WORKING CAPITAL OF SMALL BUSINESSES

Case Analysis
Presented to the Faculty of the College of Accounting Education
University of Mindanao, Davao City
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In Partial Fulfilment of the Final Requirement

ACC222 (Financial Management)
2nd Term 2nd Semester, SY 2022-2023

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Calansingin, Joan Rachel M.

Literatus, Bea Moriz L.
Maton, Honey Jean L.
Mujal, Jessel Killee S.
Sanches, Gladylus C.

May 2023
 I. Executive Summary
This paper shall examine the challenges and effects of working capital on small
business enterprises and aim to understand their internal working capital management.
Thus, SMEs should be given more attention in terms of effective and efficient working
capital in order to impart them with practical and convenient strategies and methods for
a long-lasting life, as ninety percent of businesses are composed of SMEs.

II. Background
Working capital is an investment using current "short-term" assets and is divided
into two parts: gross and net working capital. The total, or amount, of the current assets
of a company is identified as the gross working capital, while net working capital pertains
to "current assets less current liabilities." Working capital is an essential component in the
growth process of a business, as it is the basis of significant considerations in investment
decisions (Sitompul & Nasution, 2020). Primarily, working capital falls under the cash flow
statement and operating activities of the firm (Libby, Libby, & Short, 2007). Hence, it is
evident that cash flow plays a direct role and has a significant impact on the movements
of working capital (Asokan, 2022).

In addition, a recent study by PWC discovered that better working capital

management might contribute to improving business performance, such as "return on
common equity." In accordance with consumer needs for finished goods and the
preferences of resource owners, all owners of producing resources will get the highest
return (Cohen & Richard, 1975, as cited in Boisjoly, Conine, & McDonald, 2020). Working
capital must be used to account for time gaps between the cash flow streams for
inventories, payables, and receivables, in addition to certain durable products, suppliers,
prepayments, or advance collections.

International. Working capital management is a managerial activity that deals with

the planning and control of a company's financial resources. It is one of the most crucial
aspects of a company's health and existence. However, in Sri Lanka, they found that
many small businesses fail because of poor finance and accounting practices— causing
the fast collapse of SMEs (Bandara & Rathnasiri, 2016). In Uganda, small businesses fail
due to a lack of business planning, excessive taxes, power outages, a lack of cash, a bad
market, expensive rent costs, and incorrect pricing (Tushabomwe-Kazooba, 2006).
Additionally, delays in payments from clients, suppliers, or financial institutions have an
effect on working capital. It is commonly seen in the global economy because of the
complications of transactions across borders or cultural variations (Singh, 2023). Market
globalization has increased competition, making it challenging for businesses to hold onto
or grow their market share. These demands often lead to working capital management
that is damaging to the company's future growth (Heathfield, 1991).
 National. A study conducted by PwC Philippines found that as the global
pandemic persists, dealing with working capital and the necessity for finance rank among
the most prevalent worries of all entities (Desiderio, 2020). Certain companies must
therefore turn to reducing remuneration or labor. When the expanded community isolation
phase is tough in the Philippines, they intend to give preference to possibilities for flexible
employment while also aiming to prioritize technological advancement and staff
professional development. The matter is made stronger specifically for small entities. The
majority of companies experienced a decline in revenue due to supply sector
interruptions. Customer movements were hindered by the restrictions, and demand went
down. Working capital problems persist notwithstanding initiatives to stimulate the market
(Lagua, 2022). Filipino small businesses currently have issues with accessibility to
advances in technology, capital business financing, advertising assistance, and
difficulties starting up and sustaining their ability to compete in their local marketplace.

Local. In Cebu City, it has been found that the components of working capital like
cash flow, receivable accounts, and inventory accounts affect the financial health of small
and medium businesses. They noticed that when a company collapses, there are several
components to take into account, such as inadequate management and the state of its
working capital. The success rate of a business depends on working capital effectiveness
and efficiency. Due to their inability to meet their immediate responsibilities, many SMEs
are compelled to close their doors— not because of their lack of resources, but rather
because of how they handle their working capital. The profitability of a business may grow
with dependable working capital management practices (Dato-on et al., 2014).

III. Case Evaluation

The prime focus of this study circulates in the context of small business enterprises.
As it is known, working capital is highly influenced by the nature and size of a business.
Working capital manifests how efficient a business becomes. It enables the firm to
operate on a daily basis and manage to pay the company's bills.

A company's working capital may provide them with a strategic benefit. Large
companies have recently learned that if they actively manage their working capital
accounts, they may access major cash flow sources of information (accounts receivable,
accounts payable, inventory, and advance payments) (Reason, 2002). Conversely, large-
scale businesses have more control over their working capital as they are backed up by
several stakeholders, such as investors and shareholders. On the other hand, small
enterprises solely rely on their own capital, debt, and bank loans.

The efficiency of working capital management is more necessary for SMEs than
large businesses (Dato-on et al., 2014). Along with this notion, it is said that the working
capital of small firms encounters various issues. One of which they may run into is when
the working capital is not operating properly, such as when there is insufficient or unstable
capital to cover the monthly expenses of the company— resulting in negative working
capital, which would then make the business unable to pay its debts and raise their
inability to compete in the industry, which could later result in insolvency (Beaver, 2020).
For small business enterprises, if their working capital is insufficient, they risk filing for
bankruptcy since they would not be able to carry out their regular business operations
and would not be able to repay their debts to creditors (5 Working capital problems
nobody told you about, 2019).

According to a study conducted by Tran, Abbot, and Yap (2017), when owners
reduce the number of days of their inventories and trade payables and receivables to a
minimum, it exhibits an increase in the profitability of the firm’s working capital—
supporting the statement written by Nyamao, Patrick, Martin, Odondo, & Otieno (2012)
that WCM (working capital management) is positively related to efficient management of
inventories and receivables. With this consistency, companies can focus on taking on
more customers, expanding operations, and implementing plans for solvency (PR
Newswire, 2018).

IV. Proposed solutions

Companies that use a conservative strategy opt to make significant investments in

working capital to boost sales volume by raising inventories and receivables to increase
profitability. The lack of capital liquidity has the potential to impede developing market
banks' prompt issuing (to importers) and discounting (to exporters) of letters of credit,
particularly for their small and medium business (SME) clients.

A working capital solutions (WCS) loan allows a local bank to satisfy its clients'
immediate trade financing and working capital needs by providing cash. These services
boost the quantity and value of short-term transactions that an IFC bank partner may offer
to support small businesses' and exporters' working capital needs (Working Capital
Systemic Solutions, n.d.). These businesses often raise current obligations to finance
current assets or decrease investments in inventory and receivables. Businesses can
increase profitability by reducing the time the inventory is held in storage; doing so lowers
expenses associated with theft, insurance, and storage.

Additionally, an aggressive WCS can increase profits by shortening the

receivables period, which then improves the net cash available to fund daily operations
and reduces the need for pricey external financing. Investors and creditors must keep a
close eye on a firm's capacity to effectively match its WCS with the relevant life cycle
stage to avoid making investments in companies with unsustainable policies (Wang,
Akbar, & Akbar, 2020).
 V. Conclusion

Working capital is not mere financing; it dwells more on effective and efficient cash
flow management. Overall, it can be generalized that small businesses can survive by
developing an aggressive working capital strategy for good stabilization and to boost the
company's earnings. It has been concluded by the researchers of this study that most
small enterprises fail many times. The researcher’s data analysis yielded the following
issues:

(a) poor finance and accounting practices

(b) lack of business planning, excessive taxes, power outages, a lack of cash, a
bad market, expensive rent costs, and incorrect pricing,

(c) global pandemic, and

(d) inadequate management and the state of its working capital

Consequently, some entrepreneurs of small businesses need to find ways to raise

funding to start and grow their firms by (a) managing debts, (b) hiring internal and external
accountants, (c) tracking expenses and making a budget, and (d) cash management.

The researchers discovered that better access to working capital may increase
small businesses’ ability to sustain themselves. Every company involves money, but
regardless of having a brilliant idea, it can be challenging to secure investment. A lot of
individuals must overcome the obstacle of having bad credit, which makes it more
challenging to obtain funds from any lending institutions or creditors when combined with
an unknown company strategy and financial history.

VI. Recommendations

• Managing Debts. By means of debt management, it is easier to invest and

cultivate the business if the current liability of the company does not exceed
the current asset.

• Hiring Internal and External Accountants. With the help of experts,

aspiring investors are able to make decisions about investing in a company
once they are provided with credible and reliable data about the company’s
financial health.

• Tracks of Expenses and Budget Forecast. This enables owners to

monitor their spending patterns and make decisions that may accelerate the
expansion and growth of their business.
 • Cash Management. Since the firm has an aging schedule of its accounts
receivable that can encourage clients to pay on or before time, it enables a
faster inflow of cash if it has a collection policy and updated software.

VII. Implementation

The company will succeed if its strategies are put into action. We need equity to
create income, but occasionally our capital is insufficient to sustain a firm. Therefore, we
occasionally borrow money from creditors. We must be careful not to borrow more than
our assets can support because taking on extra debt has a big impact on the business.
Budgeting lets us control unnecessary expenditures for the business by keeping track of
income and expenses. We should employ reliable and trustworthy internal and external
accountants to manage business operations and handle transactions that will be
advantageous to the company. The external accountant sees outside the corporation,
whereas the internal accountant sees inside.

Cash flow management is an important component of running a successful

business. To manage cash flow effectively, businesses must be proactive in their
methods. Forecasting financial flows, monitoring actual cash flows, reducing costs,
managing accounts receivable and payable, and keeping appropriate cash reserves are
important components (Five ways to manage your cash flow, 2021). Monitoring is a key
aspect of cash flow management. Controlling expenses is also important for effective
cash flow management. Businesses need to ensure that their expenses are in line with
their revenue to maintain positive cash flow. This may involve reducing costs, negotiating
better terms with suppliers, or finding ways to increase revenue (Managing Cash Flow
and Expenses, n.d.).
VIII. References

5 Working capital problems nobody told you about. (2019, 25 February). Retrieved from
https://www.instamojo.com/blog/5-working-capital-problems-nobody-told-you-
about/

Asokan, D. N. (2022, December 11). What is the difference between cash flow and
working capital? Retrieved from https://agicap.com/en/article/cash-flow-and-
working-
capital/#:~:text=The%20income%20pays%20the%20accounts,creates%20a%20
negative%20cash%20flow

Bandara, S., & Rathnasiri, H. (2016). The Working Capital Management Practices of
Small and Medium Enterprises (SMEs) in Sri Lanka. Faculty of Management and
Finance, University of Ruhuna.

Beaver, S. (2020, September 25). 10 Top Financial Challenges for Small Businesses and
How to Overcome Them. Retrieved from Oracle Netsuite:
https://www.netsuite.com/portal/resource/articles/business-strategy/small-
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Boisjoly, R. P., Conine, T. E., & McDonald, M. B. (2020). Working capital management:
Financial and valuation impacts. Journal of Business Research, 108, 1-8.

Cohen, K. J., & Richard, M. C. (1975). Theory of the firm; resource allocation in a market
economy. Prentice-Hall International Series in Management (EUA).

Dato-on, D. V., Monto, R. P., Calaylay, N. M., Villanueva, G. B., Velez, J. K., & Temanel,
E. N. (2014). Working Capital Management of small and medium. University of the
Visayas.

Desiderio, L. (2020, May 10). Working Capital, Financing Top MSME Concerns Amid
Pandemic. Retrieved from The Philippine Star:
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financing-top-msme-concerns-amid-pandemic

Five ways to manage your cash flow. (2021, October 1). Retrieved from National
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https://www.fsb.org.uk/resources-page/five-ways-to-manage-your-cash-flow.html

Libby, R., Libby, P. A., & Short, D. G. (2007). Financial Accounting. New York: McGraw-
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Nyamao, N. R., Patrick, O., Martin, L., Odondo, A. J., & Otieno, S. (2012). Effect of
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PR Newswire. (2018, January 08). Small Business Funding Solutions: What to Do

Differently in 2018: Interstate Capital shares tips to small business on accessing
working capital in the new year. Retrieved from ProQuest:
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Sitompul, S., & Nasution, S. K. (2020, March). Analysis Net Profit, Dividend, Debt, Cash
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Tran, H., Abbot, M., & Yap, C. J. (2017). How does working capital management affect
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Tushabomwe-Kazooba, C. (2006). Causes of Small Business Failure in Uganda: A Case

Study from Bushenyi and Mbarara Towns. African Studies Quarterly, 8(4).

Wang, Z., Akbar, M., & Akbar, A. (2020). The Interplay between Working Capital
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Sustainability. Retrieved from https://doi.org/10.3390/su12041661

Working Capital Systemic Solutions. (n.d.). Retrieved from International Finance

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