Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Chapter 1
THE PROBEM AND ITS SETTING
Introduction
Effect of Financial Management practices on the profitability of Small and
Medium Enterprises play significant roles economic development of nations by
facilitating industrialization, reducing unemployment by creating large scales of new jobs
that and reduce poverty which in general contribute to the Gross Domestic Products.
Financial management practice for small-scale business generally concerned with
procurement, allocation, and control of financial resources. It is also the backbone as
once the resources are procured, it should be utilized in effectively at least cost, ensure
safety on speculation. It is believed that broad-based economic growth is th e
main route to poverty reduction through employment generation. Currently, San
Francisco, Agusan del Sur has prioritized on micro and small scale enterprises
development for economic growth, employment generation and building an industrial
economy.
There is variance in profitability, survival, and growth of small scale enterprises
compared to larger firms and each accounts for special problems in financial
management (Dumbu, 2014). Getahun (2016) indicate that poor financial management
practice is one the significant factor that affects the overall performance. Small Scale
Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Enterprises generally tend to be confronted with higher interest rates, as well as credit
rationing due to the shortage of collateral. Previous studies conducted by Derbie &
Kassahun (2013) and Dumbu, (2014) focused on the evaluation of management
practices and hindrances to the success of the financial management practices. Ngugi
(2014) also focused on factors affecting the performance of small and medium scale
enterprises. Besides, most of the previous studies focused on other countries and
literature related to the effect of financial management practice on the profitability of
small scale enterprises as far as the knowledge of the researchers is concerned is
scarce.
This study aims to assess the effect of financial management practices on the
profitability of small and medium enterprises in San Francisco, Agusan del Sur. This
study will address the gap, why some businesses in the Municipality does get closed
after a few months or year it operates. In addition, this study will examine the effect of
financial management practices specifically Accounting Information Systems (AIS)
practices, Financial reporting and analysis (FRA) practices, Working capital
management (WCM) practices, Fixed Asset Management (FAM) practices, and Capital
Structure Management (CSM) practices on the performance of Small and medium
enterprises in the San Francisco Municipality.
This study will help the researcher examine the effect of financial management
practices on the profitability of SMEs in San Francisco, Agusan del Sur in more depth
and contribute by proposing practical solutions to overcome any gaps to improve its
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
operations. The results of the study will be extended to the SME’s in San Francisco that
the researcher surveyed.
Theoretical/Conceptual Framework
This study will examine the effects of financial management practices on the
profitability of SME’s in San Francisco, Agusan del Sur to ensure its effectiveness. In
the Municipality, some businesses cannot sustain its operation in the long run and
automatically got shut down. That’s why, this study will thorough examine the business
management practices in order to help them to proposed practical solutions to
overcome its problems and to sustain the business in the long run.
Contingency Management Theory is based on the idea that effective leadership
was directly related to the traits the leader displayed in any given situation. From that
idea sprang the belief that there exist a set of traits that are effective for every situation
and that different situations demand different leadership traits. As such, leaders must be
flexible and adapt to change as the market, the business, and the team demands. With
this theory, it can help business owner/manager to know how to react to emerging
problems in the business and proposed alternative solution to that. They must be able
to identify the particular management style suitable for every given situation. They must
also be willing and able to apply that management style quickly and effectively
whenever necessary. In a larger sense, businesses and managers who adhere to
Contingency Management Theory — whether intentionally or unintentionally — will be
concerned, above all else, with maintaining the alignment of their team and achieving a
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
good fit in all projects and situations. Ultimately, there is no one best way to do things.
The way a business chooses to organize will depend on the environment in which they
operate.
Organizations as Learning Systems Management Theory sometimes called
Integral or Holistic Management Theory — starts with the idea that the business is a
system that is built on a succession of subsystems. In order for the business to run
smoothly and efficiently, each subsystem must also work smoothly and efficiently within
itself, but also with the other subsystems around it. In this theory, managers are
responsible for coordinating the cooperation necessary to ensure the larger “organism”
continues to function successfully. Learning and change are major components of this
theory, and learning is encouraged and made available to everyone — not just middle
and upper-management. The emphasis in this theory is on teamwork, participation,
information sharing, and individual empowerment.
Bureaucratic Management Theory revolve around the importance of structuring
your business in a hierarchical manner with clear rules and roles. According to Weber,
the ideal business structure (or bureaucratic system) is based on: Clear division of
labor, Separation of the owner’s personal and organizational assets, Hierarchical chain
of command, accurate record keeping, Hiring and promotion based on qualifications
and performance, not personal relationships and Consistent regulations. It can be very
useful for new businesses that are in need of standards, procedures, and structure
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
The first box contains the profile of respondents, which comprises of Gender,
Age, Position, Educational Attainment, Trainings and Seminars, Industry Type,
Ownership, Years’ operating, Number of Employees, Total Assets and Annual Sales.
The second box shows the components of financial management practices that
includes, accounting information systems, financial reporting and analysis, working
capital management, fixed asset management, capital structure management, and
financial planning. Financial Characteristics include Liquidity ratios, financial leverage
ratios, and Activity ratios.
The third box shows the improved practices of SMEs. Such intervention will
determine the effects of financial management practices on the profitability of SMEs,
hence what management practices are to be developed and improved for the benefit of
the SMEs.
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Financial
Management
Respondent’s Practices and Improved
Profile Financial Practices of
Characteristics SME’s
Figure 1: Schematic Diagram of the Study
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Statement of the Problem
The study entitled the Effect of Financial Management practices on the
profitability of Small and Medium Enterprises aims to answer the following questions:
1. What is the profile of the respondents in terms of:
a. Gender
b. Age
c. Position
d. Educational Attainment
e. Training and Seminars
1.1 Business details in terms of:
a. Type of Industry
b. Ownership
c. Years’ operating
d. Number of Employees
e. Total Assets
f. Annual Sales
2. What is the Financial Management Practices of SME’s in San Francisco,
Agusan del Sur in terms of:
a. Accounting information System
b. Financial Reporting and Analysis
c. Cash management practices
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
d. Receivable Management practices
e. Inventory management practices
f. Fixed Asset management practices
g. Financial planning practices
3. What is the Financial Characteristics of SME’s in San Francisco, Agusan del
Sur in terms of:
a. Current Ratio
b. Debt-to-equity ratio
c. Total Asset Turnover
d. Return on Sales
e. Return on Assets
f. Return on Equity
4. How important are financial management practices and financial
characteristics to SME profitability?
5. Is there significance relationships between financial management practices,
financial characteristics and SME profitability?
6. What are the problems encountered by the business?
7. What action can improve the financial management and profitability of SMEs
in San Francisco, Agusan del Sur?
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Scope and Limitation of the Study
Regardless of its high ambitions, this research is constrained by resource
limitations, both financial and non-financial resources. Limitations of time, funding and
scope of the study required the research study to focus on a limited number of
objectives. Moreover the research problem and questions often directly or indirectly
involve multiple areas of financial management while limits of time and funds would not
make all areas can be investigated.
Because of limited access to scare resources, this study could not research
SMEs in all Municipality of Agusan del Sur but only selected SMEs located in San
Francisco, Agusan del Sur as the target population and considered the target SMEs
representative for all SMEs in Agusan del Sur.
Significance of the Study
Completing this study brings together aspects of theory and practice. For theory,
this study is an expansion of previous studies on financial management practices and
financial characteristics of SMEs by focusing on examining the simultaneous impacts of
financial management practices and financial characteristics on SME profitability. In
addition, utilizing data from the Municipality of San Francisco, one of the emerging
economies, contributes to the literature of SME financial management, which
traditionally concentrates on SMEs of developed economies rather than SMEs in other
economies. Using data from the Municipality of San Francisco to test theories of
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
financial management helps to confirm and expand the scope of theoretical
applications.
This study is significant for financial management practices in the Municipality of
San Francisco. Results will indicate relationships between financial management
practices, financial characteristics and SME profitability and will assist owner-managers
and financial managers to improve performance and profitability of their businesses by
managing financial matters efficiently and effectively. Again, the results of this study will
be distributed to the SME’s respondents that the researcher got surveyed and this are
the following;
Manufacturing
Construction
Service
Trade
Agriculture
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Definition of Terms
Accounting Information System (AIS). A system of collecting, storing and processing
financial and accounting data that are used by decision makers. It is generally a computer-
based method for tracking accounting activity in conjunction with information technology
resources.
Activity ratios. A category of financial ratios that measure a firm's ability to
convert different accounts within its balance sheets into cash or sales.
Capital Structure Management. Refers to a company's outstanding debt and
equity. It allows a firm to understand what kind of funding the company uses to finance
its overall activities and growth. In other words, it shows the proportions of senior debt,
subordinated debt and equity (common or preferred) in the funding.
Financial Management. It means planning, organizing, directing and controlling
the financial activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the enterprise
Financial reporting and Analysis. Refers to standard practices to give
stakeholders an accurate depiction of a company's finances, including their revenues,
expenses, profits, capital, and cash flow, as formal records that provide in-depth
insights into financial information.
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Fixed assets management. It is an accounting process that seeks to track fixed
assets for the purposes of financial accounting, preventive maintenance, and theft
deterrence.
Leverage ratio is any one of several financial measurements that look at how
much capital comes in the form of debt (loans) or assesses the ability of a company to
meet its financial obligations.
Liquidity ratios. Are an important class of financial metrics used to determine a
debtor's ability to pay off current debt obligations without raising external capital.
Liquidity ratios measure a company's ability to pay debt obligations and its margin of
safety through the calculation of metrics including the current ratio, quick ratio, and
operating cash flow ratio
Return on assets (ROA). An indicator of how profitable a company is relative to
its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a
company's management is at using its assets to generate earnings. Return on assets is
displayed as a percentage.
Return on equity (ROE). A measure of financial performance calculated by
dividing net income by shareholders' equity. Because shareholders' equity is equal to a
company’s assets minus its debt, ROE could be thought of as the return on net assets.
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Republic of the Philippines
SURIGAO DEL SUR STATE UNIVERSITY
Tandag City, Surigao del Sur
GRADUATE SCHOOL
Return on sales (ROS). A ratio used to evaluate a company's operational
efficiency.This measure provides insight into how much profit is being produced per
dollar of sales.
Small and medium-sized enterprises (SMEs). Non-subsidiary, independent
firms which employ less than a given number of employees. This number varies across
countries. The most frequent upper limit designating an SME is 250 employees.
Working Capital Management. A business strategy designed to ensure that a
company operates efficiently by monitoring and using its current assets and liabilities to
the best effect. The primary purpose of working capital management is to enable the
company to maintain sufficient cash flow to meet its short-term operating costs and
short-term debt obligations. A company's working capital is made up of its current
assets minus its current liabilities.
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