6 14.3 3
11 to 15 years 4 9.5 4.5
16 to 20 years 4 9.5 4.5
21 to 25 years 9 21.4 2

Most of the respondents’ length of working experience is within the bracket of 1 to

5 years which is 45.2% of our sample size. The second is in the bracket of 21 to 25 years

representing 21.4% of the sample size. Third is 6 to 10 years which is 14.3% and lastly,

11 to 15 years and 16 to 20 years both representing 9.5% of our sample size.

Based on the frequency according to the length of working experience, it can be

inferred that most of the employees are new to the company and a few only stays and

works for a long period of time. This can be related to age, as the company may want to

hire young professionals and for that reason most of the respondents working for the

company is still in the 1-5 years’ category.

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Positions earned in SMEs coincide with the years of experience the employees

garnered. According to indeed.com, Chief Operations Officer must have 15 to 20 years of

experience in management and human resource. Cashier/Fund Custodian/ Treasurer is 1

to 2 years of relevant experience. Accountant must have 1 to 3 years of relevant

experience. Operations Manager must have 1 to 5 years of experience in operation and

financial reporting.

Table 4.6

Distribution of Respondents According to the number of training/seminar attended


about working capital management

Number of Frequency Percentage Rank


training/seminar
attended about
working capital
management
1 to 5 35 83.3 1
6 to 10 4 9.5 2
11 to 15 1 2.4 4
16 and above 2 4.8 3

Most of the respondents have attended 1 to 5 training or seminars which is 83.3%.

Second is 6 to 10 trainings or seminar attended which represents 9.5% of the sample size.

Third is 16 and above which is 4.8% and lastly 11 to 15 which represents 2.4% of the

sample size.

According to bakertilly.com, the main objective their seminar is to enhance the

participants’ knowledge and understanding on working capital management by introducing

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the best practices and new developments in this area. The course is aimed at helping the

participants better understand what the working capital of organization and how this can be

managed by them. The participants will gain an inside of the managing of cash and

marketable securities and they will also get a practical knowledge of how businesses

manage their Inventory, Receivables and Payables for more efficient working capital

management. Based on this we can infer that attending in trainings and seminars about

working capital management will help businesses to manage and handle their working

capital assets.

2. Awareness in Level of Implementation of Working Capital Management

practices in SMEs.

Table 4.7

Mean and verbal interpretation on level of Implementation of Working Capital


Management practices of SMEs in terms of Sources of Financing Working Capital

Sources of Financing Weighted Mean Verbal Rank


Working Capital Interpretation
Equity finance as a source of 3.6429 Implemented 1
financing working capital.
Asset-based financing as a 2.9524
source of funding working Somewhat
3
capital for effective Implemented
6operations.
Accounts payable as a 3.0714
valuable source of financing Somewhat
2
in working capital to meet Implemented
short-term obligations.
Bank loans as a source of 2.9048 Somewhat
financing working capital for 4
Implemented
the liquidity.

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Borrowing from friends and 2.1667


family as source of financing Less
5
in working capital for the Implemented
profitability.
Total 2.9476 Somewhat
Implemented

Table 4.7 shows a weighted mean of 2.95 which is within the range of 2.50-3.49,

interpreted as Somewhat Implemented with the details as to the level of implementation

of Working Capital Management practices of SMEs in terms of Sources of Financing

Working Capital.

This weighted mean includes the average of the means 3.64,2.95,3.07,2.90 and

2.17 were based on the following questions provided under sources of financing working

capital.

Table 4.8

Mean and verbal interpretation on level of Implementation of Working Capital


Management practices of SMEs in terms of Investment Management Practices.

Investment Management Weighted Mean Verbal Rank


Practices Interpretation
Investment policies should be 3.2381 Somewhat
formulated and reviewed 4.5
Implemented
periodically as a practice.
Investment conversion period 3.2381
(i.e. cash-to cash conversion
cycle), risk on investments
Somewhat
and rate of return on 4.5
Implemented
investments should be
evaluated before investing in
working capital as a practice.
Management should engage 3.5714
in training on best investment Implemented 2
practices as a practice.

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All idle cash should be 3.6667


invested into the business as Implemented 1
a practice.
Liquidity and profitability 3.3571
should be major determinants Somewhat
3
of investment in working Implemented
capital as a practice.
Total 3.4143 Somewhat
Implemented

Table 4.8 shows a weighted mean of 3.41 which is within the range of 2.50-3.49,

interpreted as Somewhat Implemented with the details as to the level of implementation

of Working Capital Management practices of SMEs in terms of Investment Management

Practices.

This weighted mean includes the average of the means 3.24, 3.24, 3.57, 3.67 and

3.36 were based on the following questions provided under Investment management

practices.

Table 4.9

Mean and verbal interpretation on level of Implementation of Working Capital


Management practices of SMEs in terms of Cash Management Practices.

Cash Management Weighted Mean Verbal Rank


Practices Interpretation
Comprehensive cash
planning policies is as a 3.9524 Implemented 3
practice.
Maintaining optimum cash
and investment of
excessive cash as a 3.9048 Implemented 4
practice for effective
operations.
Matching cash inflows with
4.2619 Implemented 1
cash outflows as practice.

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Cash receipts and cash


expenditures should be 4.2143 Implemented 2
estimated as a practice.
Staff handling cash should
be trained and rotated at Somewhat
3.4762 5
intervals for effective Implemented
internal controls.
Total 3.9619 Implemented
Table 4.9 shows a weighted mean of 3.96 which is within the range of 3.50-4.49,

interpreted as Implemented with the details as to the level of implementation of Working

Capital Management practices of SMEs in terms of Investment Management Practices.

This weighted mean includes the average of the means 3.95, 3.90, 4.26, 4.21 and

3.48 were based on the following questions provided under Investment management

practices.

Table 4.10

Mean and verbal interpretation on level of Implementation of Working Capital


Management practices of SMEs in terms of Account Receivables Management
Practices

Account Receivables Management Weighted Mean Verbal Rank


Practices Interpretation
Management should formulate policies
guiding accounts receivables as a 3.8810 Implemented 5
practice.
Evaluating the average credit extended
to customers and providing terms of
3.9524 Implemented 2.5
agreement made for every credit sales
as a practice.
Management should review accounts
receivable policies from time to time as
a practice. So that the account
3.9286 Implemented 4
receivables to customers should go with
an interval and be monitored for
repayment as a practice.
Management should make expectations
on account receivable turnover and 3.9524 Implemented 2.5
resulting bad debts as a practice.

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Collection policy should be made for


obtaining payments of past due
3.9762 Implemented 1
accounts and staff should be trained in
credit and collection policies
Total Implemented
3.9381

Table 4.10 shows a weighted mean of 3.94 which is within the range of 3.50-4.49,

interpreted as Implemented with the details as to the level of implementation of Working

Capital Management practices of SMEs in terms of Accounts Receivable Management

Practices. This weighted mean includes the average of the means 3.88, 3.95, 3.93, 3.95

and 3.98 were based on the following questions provided under account receivables

management practices.

Table 4.11

Mean and verbal interpretation on level of Implementation of Working Capital


Management practices of SMEs in terms of Inventory Management Practices

Inventory Management Practices Weighted Mean Verbal Rank


Interpretation
Inventory management policies
should be made as a practice for 3.9524 Implemented 3.5
optimal resource utilization.
Economic Order Quantity (EOQ)
and Justin-Time (JIT) should be
used to ascertain inventory level as 3.9524 Implemented 3.5
a practice to avoid inventory stock
out.
Minimum stock level should be fixed
to avoid excess inventories as a
4.2143 Implemented 2
practice for effective internal
controls.
On-the-job training should be
organized as a practice for staff on
3.8810 Implemented 5
inventory management needed for
the effective operations.
Inventories should be ordered
following laid down guidelines and
4.2857 Implemented 1
properly checked on arrival as a
practice.

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Total Implemented
4.0571
Table 4.11 shows a weighted mean of 4.06 which is within the range of 3.50-4.49,

interpreted as Implemented with the details as to the level of implementation of Working

Capital Management practices of SMEs in terms of Inventory Management Practices.

This weighted mean includes the average of the means 3.95, 3.95, 4.21, 3.88 and 4.29

were based on the following questions provided under inventory management practices.

With regards to the Inventory Management of Service Industry, it can be noticed

that they don’t implement inventory management that much considering they offer services

as their main product, though some service company sells other products in line with their

service as other income. Hence, they somewhat implement inventory management.

Table 4.12

Mean and verbal interpretation on level of Implementation of Working Capital


Management practices of SMEs in terms of Accounts Payable Management Practices

Accounts Payable Management Weighted Mean Verbal Rank


Practices Interpretation
Accounts payable policies and
procedures should be formulated as a 3.5476 Implemented 4
practice.
Management should set up
disbursement system in managing
accounts payable and be monitored and 3.7143 Implemented 3
reevaluated at intervals as a practice for
effective operations.
The staff handling credit payments
should be trained and his duty should be Somewhat
3.1667 5
separated to avoid manipulation of Implemented
accounts payable.
Accounts payables received from
customers should go with a time frame
for payment and terms of agreement 3.8095 Implemented 2
should be made for every credit receipt
as a practice.
Management should review accounts
payable policies from time to time and
3.8571 Implemented 1
project a limit on accounts payable as a
practice.
Total 3.6190 Implemented

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Table 4.12 shows a weighted mean of 3.62 which is within the range of 3.50-4.49,

interpreted as Implemented with the details as to the level of implementation of Working

Capital Management practices of SMEs in terms of Accounts Payable Management

Practices. This weighted mean includes the average of the means3.55, 3.71, 3.17, 3.81

and 3.86 were based on the following questions provided under accounts payable

management practice

Table 4.13

Summary of Weighted Mean and Verbal Interpretation on level of Implementation of


Working Capital Management practices of SMEs

WEIGHTED VERBAL
ATTRIBUTES
MEAN INTERPRETATION

Sources of Financing
2.95 Somewhat Implemented
Working Capital

Investment Management
3.41 Somewhat Implemented
Practices

Cash Management
3.96 Implemented
Practices
Account Receivables
3.94 Implemented
Management Practices
Inventory Management
4.06 Implemented
Practices
Accounts Payable
3.62 Implemented
Management Practices

Table 4.13 shows the average weighted mean of 3.66which is within the range of

3.50-4.49 and thelevel of Implementation in terms of six dimensions computed as the

average of weighted mean of all dimensions coming from the breakdown presented in

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the preceding tables. It implies that the management of SMEs implemented Working

Capital Management within their organizations.

3. Differences between Respondent’s Profile and Level Implementation of

Working Capital Management of SMEs

Table 4.14

ANOVA for significant difference among Working Capital Management Practices


of SMEs based on their Type of Business

Mean F Value P Value Decision Remarks

Sources Services 3.0222


.276 .761 Failed to
Merchandising 2.9655 NS
Reject Ho
Manufacturing 2.6500
Investment Services 3.3111
.253 .778 Failed to
Merchandising 3.4828 NS
Reject Ho
Manufacturing 3.1500
Cash Services 3.8444
.627 .540 Failed to
Merchandising 4.0345 NS
Reject Ho
Manufacturing 3.7000
Receivables Services 3.9778
.011 .989 Failed to
Merchandising 3.9241 NS
Reject Ho
Manufacturing 3.9500
Inventory Services 3.8444
.712 .497 Failed to
Merchandising 4.1517 NS
Reject Ho
Manufacturing 3.8500
Payable Services 3.6222
Merchandising 3.6828 .542 .586 Failed to
NS
Reject Ho
Manufacturing 3.1500

Legends:

Degrees of Freedom: 41

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Level of Significance: .05

Critical Value: 3.238

Verbal Interpretation (VI):

Not Significant (NS)

Significant (S)

The table above shows the difference between the assessments on the level of

implementation when they are grouped according to their business type. Based on the

results, there’s no significant difference on the level of implementation in terms of

sources of financing working capital, investment management, cash management,

account receivables management, inventory management and accounts payable

management.

Table 4.15

ANOVA for significant difference among Working Capital Management Practices


of SMEs based on their Sex

Mean F Value P Value Decision Remarks

Sources Male 3.0320 Failed to


Female 2.8235 .602 .443 NS Reject Ho
Investment Male 3.5440 Failed to
Female 3.2235 1.068 .308 NS Reject Ho
Cash Male 4.0880 Failed to
Female 3.7765 2.350 .133 NS Reject Ho
Receivables Male 3.8720 Failed to
Female 4.0353 .309 .582 NS Reject Ho
Inventory Male 4.2160 Failed to
Female 3.8235 2.805 .102 NS Reject Ho
Payable Male 3.8000 Failed to

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Female 3.3529 2.322 .135 NS Reject Ho

Legends:

Degrees of Freedom: 41

Level of Significance: .05

Critical Value: 4.085

Verbal Interpretation (VI):

Not Significant (NS)

Significant (S)

The table above shows the difference between the assessments on the level of

implementation when they are grouped according to the respondents’ sex. Based on the

results, there’s no significant difference on the level of implementation in terms of

sources of financing working capital, investment management, cash management,

account receivables management, inventory management and accounts payable

management.

Table 4.16

ANOVA for significant difference among Working Capital Management Practices


of SMEs based on their Age

Mean F Value P Value Decision Remarks

Sources 18 to 30 years old 3.1111


Failed to
31 to 40 years old 2.6444
.711 .551 NS Reject Ho
41 to 50 years old 3.2000

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51 to 60 years old 2.8667


Investment 18 to 30 years old 3.5667
31 to 40 years old 3.4222 Failed to
.308 .819 NS
41 to 50 years old 3.2000 Reject Ho
51 to 60 years old 3.2333
Cash 18 to 30 years old 4.1667
31 to 40 years old 3.8667 Failed to
1.516 .226 NS
41 to 50 years old 3.4000 Reject Ho
51 to 60 years old 3.8667
Receivables 18 to 30 years old 3.7000
31 to 40 years old 4.2667 Failed to
.952 .425 NS
41 to 50 years old 4.3333 Reject Ho
51 to 60 years old 3.9500
Inventory 18 to 30 years old 4.1333
31 to 40 years old 4.2889 Failed to
1.354 .271 NS
41 to 50 years old 3.3333 Reject Ho
51 to 60 years old 3.9500
Payable 18 to 30 years old 3.7444
31 to 40 years old 3.9333 Failed to
41 to 50 years old 2.5333 1.982 .133 NS
Reject Ho
51 to 60 years old 3.4667

Legends:

Degrees of Freedom: 41

Level of Significance: .05

Critical Value: 2.851

Verbal Interpretation (VI):

Not Significant (NS)

Significant (S)

The table above shows the difference between the assessments on the level of

implementation when they are grouped according to the respondents’ age. Based on the

results, there’s no significant difference on the level of implementation in terms of

sources of financing working capital, investment management, cash management,

account receivables management, inventory management and accounts payable

management.

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Table 4.17

ANOVA for significant difference among Working Capital Management Practices


of SMEs based on their Position Held in the company

Mean F Value P Value Decision Remarks

Sources Chief Operations 2.2000


Officer (COO)
Cashier/Fund 2.6000
Custodian/ Treasurer .763 .556 Failed to
NS
Reject Ho
Accountant 3.0000
Operations Manager 3.3333
Others: Staff 2.9379
Investment Chief Operations 2.7000
Officer (COO)
Cashier/Fund 3.3000
Custodian/ Treasurer .957 .443 Failed to
NS
Reject Ho
Accountant 4.2000
Operations Manager 3.7333
Others: Staff 3.3241
Cash Chief Operations 4.2000
Officer (COO)
Cashier/Fund 3.8000
Custodian/ Treasurer .979 .431 Failed to
NS
Reject Ho
Accountant 4.2000
Operations Manager 4.3667
Others: Staff 3.8483
Receivables Chief Operations 4.8000
Officer (COO)
Cashier/Fund 3.6000
Custodian/ Treasurer 2.225 .085 Failed to
NS
Reject Ho
Accountant 4.0000
Operations Manager 3.0667
Others: Staff 4.0759
Inventory Chief Operations 4.9000
Officer (COO)
Cashier/Fund 4.5000
Custodian/ Treasurer 2.403 .067 Failed to
NS
Reject Ho
Accountant 4.7333
Operations Manager 3.5333
Others: Staff 4.0069
Payable Chief Operations 3.8000
Officer (COO)
Cashier/Fund 3.4000
Custodian/ Treasurer .161 .957 Failed to
NS
Reject Ho
Accountant 4.0000
Operations Manager 3.6000
Others: Staff 3.5862

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Legends:

Degrees of Freedom: 41

Level of Significance: .05

Critical Value: 2.626

Verbal Interpretation (VI):

Not Significant (NS)

Significant (S)

The table above shows the difference between the assessments on the level of

implementation when they are grouped according to the respondents’ position held in

the company. Based on the results, there’s no significant difference on the level of

implementation in terms of sources of financing working capital, investment

management, cash management, account receivables management, inventory

management and accounts payable management.

Table 4.18

ANOVA for significant difference among Working Capital Management Practices


of SMEs based on their Length of Experience

Mean F Value P Value Decision Remarks

Sources 1 to 5 years 3.0632


6 to 10 years 2.9333
.292 .881 Failed to
11 to 15 years 2.5500 NS
Reject Ho
16 to 20 years 2.9000
21 to 25 years 2.9111
Investment 1 to 5 years 3.5158 Failed to
NS
6 to 10 years 3.6333 Reject Ho

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

11 to 15 years 3.1000 .752 .563


16 to 20 years 2.7000
21 to 25 years 3.5111
Cash 1 to 5 years 4.1053
6 to 10 years 4.0333
1.011 .414 Failed to
11 to 15 years 3.7000 NS
Reject Ho
16 to 20 years 3.4500
21 to 25 years 3.9556
Receivables 1 to 5 years 3.6737
6 to 10 years 4.5000
1.093 .374 Failed to
11 to 15 years 4.2500 NS
Reject Ho
16 to 20 years 4.1000
21 to 25 years 3.9111
Inventory 1 to 5 years 4.1684
6 to 10 years 4.3667
.903 .472 Failed to
11 to 15 years 3.7500 NS
Reject Ho
16 to 20 years 3.6000
21 to 25 years 3.9556
Payable 1 to 5 years 3.7684
6 to 10 years 3.9000
11 to 15 years 2.9500 .832 .513 Failed to
NS
Reject Ho
16 to 20 years 3.3500
21 to 25 years 3.5333

Legends:

Degrees of Freedom: 41

Level of Significance: .05

Critical Value: 2.851

Verbal Interpretation (VI):

Not Significant (NS)

Significant (S)

The table above shows the difference between the assessments on the level of

implementation when they are grouped according to the years working in the company.

Based on the results, there’s no significant difference on the level of implementation in

terms of sources of financing working capital, investment management, cash

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management, account receivables management, inventory management and accounts

payable management.

Table 4.19

ANOVA for significant difference among Working Capital Management Practices


of SMEs based on the number of training/seminar attended.

Mean F Value P Value Decision Remarks

Sources 1 to 5 2.9771
6 to 10 3.1000 .480 .698 Failed to
NS
11 to 15 2.6000 Reject Ho
16 and above 2.3000
Investment 1 to 5 3.3886
6 to 10 4.3000 2.514 .073 Failed to
NS
11 to 15 3.4000 Reject Ho
16 and above 2.1000
Cash 1 to 5 3.9714
6 to 10 4.3000 1.566 .213 Failed to
NS
11 to 15 4.0000 Reject Ho
16 and above 3.1000
Receivables 1 to 5 3.9714
6 to 10 3.9000 .717 .548 Failed to
NS
11 to 15 4.6000 Reject Ho
16 and above 3.1000
Inventory 1 to 5 4.0800
6 to 10 4.3000 1.231 .312 Failed to
NS
11 to 15 4.2000 Reject Ho
16 and above 3.1000
Payable 1 to 5 3.6571
6 to 10 3.9500 1.333 .278 Failed to
NS
11 to 15 3.4000 Reject Ho
16 and above 2.4000

Legends:

Degrees of Freedom: 41

Level of Significance: .05

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Critical Value: 2.626

Verbal Interpretation (VI):

Not Significant (NS)

Significant (S)

The table above shows the difference between the assessments on the level of

implementation when they are grouped according to the respondents’ number of

seminars or trainings attended. Based on the results, there’s no significant difference on

the level of implementation in terms of sources of financing working capital, investment

management, cash management, account receivables management, inventory

management and accounts payable management

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Chapter 5

SUMMARY OF FINDINGS, CONCLUSION, AND RECOMMENDATIONS

Introduction

This chapter presents the summary of findings, conclusion, and

recommendations drawn from the data gathered and analyzed and interpreted in

Chapter 4. The summary of findings integrated the highlights of the significant results of

the research. Conclusion is the proving or disproving of the hypothesis based on the

summary of findings while the recommendations are the researchers’ suggestions for

the betterment of the parties to whom this study will contribute based on the conclusions

derived.

Summary of Findings

The following are the summary of the findings arranged according to the

statement of the problem.

The profile of the respondents is composed of: Type of Business, Sex,

Age, Position Held, Length of Working Experience, and No. of Seminars

attended regarding working capital management.

From the profile of the respondents gathered, it is found that the largest

group of the respondents was engaged in the merchandising type of business

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which is 69% of total respondents which in contrast, the smallest group was from

manufacturing industry with a percentage of 9.5%; the maximum of the

respondents was male which comprise of 59.5% while 40.5% were female; the

largest group of the respondents was found on the age bracket of 18 to 30 years

old with a percentage of 42.9% which in contrast, the smallest group was from

the age bracket of 41 to 50 years old with a percentage of 7.1%; mostly

belonging to ‘others’ which composed of staff, sales representative, and area

supervisor with a percentage of 69% while the least held the Chief Operations

Officer (COO) and Cashier/Fund Custodian/ Treasurer which is both 4.8% of the

sample size; the maximum of the respondents worked for one to five years with a

45.2% while there are both 9.5% worked for eleven to fifteen years and sixteen to

twenty years; and that most of the respondents have attended one to five

seminars regarding the working capital management with a percentage of

83.33% and the minority attended eleven to fifteen seminars which is 2.4% of the

respondents.

The level of implementation of working capital management in SMEs in

the City of Manila, District 2 was derived from the following variables: Sources of

Financing Working Capital, Cash Management Practices, Accounts Receivables

Management Practices, Inventory Management Practices, Accounts Payable

Management Practices, Investment Management Practices.

The implementation of working capital management in SMEs on the six

dimensions, Sources of Financing Working Capital is somewhat implemented

with a mean of 2.95, , Investment Management Practices is somewhat

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implemented with a mean of 3.41, Cash Management Practices is implemented

with a mean of 3.96, Accounts Receivables Management Practices is

implemented with a mean of 3.94, Inventory Management Practices is

implemented with a mean of 4.06, Accounts Payable Management Practices is

implemented with a mean of 3.62. And with an average weighted mean of 3.66

which is “Implemented”.

The differences on the level of implementation when respondents were

grouped into their profile is comprised of either there is a significant difference or

there is no significant difference.

When respondents were grouped into their type of business, based on

the results, there’s no significant difference on the level of implementation in

terms of sources of financing working capital, investment management, cash

management, account receivables management, inventory management and

accounts payable management.

Furthermore when respondents were grouped into their sex, according to

the results, there’s no significant difference on the level of implementation in

terms of sources of financing working capital, investment management, cash

management, account receivables management, inventory management and

accounts payable management.

Moreover when respondents were grouped into their age groups, the

results show there’s no significant difference on the level of implementation in

terms of sources of financing working capital, investment management, cash

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management, account receivables management, inventory management and

accounts payable management.

After the respondents were grouped into the Position Held by them, the

results show that there’s no significant difference on the level of implementation

in terms of sources of financing working capital, investment management, cash

management, account receivables management, inventory management and

accounts payable management.

Additionally when the respondents were grouped into their Length of

Working Experience, according to the results, there’s no significant difference on

the level of implementation in terms of sources of financing working capital,

investment management, cash management, account receivables management,

inventory management and accounts payable management.

Likewise when the respondents were grouped into their Number of

Seminars/Trainings Attended about Working Capital Management, on the basis

of results, it shows there’s no significant difference on the level of implementation

in terms of sources of financing working capital, investment management, cash

management, account receivables management, inventory management and

accounts payable management.

Basically, there is no significant difference on the level of implementation of

working capital management whether they are grouped according to their profile.

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Conclusion

According to the profile of the respondents gathered, majority of the

respondents were from merchandising company, 18 to 30 years old, male, others

such as staff, sales man and supervisor, have a one to five year working

experience, and have attended one to five seminars/training regarding working

capital management.

Based on the Level of Implementation obtained on the results, majority of

the respondents answered that they are implementing working capital

management practices within their organizations.

And that the results analyzed show there is no significant difference in the

level of implementation of working capital management in SMEs of CPAs when

grouped according to profile.

Recommendations

Based on the conclusions derived from the Profile of the Respondents

gained, the authorized persons recommends to require their employees to learn

and establish efficient and effective working capital management practices within

their organizations.

Their Chief Operation Officers to provide the leadership, management

and vision necessary to ensure that the company has the proper operational

controls, administrative and reporting procedures, and people systems in place to

effectively grow the organization and to ensure financial strength and operating

efficiency they should establish effective and efficiently working capital

management practices to be implemented within the organization.

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The Cashier/Fund Custodian/Treasurer which in terms of working capital,

liquidating assets are the most material like cash. To be more responsible for

securing the cash of the company. These employees should properly follow the

established policies and practices for the management of cash and other

controls in securing the cash of the company.

Their Accountant to assure that working capital management practices

are being apply properly on each account. They should verify each amount in

under each account if proper valuation is done.

The Operation’s Managers for they oversee the sales and production.

They need to make sure that each cost allotted for the production is properly

utilized.

Others where most of our respondents were from this group, the

management are responsible to train their staff, sales man and others to be more

knowledgeable about their company’s policies about working capital

management. We can see that they are more hands-on with the business. In that

way, they will know how they should perform to meet the company’s objectives

According to the conclusions derived from the Level of Implementation

obtained, the authorized persons recommends to require the respondents to

follow the standards and policies set by the authority and not ignore them. These

standards make the working capital management of more efficient.

In sources of financing in working capital of SMEs, the gathered data

show that the most source of the finance of working capital is from the bank

loans, the entity is asked to find an alternative way of financing their working

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capital that has a lesser interest or if possible that there is no interest considering

most of these entities are small enterprises.

Under their Cash Management Practices, it is good to consider investing

the excessive cash of the company to avoid idle cash and to utilize the assets of

the company well. In this way, the value of the entity will increase and future in

flows can be expected. And the theft for the excessive cash that is in the

possession of the treasurer or custodian can be avoided. Forecasting of inflows

and outflows of the entity should also be considered for the forecasting of the

entities profitability.

For Account Receivables Management Practices, the management is to

set a limit of how long and how much credit the customers are entitled especially

in merchandising and manufacturing industry. And to give their employees

training on how to implement the credit and collection policies.

Furthermore in Inventory Management Practices, it is very important that

the company forecast the sales and the needed stocks for the certain period

especially in merchandising and manufacturing industry to avoid shortage and

idle time in production. The management should set the EOQ and reorder point

each certain period and updated it as necessary as it is.

Also in Accounts Payable Management Practices, they are to monitor the

credit limit and capability of the company. The terms and conditions of payables

agreement should be reviewed first before accepting or entering credit loans. The

management should also set a time frame for accounts payable to avoid delays

and such.

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In addition, under Investment Management Practices, the enterprise is

recommended to engage their employees in seminars tackling about different

ways on how and where to invest. In this way, the company’s assets will be

utilized efficiently and effectively.

88