REPUBLIC OF THE PHILIPPINES

REGION X
NAAWAN, MISAMIS ORIENTAL
PEDRO PAGALAN ST., POBLACION, NAAWAN, MISAMIS ORIENTAL
9023

“IMPACT OF WORKING CAPITAL MANAGEMENT IN RELATION TO FINANCIAL PERFORMANCE OF

ANDI GLENN C. SABELLANO

KIEFER ALAN A. BAGOLOR

MAY ANN E. TAIROS

A Concept Paper

Submitted to the Faculty of

College of Business Administration and Accountancy

Naawan, Misamis Oriental

Business Research and Methods

OCTOBER 2023
 INTRODUCTION

BACKGROUND OF THE STUDY

Working capital management plays a vital role in managing the financial performance of businesses
across various industries. It plays an important role in ensuring that a company has the ability to meet its short-
term obligations and sustain its day-to-day operations efficiently. It represents the difference between a
company’s current assets and its current liabilities. Most businesses experience difficulty managing their
working capital since managing their operations requires careful consideration and strategic decision-making.
Some businesses may tend to incur higher current liabilities, for which current assets would not be sufficient to
cover those short-term obligations. Beforehand, many studies were made with regards to the impact of
working capital management on the company’s performance. However, there are no specific studies that dwell
on the impact of working capital management on the performance of publicly listed companies situated in the
Philippines.

Working capital management is an effort to administer, control, and manage the current assets and the
current liabilities in a given business firm to maximize profitability or performance and to maintain a proper
level of liquidity (Wassie, 2021). This study would address the issue regarding the effective utilization of
working capital by the listed companies in order to maintain good financial performance. The study would also
answer the question of how publicly listed companies use their current assets in order to run their day-to-day
operations as well as how publicly listed companies handle their current liabilities in order to support their
business operations.

Understanding how working capital management impacts financial performance can assist companies
in making informed decisions about their liquidity, investments, and operational efficiency. Additionally, this
research can provide regulators and financial institutions with valuable information to tailor their support and
policies to the needs of the Philippine corporate landscape.

STATEMENT OF THE PROBLEM

1. What are the working capital management of the publicly listed companies in the Philippines for the
periods 2015-2019?

2. What is the impact of working capital management to the financial performance of the publicly listed
companies in the Philippines for the periods 2015-2019?

3. Is there a significant relationship between working capital management and financial performance of
the publicly listed companies in the Philippines for the periods 2015-2019?
OBJECTIVES OF THE STUDY

1. Investigate the correlation and causation between working capital management efficiency and financial
performance metrics.

2. Identify and analyze the factors that influence working capital management practices among publicly
listed companies in the Philippines.

3. Assess how these influencing factors impact the financial performance of these companies.

SIGNIFICANCE OF THE STUDY

The results of the study on the Impact of Working Capital Management in relation to the Financial
Performance of Publicly Listed Companies in the Philippines will be significant to the following;

Academics and Future Researchers. Academics and Future researchers in the field of finance and
accounting can also use this study as a reference for their future research. This study can expand their
knowledge in the field of working capital management and its impact on financial performance.

Financial Analysts. Financial analysts who analyze and evaluate the performance of publicly traded
companies can use the findings of this study to examine the effectiveness of working capital management
strategies. This information can help a financial analyst to make more accurate financial forecasts and
valuations for the betterment of the company.

Investors. Both individual and institutional investors can benefit from this study as it provides significant
information on how managing working capital affects a company’s financial performance. This information
allows investors to make more informed decisions about whether to invest in the company or not.

Managers and Executives. Managers and executives of publicly listed companies can gain useful information
from this study to improve their working capital management practices. It can help them to better handle their
cash flow, inventory, and accounts receivable/payable management, that could lead to increased efficiency,
profitability, and overall financial performance.

Policy Makers and Regulators. Policy makers and regulators in the Philippines can benefit from this study by
understanding the importance of working capital management in improving the financial health of publicly
listed companies. The Policy Makers and Regulators can use this information in formulating an effective rules
and regulations that promote an efficient working capital management practices.
CONCEPTUAL FRAMEWORK

INDEPENDENT AND DEPENDENT VARIABLE

INDEPENDENT VARIABLES DEPENDENT VARIABLES

Working Capital Management Financial Performance

• Cash conversion cycle (CCC) • Return on Asset

Figure 1: Conceptual framework for the relationship between working capital management and Financial
Performance.

From Figure 1 above Conceptual framework proposes a direct relationship between the independent
variable; Working Capital Management and Dependent Variable; Financial Performance of Publicly Listed
Companies.
THEORITICAL FRAMEWORK

Working capital management is an essential element in the financial performance of publicly listed companies.
Al-Mosari (2020), indicated that working capital management involves managing both current assets and
current liabilities to ensure smooth operations and maximize profitability (Laghari & Ye, 2019). Arunkumar &
Ramanan (2013), also stated that working capital management is an important financial decision for a
company because it directly affects the company’s liquidity and profitability. Working capital represents the
main artery in the company; it is one of the most important elements that contribute to the survival of its work
(Al Dalayeen, 2017; Maswadeh et al., 2020). By prioritizing effective working capital management, the
company could enhance their financial performance (Abuzayed, 2012) and ensures that the company is
capable enough to continue its day-to-day operations and has sufficient capacity to cover future operating
expenses and commitments in the short term (Al Dalayeen, 2017) which helps a company to achieve its goals
and succeed in the long run. Samiloglu & Akgün, )2016) also added that the main objective of working capital
is to ensure that companies have sufficient cash flow to continue normal operations. It means having enough
funds to pay short-term obligations such as paying operating expenses. Working capital management is an
important financial decision for a company because it directly affects the company’s liquidity and profitability
Arunkumar & Ramanan, )2013). With that, working capital management ended crucial for a business to
operate smoothly, meet financial obligations, maximize profitability, and improve financial health and
sustainability of a business.

SCOPE AND LIMITATIONS

DEFINITION OF TERMS

Here are the definitions of some key terms used in the study on the impact of working capital management in
relation to financial performance of publicly listed companies in the Philippines:

Working capital management: refers to how a company manages its short-term assets (like cash and
inventory) and liabilities (like debts and payables) to ensure that the company maintains a healthy cash flow,
meets its financial obligations, and has resources available for growth and investment which results in smooth
operations and financial stability. Working capital management involves keeping enough cash on hand,
minimizing excess inventory, and managing payments and collections efficiently. By optimizing these day-to-
day financial activities, companies can ensure they always have enough funds to cover expenses, invest in
growth opportunities, and meet their financial commitments, ultimately leading to better financial performance
and success.

Financial Performance: refers to the evaluation and measurement of a company’s financial health and
success. It can be thought of as the heartbeat of a company by reflecting its overall health and vitality. It
measures how well a company manages its resources, generates profits, and creates value for its
shareholders. With that, stakeholders will understand if a company is thriving or experiencing challenges, and
guides decision-making to ensure sustainable success. Common indicators of financial performance include
return on assets (ROA), return on equity (ROE), net profit margin, and earnings per share (EPS).
Return on Assets (ROA): Return on Assets (ROA) is a financial ratio that measures how effectively a
company utilizes its assets to generate profits. Just like a person’s productivity is determined by how efficiently
they use their time and skills to achieve results. Return on Assets is calculated by dividing the company’s net
income by its total assets. It indicates how well a company is able to generate profits from its investments in
assets. Return on investment indicates how well a company is able to generate profits from its investments in
assets. A higher ROA shows that a company is effectively utilizing its resources such as buildings, equipment,
and investments to generate earnings, while a lower ROA suggests inefficiency in asset utilization. It is
commonly used by investors and analysts to assess and compare the financial performance of different
companies in the same industry.

Return on Equity (ROE): The return on equity (ROE) of a firm is a financial metric that reveals how well it is
producing profits for its owners or shareholders. It resembles a performance evaluation of how well the
business is employing the capital that its owners have invested. Divide the company’s net income by the
equity held by shareholders to arrive at ROE. It displays the owners’ investment’s percentage return. For
instance, if the ROE is 20%, it signifies that the shareholders are making a profit of 20 pesos on every peso
they invest. It essentially informs us how effectively the business is increasing the wealth of its shareholders.

Net Profit Margin (NPM): The net profit margin is a financial indicator that shows how effectively a company is
controlling its costs and making money. It acts as a kind of “financial health check” by revealing the portion of
every dollar of sales that remains as profit after all expenses are paid. After deducting all expenditures,
including taxes, operating expenses, and interest, a company’s net profit is computed by dividing it by its
whole revenue. If a corporation, for instance, has a net profit margin of 10%, it means that for every peso in
sales, it makes a profit of ₱0.10. A higher net profit margin shows that the business is successfully controlling
costs and making a profit.

Cash Conversion Cycle (CCC): The length of time it takes for a business to turn its investments in raw
materials, output, and inventory back into cash is measured by the cash conversion cycle, a financial indicator.
The term “cash flow efficiency” might be used to describe it. The cycle begins with the acquisition of raw
materials or inventory, which is subsequently transformed into finished goods, sold to clients, and finally paid
for with cash. The average time it takes to sell inventory, the average time it takes to get paid by consumers,
and the average time it takes to pay suppliers are added together to create the cash conversion cycle. A
corporation is said to be able to quickly turn its investments into cash if it has a shorter cash conversion cycle,
which results in higher liquidity and financial health. On the other hand, a prolonged cash conversion cycle
might point to ineffective working capital management.

These definitions aim to provide clarity and understanding of the terms used in the study, ensuring that
readers, including those who are not specialized in the field, can comprehend the context and findings of the
research.
 CHAPTER II

REVIEW ON RELATED LITERATURE

LITERATURE REVIEW

This chapter of research discusses and explores the related literature and studies regarding the Impact of
Working Capital Management in relation to the Financial Performance of Publicly Listed Food and Beverages
Companies in the Philippines.

PUBLICLY LISTED FOOD AND BEVERAGES COMPANIES IN THE PHILIPPINES

Publicly listed food and beverage companies in the Philippines are businesses operating in the food
and beverage industry that have chosen to be listed on the Philippine Stock Exchange (PSE). Being publicly
listed means that these companies have issued shares of stock that are traded on the stock exchange,
allowing investors, both individual and institutional, to buy and sell shares in these companies. These
companies typically engage in the production, distribution, and sale of various food and beverage products,
including processed foods, beverages, and related items. They play a significant role in the Philippine
economy due to the country’s growing population and consumer demand for food and beverages.

These publicly listed companies are subject to regulatory oversight by the Philippine Stock Exchange
(PSE) and are required to adhere to financial reporting and disclosure standards set by the Securities and
Exchange Commission of the Philippines (SEC). They ensure transparency and compliance with reporting
requirements. Investors and stakeholders rely on financial reports, disclosures, and corporate governance
practices to assess the performance and stability of these firms. Investors can buy shares in these companies
as a way to participate in the growth and performance of the food and beverage industry in the Philippines.
Common subsectors within publicly listed food and beverage companies in the Philippines include processed
food manufacturing, beverage production, fast food and restaurant chains, and retail food distribution. These
companies may face challenges related to supply chain management, changing consumer preferences, and
regulatory compliance.

One reason companies go public is because doing so creates an opportunity for insiders to sell their
equity holdings. A company’s initial public offering of shares effectively converts the private equity holdings of
business insiders and investors into publicly traded shares, which those insiders and investors can choose to
sell on the open market. Companies can also become publicly traded by being acquired by, or merging with, a
special purpose acquisition company (SPAC), which is a shell business structure established for the specific
purpose of taking a promising company public (Browman, 2023).
WORKING CAPITAL MANAGEMENT

According to Wassie (2021), a study on Working Capital Management and Its Impact on Firms’
Performance, various components of working capital management, includes inventory, trade credit, accounts
payable, and accounts receivable. The study emphasizes that effective management of these components can
impact a firm’s financial performance positively, with strategies like maintaining a large inventory potentially
reducing the risk of stock-outs. The importance of managing accounts payable is highlighted, as delaying
payments to vendors can offer a cost-effective means of financing. However, it also mentions that excessively
deferring payments may be costly if discounts for prompt payment are available. The study further notes the
significance of cash management, measured by the cash conversion cycle, in influencing profitability, but it
warns that an extended cycle may harm corporate profitability if investment in working capital outpaces
benefits.

Furthermore, the impact of working capital management on firm performance was positive in a number
of studies. One of them is Asaduzzaman and Chowdhury (2014) in Bangladesh, an empirical study which was
built upon the data from Bangladeshi Textiles firms. The authors found a significant relationship between
working capital management and profitability, using four measures, Days of Inventory Outstanding (DIO), Days
of Sales Outstanding (DSO), Cash Conversion Cycle (CCC), and Days of Payables Outstanding (DPO) to
represent working capital management. While DPO showed a negative impact on profitability, the rest
indicated a positive correlation with firms’ profitability. Another empirical research from Nigeria, Imeokparia
(2015) has also found a positive relation between working capital management and firms’ performance. In
addition, Akoto, Awunyo-Vitor, and Angmor (2013) had examined the impact by using the data from Ghanaian
companies, and the results suggested that working capital management (as measured by CCC) positively
influenced firms’ profitability as measured by net operating profits.

FINANCIAL PERFORMANCE

Financial Performance in broader sense refers to the degree to which financial objectives being or has
been accomplished and is an important aspect of finance risk management. It is the process of measuring the
results of a firm’s policies and operations in monetary terms. It is used to measure firm’s overall financial
health over a given period of time and can also be used to compare similar firms across the same industry or
to compare industries or sectors in aggregation (Verma, 2023). Financial performance analysis includes
analysis and interpretation of financial statements in such a way that it undertakes a full diagnosis of the
profitability and financial soundness of the business. The financial analyst program provides vital
methodologies of financial analysis. According to Le et al. (2018), a positive correlation between growth rates
and firm performance, indicating that high-growth firms tend to generate more profits, invest in profitable
projects, and improve overall performance. Cash flow demonstrated a significant positive relationship with all
firm performance measurements, emphasizing the importance of strong cash flow for funding positive projects
without costly external financing. Risk negatively impacted the Return on Sales (ROS) in Vietnamese listed
firms, as fluctuations in cash flows increased the probability of default, financial distress, and higher
bankruptcy costs, ultimately diminishing corporate performance. These findings shed light on various factors
influencing firm performance in the Vietnamese context.
 Other similar studies suggest that working capital management is crucial on company’s profitability.
Effective and efficient utilization of working capital can improve the financial standing of the company and can
positively impact its business operation. Examining the effectiveness of working capital management is very
important in determining the company’s performance because a good working capital management promotes
excellent management and stewardship of company’s resources.

POLICY

Policy is important in managing the performance of the company. Policy is a set of rules or guidelines for
your organization and employees to follow in order to achieve a specific goal (i.e. compliance). An effective
policy should outline what employees must do or not do, directions, limits, principles, and guidance for
decision making (Lane, 2018). Policy is a formal statement or set of guidelines that defines an organization’s
principles, rules, and expectations regarding specific actions, behaviors, or decisions within the organization. It
is designed to ensure consistency, compliance with laws and regulations, and alignment with the
organization’s objectives. They serve as a reference point for employees and stakeholders to understand what
is acceptable and expected behavior in various aspects of the organization’s operations. Common policies
related to working capital management includes Minimum Cash Balance which establish a minimum cash
balance that should always be maintained to cover immediate financial needs. Credit Policy in which a
guideline for extending credit to customers, including credit limits, payment terms, and credit checks. Inventory
Policy which determine inventory turnover targets and reorder points to avoid overstocking or stockouts.
Accounts Receivable Policy that sets the terms for invoice issuance, late payment penalties, and collections
procedures. Accounts Payable Policy which specify payment terms with suppliers and criteria for negotiating
extended payment periods. Cash Flow Forecasting that implement a regular process for forecasting cash
flows to anticipate shortfalls or surpluses. Debt Management which outline strategies for managing short-term
and long-term debt, including debt repayment schedules. Working Capital Ratios which define target ratios for
current ratio, quick ratio, and others to assess liquidity. Risk Mitigation that Identify potential risks to working
capital and create plans for mitigating them. Lastly, Capital Expenditure Approval which establish criteria and
approval processes for capital investments to ensure they align with working capital objectives. These policies
provide a structured framework for managing working capital effectively and can vary based on a company’s
industry, size, and financial goals. Consistently adhering to these policies helps optimize cash flow and
maintain financial stability.

According to Taani (2012), a study on Impact of Working Capital Management Policy and Financial
Leverage on Financial Performance, highlights significant relationships between a firm’s working capital
management policy, financial leverage, size, and financial performance indicators such as net income, return
on equity (ROE), and return on assets (ROA). The net income model demonstrated the best fit among the
regression models. It revealed that an aggressive working capital management policy, characterized by low
investments in current assets, positively influences net income. Financial leverage was found to have a
negative effect on net income due to increased borrowing costs, but it positively affected ROE, aligning with
leverage theory. However, these findings are inconsistent with some prior studies. Furthermore, the study
emphasized the positive relationship between firm size and financial performance, contrary to certain previous
research.
PRACTICES

Working capital management practices are defined by Abor (2017) as the management of current assets
and liabilities, such as inventory, accounts payables, and receivables, in a way that maximizes advantages to
the company. Investments in short-term assets, such as cash, marketable securities, accounts receivable, and
inventories, are referred to as working capital. The administration and control of two important components,
short-term assets and liabilities, are involved in working capital management. Muller (2019) said that these
details must match and be coordinated in order to reduce costs, manage risks, and maximize benefits.
Therefore, debtors, creditors, cash, and stock management are the four main components that make up
working capital management. Working capital practices refer to the specific actions and strategies that
organizations employ to effectively manage their working capital. Working capital practices are essential for
maintaining financial stability and ensuring a company’s ability to meet its short-term obligations while
efficiently utilizing its resources. Organizations often combine these practices to create a comprehensive
working capital management strategy tailored to their specific needs and industry.

Nzitunga (2019), conducted a study on the impact of working capital management practices on
profitability in state owned enterprises in Namibia. The result of the study revealed that profitability is positively
influenced by cash management, debtor management, creditor management, and stock management.
Effective business practices in working capital management involve optimizing a company’s short-term assets
and liabilities. First, it’s crucial to efficiently manage inventory levels to balance supply with demand,
minimizing carrying costs. Second, businesses should focus on timely accounts receivable collection to
improve cash flow and reduce the risk of bad debts. Third, negotiating favorable terms with suppliers helps
extend payment periods while maintaining strong relationships. Fourth, cash flow forecasting allows for
proactive planning to meet operational needs. Lastly, maintaining a balanced mix of short-term and long-term
financing options ensures financial stability and flexibility in working capital management.

FINANCIAL RATIO ANALYSIS

LIQUIDITY RATIO

PROFITABILITY RATIO

CASH CONVERSION CYCLE

The theory of the cash conversion cycle (CCC) emphasizes the management of investments in working capital
and how it affects a company’s financial performance. Cash Conversion Cycle (CCC) is a measurement of
how a company manages its working capital including its inventory, accounts payable, and accounts
receivable efficiently. According to Baolian Wang(2019) The cash conversion cycle (CCC) is an important tool
in fundamental analysis as it serves as an indicator of a company’s ability to manage working capital. Studies
have shown that a company is able to sell its products or services quickly in a shorter Cash Conversion Cycle
which results in a better financial performance, including higher return on assets (ROA) and return on equity
(ROE) Rejaul Karim, Md. Abdullah Al Mamun and Abu Sadeque Md. Kamruzzaman (2023), Fathin Nabila
Asman, Dahlia Fernandez, Nurul Atasha Jamaludin, Hafizah Omar Zaki, Aziatul Waznah Ghazali (2022). With
that, A company with a shorter Cash Conversion Cycle is seen as being more effective in managing its
working capital since it can quickly convert its investments in inventory into cash, collect payments from
customers in a shorter time frame, and manage its payables efficiently. On the contrary, a longer cash
conversion cycle indicates inefficiency in managing working capital since it can take a longer time to convert its
investments in inventory into cash flow from sales, collect payments from customers, and pay its suppliers.
Cash Conversion Cycle is calculated using three components: days inventory outstanding (DIO), days
payables outstanding (DPO), and days sales outstanding (DSO) Mohammed Ibrahim Obeidat, Tareq
Mohammad Almomani, Mohammad Abdullah Almomani(2021). Overall, A well-managed cash conversion
cycle is essential in enhancing a company’s financial performance. It is crucial in achieving profitability and
ensuring sustainable long-term growth.

ASSETS UTILIZATION CYCLE

Asset utilization involves effective management and control of assets for the maximization of the company’s
performance and achieving sustainable growth by optimizing the use of assets to generate income and
enhance profitability. In the Studies of T.Y. Ismail, Moahmed El-Deeb, Rana Rezk, A El Hamied Hemat(2022);
Christian Herdinata(2019). It shows that effective asset utilization can enhance a firm’s performance and
improve profitability through many techniques such as, enhancing the sales turnover or increasing the
inventory turnover for the firm to generate higher revenue. Enhancing the sales turnover can be achieved by
enhancing the company’s marketing efforts and sales. With that, the company can generate higher revenue,
which ultimately results in higher profitability. Another way to improve asset utilization is to increase inventory
turnover. This can be achieved by minimizing the excess inventory and effectively managing the inventory.
This technique can help the company to release funds and lower maintenance expenses and does not only
enhance asset utilization, but also mitigates the risk of obsolescence or loss of value. Further, Erli Dan, Jianfei
Shen, Xinyuan Zheng, Peng Li, Ludan Zhang, Feiyu Chen(2023) pointed out that Higher asset utilization leads
to increased operational efficiency and productivity, which in turn positively affects financial performance.
That’s why companies should focus on optimizing asset utilization to improve their financial performance and
overall value Octa Naafi’ Sutantri, Agung Dinarjito(2023) As It plays a crucial role in determining the financial
performance of a company Erna Hendrawati(2021).
 CHAPTER III

RESEARCH METHODOLOGY

RESEARCH DESIGN

To understand the impact of working capital management on the financial performance of publicly traded
companies in the Philippines during 2015-2019. The study will use quantitative methods to perform correlation
analysis among publicly traded companies in the Philippines. This involves the impact of working capital
management on a company’s financial performance by looking at specific financial performance on revenue
and profit growth over the past five years of operations, highlights the years before the pandemic (2015-2019).
The research design adopted in this study is a correlational design as it aims to examine the relationship
between working capital management and financial performance of listed companies, for which data were
obtained. From the respective companies will be examined using their revenue and profit growth rates over the
operating period. Stage. 2015 to 2019.

RESEARCH LOCALE

This study will be conducted at Philippines, an archipelagic country in Southeast Asia. In the western
Pacific Ocean, it consists of 7,641 islands which are broadly categorized in three main geographical divisions
from north to south: Luzon, Visayas, and Mindanao.

Figure 1. The Philippine Map

The respondents of the study were only Publicly Listed Food and Beverages Companies in the
Philippines.

SAMPLING PROCEDURE

DATA GATHERING

To gather the data the researchers will use the following steps;

First, the researchers will surf to the website.

Second, afterwards, the researchers will have to check and view the Financial Statements (FS)
of the chosen 10 Publicly Listed Companies in the Philippines.

Third, the researchers then prepare the adapted questionnaires to be used for the survey.

Fourth, the researchers will then assess and answer the adapted questionnaires based from
the Financial Statements (FS) of the chosen 10 Publicly Listed Companies in the Philippines.

Fifth, the researchers then retrieved the questionnaires after it is answered.

Lastly, the researchers will tally and analyze the answers.

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