THE EFFECTS OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY 1

SYSTEMS PLUS COLLEGE FOUNDATION

Introduction and Review of Related Literature

On 2017, Philippine Statistics Authority (PSA) released a list of establishments in

which it recorded a total of 924,721 business enterprises operating in the Philippines. Small

and medium enterprises (SMEs) account for 99.56% (920,677) of the total establishments, of

which 89.59% (828,436) were microenterprises, 9.56% (88,412) were small enterprises, and

0.41% (3,829) were medium enterprises. Large enterprises made up the remaining 0.44%

(4,044).

These small and medium-sized enterprises (SMEs) employ over 70 percent of the

working population, Boh Wai Fong, Philippine Daily Inquirer (2018).

According to PFRS Section 15, SMEs are entities with total assets of between P3

million to P350 million and total liabilities of between P3 million to P250 million. They

publish general purpose financial statements for external users that are not in the process of

filing their financial statements for the purpose of issuing any class of instruments in a public

market; and do not have public accountability.

The latest trends in substance added by SMEs in the country and their sales indicates a

growing share. SMEs have been steadily developing year after year with the overall industrial

growth, as indicated by relevant factors, including the number of establishments and the

number of employees.

Nevertheless, compared to the absolute number of establishments and employment,

SMEs show relatively small share of value added and sales, less than 30%, thus suggesting

their progressive potential in the country. One of the major issues being faced by managers in

this growth and development journey is not just the appropriation of funds but also their

meaningful distribution to achieve maximum returns.

THE EFFECTS OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY 2

SYSTEMS PLUS COLLEGE FOUNDATION

Currently, businesses use a management of assets and liabilities called, Working

Capital Management (WCM) for efficiency and effectiveness of the business itself. Working

capital management is an accounting strategy with a focus on the maintenance of a sufficient

balance between a company’s current assets and liabilities. An effective working capital

management system benefits businesses not only in covering their financial liability but

also expanding their earnings. Managing working capital means regulating inventories, cash,

accounts payable and accounts receivable. An efficient working capital management system

often uses key performance ratios, such as the working capital ratio, the inventory turnover

ratio and the collection ratio, to help in classifying areas that require attention in order to

maintain liquidity and profitability.

Working capital management expressly impacts both the profitability and level of

aspired liquidity of a business. Hence, it may have both negative and positive impact on

firm’s profitability, which in turn, has negative and positive influence on the shareholders’

wealth, Raheman & Nasr (2007). If a firm invests profoundly on working capital i.e. more

than its needs, the profits which can be produced by investing these resources in fixed or long

term assets diminishes. Moreover, the firm has to experience the expense of storing inventory

for longer periods as well as the expense of handling excessive inventory, Arnold (2008). It is

therefore a critical issue to recognize and apprehend the effects of working capital

management and its influence on firm’s profitability.

Accordingly, the researchers determining the effects of working capital management

either positive or negative to the profitability of SMEs in Angeles City, Pampanga.