Chapter 2

REVIEW OF RELATED LITERATURE AND STUDIES

The researchers reviewed various related literature and studies related to the

present study which were gathered from the internet, published and unpublished theses,

journals and different books to conceptualize the research problems. The researchers

considered it significant in understanding the present concern of the research.

Related Literature

Based on the definition under Republic Act No. 9501 or the Magna Carta for

MSMEs, which amended RA 8289 and RA 6977 (Magna Carta for Small Enterprises)

micro-enterprises in the Philippines can be characterized by size of assets, size of equity

capital, and number of staffs. A typical micro-enterprise is an enterprise that employs

nine people or fewer, with investments as low as ₱3 million and below. Approximately

90 percent of all companies in the Philippines are classified as micro companies. These

are companies involved in sector, agribusiness, and/or services, whether single-owned,

cooperative, partnership or corporation. Their total assets, including those that arise from

loans but excluding the land on which the office, plant and equipment of the particular

business entity is located, have a value not exceeding ₱3 million. Department of Trade

and Industry 2017 MSME Statistics- Sectoral Distribution shows that of all micro

businesses, about 46 percent are involved in the wholesale, retail and maintenance
business; 27.6 percent are involved in accommodations and food service; 13.5 percent are

involved in manufacturing; while 12.5 percent are involved in other service categories.

According to Mordor Intelligence (2016), Most Filipino consumers prefer both

cheap and best products. The traditional Sari-Sari convenience stores (Variety stores)

dominates the market because the demand is mostly of cheap goods. Philippines retail

sector is driven by rising income, consumer confidence and increasing high net worth

Individuals. Majority of Philippines’s have relatively low income, because of less

agricultural production and disaster prone location.

There has been much talk about helping small businesses become the backbone of

a prosperous economy even in previous administrations, yet micro entrepreneurs still

struggle to survive. There is actually a law—Republic Act No. 9501, or the Magna Carta

for micro, small and medium enterprises (MSMEs), signed on May 23, 2008—that

should guide the government in growing this sector, but its implementation leaves much

to be desired. The business community has time and again raised the continued lack of

access to financing as the biggest hurdle for these small firms, which puts them at a big

disadvantage especially when competing in the global market. Sergio Ortiz-Luis Jr.,

president of the Philippine Exporters Confederation Inc., recently argued that, locally,

there seems to be a bias in lending against MSMEs, as most banks would rather lend to

one big company than 20 small enterprises: “From my point of view, what we as an

MSME need is access to financing. There is a law, but it is not being implemented

effectively due to the faulty implementing rules and regulations of the Magna Carta for

11
MSMEs, which does not seem to be working well as financing has not flowed into the

sector over the years.”. Philippine Daily Inquirer Editorial page (2019).

Establishing new micro business is easy and the first step to do it is to finance

your business. Debelak stated in his book that MSMEs is finance either by debt or equity,

or by a combination of both. Typically, both kinds of funding come from either the

Informal Finance Sector (IFS) or the Formal Financial Sector (FFS). Commercial banks,

microfinance banks, international development agencies etc. are some examples of

formal finance sector that is made up of formal finance institutions. He revealed that

commercial banks and development banks is the most popular source of finance for

enterprises. The informal sector which consist of borrowing from friends, relatives and

cooperatives are also important source of financing MSMEs. Personal savings is another

source of financing MSME. Operations includes everything you do to buy, build, provide

or produce items or services in order to offer your product or service; it also involves

administration tasks, to require to run the business. Operation sections of plans are

intensely different from plan to plan today, because businesses operate in so many

various ways. Production is often outsourced to other businesses and, in some cases, so is

sales, marketing, administration and human resource functions. The one part of the

business plan that hasn’t changed for years is the management section. Good

management will succeed in most businesses and bad management can turn even the best

business concepts in business failures. Management has to start somewhere and there

have been many successful businesses started by young or in experienced entrepreneurs.

If at all possible, you want to be able to show your management has a successful

12
background. If you don’t have that experience, you need to show that management has

dedication and enthusiasm and that you have found mentors who will help you.

Based on an article from entrepreneur.com, majority of new businesses ultimately

end up failing. In a large part, this is due to an inability to generate sufficient profit, and

it’s not a problem to scoff at – even business built on solid ideas can suffer from a lack of

profitability. Some of the problems are too much overhead, too many ongoing costs and

unseen or hidden costs.

According to the Association of Chartered Certified Accountants or ACCA

(2016), building up the privilege money related capacities, and utilizing them, requires

the correct culture in the business. At the highest point of the association, proprietors and

directors must see how money related administration can add to the accomplishment of

the business. They added that moving toward money related administration as a task to be

designated leaves you at significant hazard if things turn out badly. Representatives need

to perceive how money related administration can enable them to perform better, instead

of simply forcing controls on them. They conclude that the business will expand its

prosperity on the off chance when you prepare to perceive how money related

administration can help accomplish the objectives.

As stated by Woodruff (2019), one of the most important responsibilities of

business owners and managers is financial management. They should consider the

potential effect of their decisions on their profits, cash flow and financial condition of the

13
company. Every activity has an impact on their business’ financial performance and must

be controlled and evaluated by the owner.

In accordance with the book of McCloskey, producing too small output leaves a

positive area of profit foregone; the profit that you could be had is minimized. It

sacrifices potential profit because the marginal revenue of unit is more than its marginal

cost. Producing too large leaves a negative area of loss incurred, the profit is also

sacrificed because the marginal revenue is less than the marginal cost. Only producing at

“just right” can maximize profits. The simplest way to determine that you produced just

right is to note that anywhere else an increase or decrease in quantity produced can make

more money.

Camposano (2007) stated that when sales expand, many entrepreneurs ignore

their descriptions for working capital. They fail to provide for the larger working capital

base required to support their larger volume of sales. Some entrepreneurs think that the

increased profit from the larger sales volume will take care of increased capital

requirement. Increase in sales will usually cause accounts receivable to rise, more

inventories to be brought and additional employees may have to be hired or new

equipment purchased. All of these changes will put demands on the firms’ working

capital and the wise entrepreneur will have done some planning to see that there is

adequate working capital to meet these needs.

According to Carbajo (2019), Many entrepreneurs don’t know where to obtain

funding when starting out or expanding. If you know where to look, you'll find that there

14
are a lot of different sources for businesses to raise capital. However, not all source of

capital is appropriate for every business. One should choose one which meets the capital

structure that best fits their business. A business' capital structure is the way that it is

funded, either through debt (loan) or equity financing. Financial backing usually includes

loans, grants, or investor funding. Some of the top ways to raise capital are through

investors, venture capitalists, government grants, and small business loans. There are

other methods for financing but these should be used only if needed and know the risk.

Boldvan (2016) stated that optimizing the replenishment of inventories makes your

supply chain more productive and more profitable for your business. The only worse

thing is not being able to fulfill customer orders than having thousands of dollars tied up

in inventory that is months away from turning over.

Based on the article written by Malyk. (2013), because of "idle assets," many

manufacturing, trading and technology companies face cash flow challenges. We all

know that "Cash is King." Even a profitable company can be in danger due to liquidity

problems without a positive cash flow.The company's unused resources tie up money but

do little to generate cash flow or profit.

According to Wilkinson (2013), the operating profit margin ratio shows how

much profit a business makes after paying for variable production costs such as wages,

raw materials, etc. It is also the return obtained from standard operations and does not

include unique or one-time transactions.

15
 On the article of Avenir (2019), inventory turnover, or the number of times inventory

is sold over a given period, affects profitability. Keeping stocks that are obsolete and

have a low turnover slows down sales. Keeping stocks that are having a high demand

boosts sales levels. Inventory levels should consider demand levels to avoid overstocking

and under stocking. Proper inventory management is vital to maximizing operational

efficiency and profitability.

Based to the blog of Incorp (2015), it takes time for business to grow, so you need to

build a plan that has at least a five-year outlook. Every year, your business needs to

define how it will grow over the years. It will become more complicated as your business

grows over the years, which means that your financial plan needs to grow with your

business.This means that your strategy needs to define not only how you're going to make

money, but also how you're going to benefit most of the money you're generating.

Review your strategic plan constantly so that you know if the results you are producing

match your goals set

Related Studies

Ligthelm’s (2012) study, using a life-cycle analysis showed that there are only

43.2% micro businesses survived in an increasing competitive environment over a period

of five years. He additionally expressed that the human issue and, especially the

entrepreneurial endowment and small business management skills appeared as strongest

predictors of micro business sustainability.

16
 Level
According to the study of Parilla (2013) entitled of Management Practices of

Micro and Small Businesses in Ilocos Norte, micro and small business owners in Ilocos

Norte is owned by young graduates and married woman. Most of them have no proper

trainings nor attending various seminar and not affiliated with professional organizations.

Also, most of the micro business in Ilocos existed for less than 5 years and mostly retail

type of business and have only one owner. They started with an initial capital of 500,000

and have 1-2 employees who are usually family related. Also, as revealed by their level

in the personal entrepreneurial competencies survey, both micro and small have their

capability to manage their business. Micro business is observed with moderate level of

management practices compared to the small business.

In the study conducted by Mendoza (2015) entitled Financial Performance of

Micro, Small and Medium Enterprises (MSMEs) in the Philippines shows that the

financial performance of MSMEs are different from large enterprises, publicly listed

companies and large corporations. This study showed that MSMEs had satisfactory

performance in liquidity, activity and leverage but experienced low profitability. As a

result, MSMEs need strategic actions and directions that focus on improving profitability.

As stated by Hampel-Milagrosa (2014), the Philippines is an excellent place to

explore the dynamics of enterprise upgrading in Southeast Asia. Micro and Small

Enterprises comprises the majority of the total enterprise in the country, which makes

them the source of most Filipinos’ livelihoods. Yet many MSEs may be stagnating in

their size categories because their owners lack the knowledge to upgrade the business.

Despite the multitude of Philippine policies in support of MSEs, their performance leaves

17
a lot to be desired. In terms of the ‘Ease of Doing Business’, the Philippines has

consistently ranked low in several indicators – and failed to inspire domestic and

international investors.

According to the study by Chimucheka and Mandipaka (2015), entitled

Challenges Faced by Small, Medium and Micro Enterprises in The Nkonkobe

Municipality, most owners are not fully aware of the government support centres or

initiatives of supporting the businesses. They also identified that lack of experience, skills

and knowledge are challenges that hampering the success of the SMMEs.

The study of Madelyn, Aplaon, Paguio, San Jose (2016) conducted in Davao City

stated that the most street vendors don’t have a plan in terms of their strategies. Most of

them are neither business graduate nor oriented. They only manage based on their own

perception of their knowledge and instincts. They found out that having business plan

may help in business success and lack of planning and technical knowledge lead to

bankruptcy. Also, street vendors don’t give importance about keeping records. They only

used estimation and simple computation based on their experiences.

Barte (2012) study entitled Financial Literacy in Micro Enterprises: The Case of

Cebu Fish Vendors shows that the pasil fish vendors have low financial skills. It is

because most of the vendors do not have proper recording of various transactions, have

poor systematic income and expenses evaluation or have no income statement at all. They

also lack on cash planning and also result to high interest due from loan. Because of the

combination of these problems, they are difficulty in facing the concerns of their micro

enterprise and affects their income and progress to some point.

18
 The study of Gawali and Gadekar (2017) entitledFinancial Management

Practices in Micro, Small and Medium enterprises-An Exploratory Analysis with the help

of Literature Review points that the importance of improved financial management

decisions based on efficient, vital financial management practices for the survival and

growth of MSMEs. It also concludes that accounting and financial knowledge,

competencies in the interpretation of financial statements, attitudes of owners-managers

and their level of involvement in financial aspects of business are largely responsible for

the success or failure of MSMEs.

In Rekish (2013) study, it examines the need for efficient use of resources.

Critical management resources are involved in financial management. It merely means

that financial resources optimization can address the inevitable cost and danger. She

stated that financial management means putting together the economic resources at hand

to make efficient use of them and to take decisions that can lead to more assets being

acquired for the business. She added that you can even draw finance with efficient

leadership of resources to satisfy the company’s short-term and long-term demands. She

concluded that the whole method is difficult and deals, if any, with the choice of

particular resources or a mixture of resources to address the economic problem.

In the study conducted by Ndirangu (2017) entitled Effect of Cash Management

on the Financial Performance of the Companies Listed at the Nairobi Securities

Exchange, the cash conversion cycle had a positive but insignificant effect on the

financial performance on the company listed on NSE. This implies that cash conversion

cycle has no any influence on the financial performance. Also, from the findings of the

19
study, the size of the company had a negative and insignificant effect on the financial

performance.

Synthesis of the State-of-the-Art

The review of related studies that were used has certain similarities and

differences with the current study. General findings showed various impact of money

utilization to the profitability of micro businesses.

Based on the study of Parilla (2013) that was conducted in Ilocos Norte, most

micro businesses don’t last for 5 years. It was supported by the study of Lighthelm.

(2012). On the other hand, MSMEs experienced low profitability even if MSMEs had

satisfactory performance in liquidity, activity, and leverage as stated in the study by

Mendoza (2015). MSMEs face different challenges. Lack of experience, skills and

knowledge have an effect on the performance of the business according to the studies

conducted by Hampel-Milagrosa (2014), Chimucheka and Mandipaka (2015), Madelyn,

Aplaon, Paguio, San Jose (2016), Barte (2012) and Gawali and Gadekar (2017).In Rekish

(2013) study, it examines the need for efficient use of resources. Critical management

resources are involved in financial management. And in the study conducted by Ndirangu

(2017), the cash conversion cycle and size of the company have insignificant effect on

the financial performance.

20
Gap Bridged by the Study

The thoughts and perceptions generated in the preceding clauses showed that the

studies related to money utilization and profitability have been extensively accomplished

globally for the past years. The study related to money utilization of the micro businesses

and its influence on trade and industry growth in the Philippines and other country may

have been studied but no extensive study has been conducted about the effect of money

utilization to the profitability of micro business. Likewise, the current study targeted to

compare the effect of money utilization to the profitability of micro business in Daet,

Camarines Norte with the help of the government and other related parties. Hence, this

was a modest effort to fill this gap.

Theoretical Framework

The researcher adapted the theory derived from Profit Theory of Management

Efficiency. According to the article by Nikita Dutta, this theory acknowledges that some

businesses are more effective than others in managing productive activities and meeting

consumer requirements effectively. Businesses with an average efficiency level earn an

average return rate. Businesses with greater management abilities and effectiveness in

manufacturing must be compensated for by above-normal revenues (i.e. financial profits).

This theory is therefore also called profit compensatory theory. Deeksha Bhardwaj

supported that profit arises as a consequence of managerial effectiveness is often

21
21
asserted. In many instances, it can be shown that management can reduce the cost of

doing business by means of more efficient operations, anticipate and offset changes that

will adversely affect the income of the company, adopt new marketing techniques,

improve product quality and expand the product line to increase profit.

On the other hand, the Baumol Model of Cash Management helps in determining

a firm's optimum cash balance under certainty. According to (Cheriyan, 2013) about this

theory, a firm attempt to minimize the sum of the holding cash and the cost of converting

marketable securities to cash. It is extensively used and highly useful for the purpose of

cash management. The Baumol model enables companies to find out their desirable level

of cash balance under certainty. The Baumol model of cash management theory relies on

the trade-off between the liquidity provided by holding money (the ability to carry out

transactions) and the interest foregone by holding one's assets in the form of non-interest

bearing money.

These theories were used as the main idea and foundation of this study and

strategies recommended to the owners or managers of the micro business in Daet,

Camarines Norte because it promotes having a good money utilization to boost the

profitability and to attain sustainability. The main focus of this study is about efficient

and effective money utilization to increase the profitability which is suggested by these

theories, the Baumol Model of Cash Management and Profit Theory of Management

Efficiency.

22
22
Baumol Model of
Effect of Money
Cash Management
Utilization to the
Profitability of Micro
Businesses in Daet,
Profit Theory of Camarines Norte
Management
Efficiency

Figure 1

Theoretical Paradigm

23
Conceptual Framework

The study used independent-dependent variable model to show the relationship of

the different factors. This conceptual framework defines how the different variables

identified by the researchers relate to each other.

The conceptual framework of this research on the effect of money utilization to the

profitability of micro business was anchored on the Profit Theory of Management

Efficiency and Baumol Model of Cash Management. As adapted in this study, the money

management/ utilization of the business like investing, replenishment of inventories,

payment of salaries, mark-ups, payment of taxes, surcharges and penalties, drawings for

personal use, purchases of supplies and debt (independent variable) with effective

management and maintaining optimum cash balance can affect the business profitability

(dependent variable). Nikita Dutta supported that the businesses with greater

management abilities and effectiveness must be compensated for by above-normal

revenues.

Having different money utilization strategy, the researchers will produce a financial

planner for entrepreneurs to properly handle and monitor their resources to help them

lessen the risks and unnecessary costs to boost up their profitability. The researchers will

also propose some seminars, workshops and competitions regarding money

utilization/management strategies to help those future and existing entrepreneurs to have

an effective and efficient money management and utilization. Also to help them to be

knowledgeable about their future and existing businesses for them to be equipped on the

24
circumstances that may happen in their business. And because most of the people has an

access to the internet, the researchers will make an online journal that compose of tips

and tricks, money utilization and management strategies and other important information

regarding running a business to help those future and existing entrepreneurs to be more

knowledgeable and this can be their source of ideas that may help them to increase their

profitability rate to attain the sustainability of their business.

25
 Money Utilization
Investments
Replenishment of inventories
Profitability
Payment of salaries of Micro
Mark-ups
Taxes, surcharges and penalties
Businesses
(Dependent Variable)
Drawings for personal use
Purchases of supplies
Debt

(Independent Variable) 1. Seminar and workshop in partnership

with Department of Trade and Industries
(DTI) for business students especially for
entrepreneur.
2. Business plan competition for students
3. Seminar and workshop in partnership
with Department of Trade and Industries
Enhanced the profitability of
(DTI) for local entrepreneur
micro business
4. Online Journal that contains the
Achieve the sustainability of the knowledge and the idea from the study.
micro business 5. Having a financial planner on the
business to monitor and organize

Figure 2

Conceptual Paradigm

26
 Notes

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Philippine Daily Inquirer Editorial Page (2019). Micro Entrepreneur Real Problem.
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problem#ixzz5wRehxTtj
Department of Trade and Industry(2017). MSME Statistics – Sectoral Distribution.
Retrieved from https://www.dti.gov.ph/dti/index.php/2014-04-02-03-40-26/news-
room/179-workshop-on-market-access-for-MSMe-set
Debelak, D. (2003). Successful business models Surefire Ways to Build a Profitable
Business. Entrepreneur Media, Inc. Canada.
DeMers (2016). 7 Problems Preventing Your Business from Being Profitable.
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Enterprises (SMEs) in Nigeria. European Scientific Journal, 10.
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business success – a guide for entrepreneurs.
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from: http://smallbusiness.chron.com/financial-management-important-business-
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McCloskey, D. (1985). The Applied Theory of Price,11, 234–236. Macmillan Publishing
Company. New York.
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Ligthelm, A. (2007 – 2011) The Viability of Informal Micro Businesses in South Africa:
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27
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29