Republic of the Philippines

SORSOGON STATE UNIVERSITY

Sorsogon City

THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX

OF SMALL-SCALE BUSINESS ENTITIES
IN SORSOGON PROVINCE, PHILIPPINES
Michelle M. Bongalonta, CPA, MBA – Presenter
Michael B. Bongalonta, CPA, DBA
Santos E. Gigantoca, CPA
 Introduction
Profit is the lifeblood of every business organization.

To better manage the finances, regular evaluation of the

current and future performance of the business is
imperative. Internal controls such as examination of
financial statements on a timely basis are normally
adopted by many to protect its assets and other properties
from abuses.

Sorsogon as “Gateway to the Southern Philippines”, is an

established hub for trade, commerce and industry. The
success and the sustainability of the operations of the
existing business establishments in the area substantially
contributes to the realization of the vision and goals of the
Province.

This notion has captured the attention of the researchers

to conduct this study in order to determine and evaluate
the liquidity and financial performance of the existing
small-scale business entities in Sorsogon.

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Theoretical
Framework
The framework presumes that the level of working
capital, acid-test (quick) and current ratios, and
receivable and inventory turnovers reflect the
liquidity level of the micro businesses which
consequently affect the profitability index, as
manifested by return on sales (margin), gross
profit rate and the return on investment, of these
particular business organizations. Such
relationship is deemed to have a positive
contribution on the sustainability of the operations
of the small-scale businesses in the Province of
Sorsogon.

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 To assess and determine the liquidity level of small-scale
Objectives business entities in terms of working capital, quick and
current ratios and inventory and receivable turnovers.
of the Study
To evaluate and identify the profitability index of small-
scale business entities in terms of return on sales, gross
profit and return on investment.

To know and establish the relationship of the liquidity level

of small-scale business entities and its profitability index.

To explore the liquidity issues commonly encountered by

the owners of small-scale business entities.

To explore measures or formulate a manual to address

the liquidity issues and thus further enhance the
profitability index of the small-scale business entities. 5
THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Methods and Design
Small-scale business owners engaged in trading in the Municipalities of Bulan, Barcelona, Bulusan, Gubat, Juban, Matnog,
Prieto Diaz, Irosin and Sta. Magdalena.
Financial figures from their financial statements (Years 2017 to 2019) and their sentiments were the main source of data for
analysis. There were 223 business owners who participated in this undertaking (C.I.=95%, M.E.=5%). The sample was then
proportionately distributed based on the papulation size per municipality.

QUANTITATIVE
Documentary analyses were used to quantitatively account and
determine the level of liquidity and the profitability index of small-scale
business entities based on their reported financial statements.
 Vertical analyses were used in order to determine and measure the
liquidity level and the profitability index of small-scale businesses
through the use of financial ratios.
QUALITATIVE
Interview with key informants was conducted using
a structured survey questionnaire. This was done
to explore the issues affecting the firms’ liquidity
and the ways by which it could be addressed.

 Step-wise regression was utilized in order to create a model

depicting which among the determinants of liquidity level is/are
predictor/s of profitability index

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Results and Discussion

Table 1. Liquidity Level – Vertical Analysis Liquidity Level

Computed
Liquidity Measure Description
Liquidity Value
Generally, the respondents found
Working capital 125,641 Very Much Liquid to have very high liquidity level in
all indicators of business liquidity
Quick ratio 86.89 Very Much Liquid
using documentary and vertical
Current ratio 94.66 Very Much Liquid analyses based on their submitted
Inventory turnover 7.76 Very Much Liquid
financial statements.

Receivable turnover 19.54 Slightly Liquid

Overall Liquidity Level: Very Much Liquid

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Results and Discussion

Table 2. Profitability Index – Vertical Analysis Profitability index

Profitability Computed
Description
Measure Liquidity Value The results of vertical analyses
Return on sales (ROS) generally revealed that the small-
19 % High Profitability
scale business owners are highly
Gross profit (GP)
21 % High Profitability profitable with their ventures based
Return on investment on the computed return on sales
(ROI) 36 % High Profitability
(19%), Gross profit (21%) and
Overall Profitability Level: High Profitability return on investment (36%).

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Return On Sales in relation Table 3. Return on Sales - Step-wise linear regression analyses
Collinearity Statistics
to independent variables Independent Variables Coefficients, ϐ Sig. Std. Error
Tolerance VIF
Constant 9.314 .000 .022    
This implies that none of the WC .031 .976 .000 .836 1.196
independent variables have QR -1.510 .132 .001 .017 59.770
relationship to the dependent CR 1.111 .268 .001 .016 60.662
variables. Hence, the level of IT -.238 .812 .001 .995 1.005

liquidity of the business RT 1.079 .282 .000 .933 1.072

neither diminishes nor F Value 2.686        

enhances the company’s R Square .058        

profitability index. Adjusted R Square .037        

** Significant at the 0.5 level

Results and Discussion

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
Gross Profit in relation to Table 4. Gross Profit - Step-wise linear regression analyses
Collinearity Statistics
independent variables Independent Variables Coefficients, ϐ Sig. Std. Error
Tolerance VIF
Constant 11.678 .000 .017    
The results show that of the five (5)
WC .934 .351 .000 .836 1.196
variables of liquidity level, only
QR -1.965 .051 .001 .017 59.770
inventory turnover (p=.006) and
CR 1.499 .135 .000 .016 60.662
receivable turnover (p=.027) were
IT 2.801 .006** .001 .995 1.005
found to significantly affect the
profitability index in terms of gross RT 2.221 .027** .000 .933 1.072

profit. The value and positive sign of F Value 6.840        

the coefficient for inventory turnover R Square .136        

(ϐ=2.801) suggests that a one-point Adjusted R Square .116        

increase in the degree of inventory ** Significant at the 0.5 level

turnover will increase the profitability
index by 2.801 points.

Results and Discussion

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
Return on Investment in Table 5. Return on Investment - Step-wise linear regression analyses
Collinearity Statistics
relation to independent Independent Variables Coefficients, ϐ Sig. Std. Error
Tolerance VIF
variables
Constant 17.747 .000 .024    

Among the five (5) independent variables WC -3.888 .000** .000 .836 1.196
of liquidity level, only working capital QR -1.311 .191 .001 .017 59.770
(p=.000) and inventory turnover (p=.018) CR 1.133 .258 .001 .016 60.662
were found to significantly affect the
IT 2.393 .018** .001 .995 1.005
profitability index in terms of gross profit.
The value and negative coefficient for RT -.996 .320 .000 .933 1.072

working capital (ϐ=-3.888) suggests that F Value 5.727        

a one-point increase in the amount of the
working capital will reduce the profitability
index by 3.888 points. This may be linked
on the fact that a very high level of
working capital makes some of the
resources idle thus affecting the
profitability index particularly the ROI.
 
R Square .117        
Adjusted R Square .096        
**Significant at .01 level
However, the results show a direct and positive coefficient for
inventory turnover (ϐ=-2.393) which means that increasing the
inventory turnover indicates increase in the ROI with a linear
regression model Y=.018IT + 2.393. This result validates the fact

Results and Discussion that increase in the disposal or sale of the given inventories
results to a better ROI due to reduction in the non-value-added
THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES
11
costs. IN SORSOGON PROVINCE, PHILIPPINES
 Results and Discussion
Limited and unavailability of capital

Absence of Credit Policy

Liquidity Issues Commonly

High finance cost for debt financing
Encountered by the Owners of
Small-Scale Business Entities Inventory obsolescence

Shortage of resources 

Lack of markets’
measure and scope
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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Results and Discussion
As much as practicable, use equity financing than debt
Measures to financing.

Address the
Strengthen the company’s policy in extending loan
Liquidity
Issues Being Minimize the purchase of inventory or stocks
Experienced
by the Avoid financial suffering by staying well-informed of
your finances.
Business
Owners Hiring bookkeepers

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Conclusions
This study concludes that small-scale
business entities in the Province of Sorsogon
are highly liquid and profitable depicting their
ability to pay short-term maturing obligation.
Inventory turnover positively affect the
profitability index both in terms of the ROI and
gross profit.
However, receivable turnover directly affects
the gross profit while the amount of the working
capital has an inverse impact on the profitability
index in terms of the ROI.
Y=.027RT + 2.221 and Y=.018IT + 2.393 are
models established based on the relationship
of liquidity and profitability index.
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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
Recommendations

The owners may use

The linear regression the economic order
models formulated quantity concept in
here may be used as maintaining their
a tool for monitoring inventories to avoid
the business. non-value-added
cost.
Use cash basis in
dealing with sales
transactions with
customers to avoid
bad debts.

The recommended
liquidity manual may
be adopted by the
small-scale business
owners.

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
Recommendations
Future researches
with a more in-depth
approach may be
conducted to
establish a stronger
relationship among
these emergent The small-scale
variables. proprietors may
consider disposing
their useless assets
and minimize or
control overhead
The business expenses.
owners may switch
from short-term to
long term debt
financing in order to
fully maximize the
cost of capital.

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES
 Thank you.

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THE LIQUIDITY ISSUES AND THE PROFITABILITY INDEX OF SMALL-SCALE BUSINESS ENTITIES IN SORSOGON PROVINCE, PHILIPPINES