Chapter 1

INTRODUCTION

Introductory Statement

The economy of the world is changing rapidly. Quick technological changes and
Globalization along with the increasing competition on the global market give managers more
responsibility for conducting their activities. Controversies arise especially on management
like profit and working capital management which plays a significant role in the growth and
survival of companies. Decision making’s issue can be seen in all of finance and working
capital management. (Valipour et al., 2012).

Working capital management is a very vital component in the daily operation of a

company (Azam, 2011). According to Sayaduzzaman (2006), key factor that affects the firm’s
profitability and risk and consequently its value, especially in short-term cycles is working
capital management. Investment in working capital has an expected return for something
between profitability and risk. Leaning towards an increase in profitability tend to increase
risk, and vice versa (Teruel & Solano, 2007). For example, a long cash conversion cycle that
leads to higher sales might increase profitability. But, if the costs of greater outlay in working
capital increase faster than payoffs of stocking extra inventories and/or allowing more credit to
customers, the profitability might reduce with the cash conversion cycle. (Gill, Biger, Mathul,
2010). The cash conversion cycle of a company tells us about how much credit to accept from
the suppliers and how much a firm must invest in the customer and inventory accounts,. Due
to this, the study on how the profitability of a company is affected by working capital
management intrigues scholars.

Working capital management has been studied over and over again to assess the firm’s
performance. Researchers like Ali & Ali from Pakistan (2012), Gill A. et al. from United
States (2010), Karadagli from Turkey ( 2012) were most these studies are based on western
data. Results from Philippine perspective, most of the time, is distantly diverse due to the
difference of Philippines to other countries in terms of business atmosphere and thus, the
study of the relationship of working capital management with profitability in the Philippines
has lesser result. When talking about profitability, Philippine firms always neglect working
capital management (Magpayo 2011). Due to this, it encouraged the researchers and scholars
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to further study the extent of the relationship between profitability and working capital
management of business of the Philippine Seven Corporation, to balance their business focus
and especially, to raise the company’s productivity.

Statement of the Problem

This study attempted to find out the relationship between working capital management
of the Philippine Seven Corporation and Subsidiaries and its profitability.

Specifically, this study sought to answer the following objectives:

1. To determine the working capital management of Philippine Seven Corporation and

Subsidiaries in terms of:

1.1 Average Age of Inventory (AAI)

1.2 Average Age of Receivables (AAR)

1.3 Average Age of Payables (AAP)

1.4 Cash Conversion Cycle (CCC)

1.5 Current Ratio (CR)

1.6 Quick Ratio (QR)

2. To determine the profitability of the Philippine Seven Corporation and Subsidiaries in terms
of Return on Asset (ROA).

3. To determine the influence of working capital management on profitability of the Philippine

Seven Corporation and Subsidiaries

Theoretical Framework

This study is based on the study of Saghir, et.al. (2011) stated that Working Capital
Management is an important factor with regards to financial management. Bad managing of
working capital will result to less efficiency and in return will also reduce the benefits one can
get from short-term investments. On the second note, low level of working capital may lead to
opportunity loss regarding profitability of a business and its short-term investment.

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 Working capital was considered to be the most important factor. According to Ernst and
Young ( 2013) 86% of small firms said that their working capital is high or very high while
65% of large firms rated to be the same.

Moreover, Teruel and Solano (2007) said that working capital management is important
in regards to small and medium-sized firms or companies. Small and medium enterprises have
to be concerned with working capital management because when they reduce their cash cycle
to minimum, they can create more value.

Conceptual Framework

This study is aimed to determine the relationship of working capital management and
profitability of Philippine Seven Corporation and Subsidiaries. The figure below shows the
independent and dependent variables. Independent variables are average age of Inventory,
average age of receivables, average age of payables, cash conversion cycle, current ratio and
also quick ratio.

The variables in the study are defined using the study, which this research is based upon
on, of Teruel & Solano, (2007). In respect to this, average age of inventory refers to the
average number of days the stock is held by the firm. It is calculated by dividing the average
inventories by daily cost of goods sold. Average age of receivables is the average number of
days the company takes to collect payment from customers. It is computed by dividing the
average accounts receivables by daily sales. Average age of payables reflects the average time
it takes for the company to pay its suppliers. It is computed by dividing accounts payable by
daily cost of goods sold. For cash conversion cycle, it is computed by adding the number of
days of accounts receivables and average age of inventory and deducting average age of
payables. Current ratio is a traditional measure of liquidity, dividing current assets by current
liabilities. On the other hand, quick ratio or liquid ratio is obtained by dividing the sum of cash
and cash equivalents, marketable securities and accounts receivable over current liabilities.

Return on Assets (ROA) is used as the dependent variable under profitability. It is

defined as the ratio of earnings before the interest and tax to assets take place.

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 Independent Variable Dependent Variable

Average Age of Inventory

Average Age of Receivables

Average Age of Payable Profitability

Cash Conversion Cycle (Return on Asset)

Current Ratio

Quick Ratio

Figure 1.1: Conceptual Framework

Statement of Hypothesis

Working capital management has no significant relationship on the profitability of Philippine

Seven Corporation and Subsidiaries

Significance of the Study

This study that discusses the significance of working capital management and
profitability would benefit the following:

Investors. This would benefit them to gain more knowledge as to why and when they should
invest in this corporation

University of Mindanao. The findings in this research would help to enrich the people
specially in Accounting Education.

Future Researchers. The study would benefit and help the future researchers as their guide
and basis.

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Definition of Terms

The following operational definition of terms was used in this study:

Working Capital. Measures how much in liquid assets a company has to build the business.

Working Capital Management is the process of managing activities and processes related to
working capital

Profitability is the capability to generate gain or profit during the cycle

Subsidiaries. Owned by a larger company which is called the parent or holding company.

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 Chapter 2

REVIEW OF RELATED LITERATURE AND STUDIES

Related Literature

This portion of the study covers the different literature and studies which played a great
significance on the study. This discusses the working capital, working capital management
and profitability of a corporate franchising company particularly in the Philippine Seven
Corporation and Subsidiaries.

Nature and Importance of Working Capital. Working Capital is the deduction of

short-term liabilities from the current assets and is also called as the net working capital. This
also refers to the cash needed for the entity’s daily operation. That’s why it is believed to be
the “life-blood” and the controlling nerve of the business. The establishment would experience
working capital deficiency or working capital deficit if the current assets are less than the
current liabilities. If this would happen, the entity would struggle to survive in the long run.
Working capital meets the short term requirement of a company. It is retained for no longer
than a year. If the assets cannot be readily converted to cash, there will be a short in liquidity
in relation to the working capital. (Woldu, 2011).

According to the study of Samson, Mary, Yemisi and Erekpitan (2012), the firm would
be at disadvantage because of the insufficiency of the working capital. They have the inability
to finance the extra shares and creditors that result to the restraining of their operations and
blocking their growth.

On the other hand, having a good working capital ensures the business it can continue to
operate and is able to meet both short-term debt and its future expenses. Working capital is
variable; it changes from time to time depending on the needs of the entity like the acquisition
of raw materials, usage of facilities, and marketing the products. Because of the mentioned
facts, it is proven that business people usually spend most of their time in managing and
planning their working capital requirements (Woldu,2011).

Working Capital Management. It is very important for the survival and success of the
firm to have a sufficient working capital and working capital management. According to the
study of Samson, Mary, Yemisi and Erekpitan (2012), the management of the working capital

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have a good relationship with the profitability of the firm. This result is based on their
experiment on Nigerian SMEs. Excellent working capital management enhances firm’s
profitability.

But, working capital has an opposite effect with the gross profit margin and return of
capital. This is because the firm must not only meet short term needs but also to maintain
stability in the entire life of the entity.

Cash Conversion Cycle. The most useful way of checking the working capital is the
cash conversion cycle and average period of collection. The business must strive to maintain
these numbers of days of the accounts receivable and the number of days needed by the entity
to convert these into cash at the very least (Woldu, 2011).

Based on Karagdali (2012), it was proven that an increase in both cash conversion cycle
(CCC) and net trading capital (NTC) improves the entity’s performance relating to the
operating income and the return for the stock market for the SMEs. While there is a decrease
in CCC and NTC on the larger firms in connection with their enhanced profitability.

Inventory Management. According to the research of Agyei-Mensah (2012), for

inventory management practices, many of the SMEs in Ghana still don’t have enough
knowledge about management inventories. Businesses reappraise their inventory levels and
prepare inventory budgets consistently, but the people’s capacity to use theories of inventory
management has its limitations. Primarily, the people don’t understand anything about
economic order quantity (EPQ) model. Similar to cash management, the owner’s/manager’s
expertise was again proven to be more dynamic than applying theories of inventory
management.

In the research of Saghir, A et al. (2011), there was a negative relationship being
shown between the number of days in inventory and corporate profitability, which suggest that
mismanagement of inventories will result to binding up excess capital at the expense of
profitable operations.

Having proficient and high inventory levels reduce the mislaying of business due to an
inadequate products and costs of possible interruptions in the production process while having
substantial inventory may lead to deficiency of use funds that could have been invested to a
more productive and revenue earning activities.

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 Accounts Receivable Management. According to the findings of Gill, Biger, &
Mathur (2010), they found out that a crawling collection of accounts receivable is a
complement to a low profitability. Managers can enhance profitability by decreasing the credit
period acknowledge by their customers.

A poor performance on accounts receivable will result to a delay in receiving cash that
may be used in paying the debts and/or financing investment and therefore will retrograde the
corporation’s cash management (Karadagli 2012). But the decrease of the receivable’s
collectible period may invoke the firm to lose its good credit customers (Nobanee & Al-
Hajjar, 2009).

Accounts Payable Management. Prolonged number of days, accounts payable will

have a negative impact on profitability. The result could be demonstrated through high
implicit cost of vendor financing therefore, since the corporation keep discounts for early
payment (Tervel & Solano, 2007). Deloot (2003) supported the result by reasoning that less
profitable corporations tends to delay the payment for their bills.

Moreover, payables that are lagging will allow more available cash to be transferred
that will finance revenue generating activities, but as reasoned by Nobanee and Al-Hajjar
(2009), prolonging of the payable deferral period can affect the corporation’s credit reputation
and can harm profitability in the long run. In addition, if an early payment discount option will
be presented, delayed accounts payable may turn out to be more expensive for the corporation.

Current Ratio. The findings of Mohamad and Saad (2010) states that current ratio is
unfavorably significant to financial performance. Their research emphasize the importance of
proper supervision of working capital as it greatly affects the corporation’s market value and
profitability. They also recommended that working capital management should be part of the
strategy and operation processes of the corporation in order to be more effective.

Quick Ratio. This ratio gives a more strict solvency test. Computing the ratio would
only liquid assets and liquid liabilities are considered. Liquid inventories are considered to be
the least. Hence, quick ratio solves the problem by subtracting inventory from current assets
and dividing the remainder by the current liabilities. Quick ratio provides a realistic
representation of the ability of the corporation to cover its day to day obligations with its
current assets. Quick ration is comparable to the current ratio in the sense that the higher the
quick ratio, the greater the corporation is relief from its short term liabilities.

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Related Studies

This study is related to the research of Ahsen Saghir, “Working Capital Management and
Profitability: Evidence from Pakistan Firms. (2011)” The study aimed to investigate the
relationship between profitability and working capital management. This study took sample
from 60 textile companies listed at Karachi Stock Exchange (KSE) for the period of 2001 –
2006. The purpose of this study is to establish a relationship that is of statistical significant
between profitability, the cash conversion cycle, and its components. His study concluded that
working capital management is an important part in a firm’s financial decision.

It also took inspiration from Kasim, Zubieru, and Antwi, “An assessment of the
Inventory Management Practices of Small and Medium Enterprises (SMEs) in the Northern
Region of Ghana. (2011)” This study aims to find out the effects of inventory management
practices to the financial performance of SMEs in the Northern Region of Ghana. The target
population was 1000 owner/managers of SMEs. Stratified random sampling was used to
obtain a sample of 300 SMEs comprising 164 trading, 26 manufacturing, 10 hairstyling, 62
dressmaking and 38 carpentry enterprises. Their study concluded that SMEs in Northern
Ghana are not good in managing their inventory since they seem to not have embraced and
implemented efficient inventory management routines in their business operations.

These findings are also based on the research of Mohamad and Saad, ”Working Capital
Management: The Effect of Market Valuation and Profitability in Malaysia. (2010)” This
study investigated the effect of working capital management and its effect to the performance
of Malaysian listed companies from the perspective of market valuation and profitability. The
companies from this study are randomly selected from the Bursa Malaysia main board for five
year period from 2003 to 2007.This study proved the importance of working capital
management in a firm’s market value and profitability.

This study was also inspired by the work of Eprehm Woldu, ”Impact of Working Capital
Management on Profitability of Small and Medium Enterprises (SMEs) in Addis Ababa.
(2011)” The purpose of this study is to identify the impact of working capital management on
the performance of SMEs in Nifas silk and Kirkos sub cities and give recommendations based
on the problem. The respondents were 30 SMEs in the sub cities of the capital city; Addis
Ababa. The findings of this paper suggests that working capital is negatively influenced by the
span of time required by the enterprises to receive their debts, pay and collect cash.

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 Lastly, it is related to the study of Reyes, Carl “Working Capital Management and
Profitability of Publicly Listed Industrial Companies in the Philippines. (2011)” This study
aims to present a feedback about the correlation of the working capital management and
profitability of publicly listed industrial companies in the Philippines. The inquest presents the
possible reasons on how these variables affect each other and work together during a whole
business course. The author wants to show the formulas used in providing computations to
adequate to support the formulated hypothesis. The findings of this researcher will reflect the
idea that proper management of working capital is indeed needed for the profitability of a
company in which our current study wants to validate. In this case, business will enhance
competitiveness and to develop proper control of the working capital suitable for the certain
size and type of their industry.

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 Chapter 3

Research Methodology

In this chapter, we present the methods and procedures that were used in making this
research proposal. It provides the explanation needed on the instrument to be used in the data
gathering and the statistical tool used for analyzing and interpreting of data.

Research Design

The main goal of this proposal is to investigate the relationship of working capital
management on firm’s profitability of Philippine Seven Corporation and Subsidiaries. The
similar empirical first used by Teruel and Solano (2007) and Woldu (2011) is used as
methodology to achieve this.
This study used the descriptive-correlation to find the relationship of working capital
management to the profitability of Philippine Seven Corporation. Descriptive-correlation
focuses on finding whether or not there is a relationship that prevails among two or more
quantifiable variables and if there is, to what scale and scope the relationship is.

Research Respondents

The respondent consists of the Philippine Seven Corporation and Subsidiaries, based on
their published 2015 consolidated financial statements. There are 1602 Subsidiaries as of 2015
and a consolidated financial statement was available for download

Research Instruments

The scholars used tabular sheet to tabulate secondary information needed in the handling
of the study. These secondary data are generated from the financial statements published from
the Web site of Philippine Seven Corporation and Subsidiaries for the year 2015.

Research Procedures

Data Gathering. The sampling plan included the samples of a consolidated financial
statement that was taken and downloaded from the web site of Philippine Seven Corporation
and Subsidiaries.
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 This research was based on financial data. The main sources of these data are financial
statements, such as income statement and balance sheets. The variables in the study, both
dependent and independents, were all calculated and taken from financial data generated from
the financial statements downloaded. Dependent and independent variables were computed
using the following formula:

INDEPENDENT VARIABLES
Average Age of Inventory (AAI) [Average Inventory/(Cost Goods Sold/365)]
Average Age of Receivables (AAR) [Average Accounts Receivables/(Sales/365)]
[Average Accounts Payable/{Cost of Goods
Average Age of Payables (AAP)
Sold/365)]
Cash Conversion Cycle (CCC) AAI+AAR-AAP
Current Ratio (CR) Current Assets/Current Liabilities
(Cash & Cash Equivalents + Marketable
Quick Ratio (QR) Securities + Accounts Receivable)/Current
Liabilities
DEPENDENT VARIABLES
Return on Assets (ROA) Earnings Before Interest and Tax/Total Assets
Table 3.1 Measurement of Data

Treatment of Data. The following statistical tools were used to compute the data

1. Mean. This measure was used to find the working capital management in terms of
Average Age of Inventory, Average Age of Receivables, Average Age of
Payables, Cash Conversion Cycle, Current Ratio and Return on Assets.

2. Standard Deviation. This measure was used to find the variability, or spread, of
the variables studies in this research

3. Correlation Analysis. This was adopted to test the hypothesis made in this
research. Specifically, linear regression was used to find the degree of relationship
among different variables under consideration. This method will ascertain the
amount of association noted in the profitability of Philippine Seven Corporation
and Subsidiaries due to the influence of working capital management.

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References
Ali , A., & Ali, S. (2012). Working Capital Management: Does It Really Affects the Profitability?
Evidence from Pakistan. Retrieved September 30, 2016, from Global Journals:
https://globaljournals.org/GJMBR_Volume12/10-Working-Capital-Management.pdf

Azam, M., & Haider, S. (September, 2011). Impact on Working Capital Management on Firm's
Performance: Evidence from Non-Financial Institutions of KSE-30 index. Retrieved September
30, 2016, from Interdisciplinary Journal of Contemporary Research in Business:
http://journal-archieves8.webs.com/481-492.pdf

Gill, A., Biger, N., & Mathur, N. (2014, December). The Impact of Independent Directors on the Cash
Conversion Cycle of American Manufacturing Firms. Retrieved September 30, 2016, from
Liberty University Web site:
http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1031&context=busi_fac_pubs

Kasim, H., Zubieru, M., & Antwi, S. (2015, July). An assessment of the Inventory Management
Practices of Small and Medium Enterprises (SMEs) in the Northern Region of Ghana. Retrieved
September 30, 2016, from Research Gate GmbH:
https://www.researchgate.net/publication/295080265_An_assessment_of_the_Inventory_M
anagement_Practices_of_Small_and_Medium_Enterprises_SMEs_in_the_Northern_Region_
of_Ghana

Magpayo, C. (2009). Effect of Working Capital Management and Financial Leverage on Financial
Performance of Philippine Firms. Retrieved 30 2016, September, from Business Journals:
www.wbiconpro.com/303-corazon.pdf

Mohamad, N., & Saad, N. (2010, November). Working Capital Management: The Effect of Market
Valuation and Profitability in Malaysia. Retrieved September 30, 2016, from Canadian Center
of Science and Education:
http://www.ccsenet.org/journal/index.php/ijbm/article/view/8066/6095

Reyes, C. (2011). Working Capital Management and Profitability of Publicly Listed Industrial
Companies in the Philippines. Davao City.

Saghir, A. (2011, December). Working Capital Management and Profitability: Evidence from Pakistan
Firms. Retrieved September 30, 2016, from Scribd:
https://www.scribd.com/document/92185492/1092-1105

Sayaduzzaman, M. (2006, December). Working Capital Management: A Study on British American

Tobaco Bangladesh Company Ltd. Retrieved September 30, 2016, from Scribd:
https://www.scribd.com/document/77513490/British-American-Tobacco-Com

Teruel, P. G., & Solano, P. M. (2005). Effects of Working Capital Management on SME Profitability.
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Valipour, H., Moradi, J., & Farsi, F. (2011, December 1). The Impact of Company Characteristics on
Working Capital Management. Retrieved September 30, 2016, from Science Press:
http://www.scienpress.com/Upload/JAFB/Vol%202_1_5.pdf

Woldu, E. (2011, June). Impact of Working Capital Management on Profitability of Small and Medium
Enterprises (SMEs) in Addis Ababa. Retrieved September 30, 2016, from Addis Ababa
University Web site :
http://etd.aau.edu.et/bitstream/123456789/2286/3/Ephrem%20Woldu.pdf

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 TABLE OF CONTENTS

TITLE PAGE

TABLE OF CONTENTS ii

CHAPTER

I INTRODUCTION 1

Introductory Statement 1

Statement of the Problem 2

Theoretical Framework 2

Conceptual Framework 3

Statement of Hypothesis 4

Significance of the Study 4

Definition of Terms 5

II REVIEW OF RELATED LITERATURE AND STUDIES 6

Related Literature 6

Related Studies 9

III RESEARCH METHODOLOGY 11

Research Design 11

Research Respondents 11

Research Instruments 11

Research Procedures 11

REFERENCES 13

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