CHAPTER ONE

INTRODUCTION

1.1 Introduction

This chapter serves to firstly introduce the background to the study and explain the problem statement
as well as the limitations behind this research. The roles and importance of retailers in terms of the
economy will be highlighted as a backdrop to why the impact of cash management on profitability and
sustainability of retailers was an important topic for research.

The chapter will also discuss the rationale relating to cash management knowledge and practices that
contribute to increase profitability and sustainability of retailers. The hypotheses, aim and objectives will
also be listed. The approach to the study, its benefits, as well as the methodology will be presented. This
chapter will also include an outline of this study.

Background of the study

The retail sector plays an important role in the Philippine economy. In 1997, it contributed US$2.6
billion, or 11.10% of the country’s gross domestic product (GDP). Moreover, the retail food industry
contributes substantially to the total output of the retail trade sector. In 1997, the share of food
consumption expenditure was about $11 billion, or some 42% of the total gross domestic product.

Food is intricately linked with its culture and traditions. In the family, food accounts for 43% of total
expenditures items which was the highest type of spending of Filipino households, amounting to nearly
three trillion Philippine pesos as of 2019. Food means brisk business, thus, Filipinos' increasing food
consumption has been driving growth in the food retail sector over the last few years which involves a
wide array of sellers from the sidewalk vendors, wet and dry markets, sari-sari stores, groceries,
supermarkets, hyper marts, warehouse and discount clubs and convenience stores. As of 2019, the
Philippines' food retail sales were valued at approximately 50 billion U.S. dollars, almost twice the value
compared to ten years ago.

On the other hand, cash is seen as the “life blood” of every business organization. Khan and Jain (2013)
indicate that, apart from the fact that cash is the most current asset, it is also seen as the common
denominator to which all current assets can be reduced. They explain this to mean that all other liquid
assets, such as; inventories, receivables and marketable instruments will all be converted to cash
eventually.

The underlying processes of cash management include liquidity management, accelerating collections,
maximizing investment earnings; supporting accurate financial reporting, and forging strong banking
relationships (Modlin, 2014). If these processes are ineffective, small business owners may find
themselves limited in their ability to build cash reserves, remain solvent, and manage day-to-day
operations effectively (Nobanee & 2 Abraham, 2015).

A business organization must develop appropriate mechanism to manage and correctly forecast its cash
needs in order to make appropriate decisions with respect to borrowing and investment. Proper cash
management therefore is an effective way of ensuring that the little cash available to the business is
managed well to bring full benefit to the business in question.

Planned acquisition and utilization of cash or near cash resources ensures that businesses are in the
position to meet their liquidity requirement while earning reasonable profits on their cash reserves. On
the other hand, poor cash management practices can result in cash flow a problem which is
characterized by inability to honour financial obligations, inability to put idle funds into profitable
ventures and failure to expand.

A business owner must possess proper cash management strategies to ensure that adequate cash is
available to meet obligations as they come due and to invest excess cash to maximize investment
returns (Prasad, 2017).

Some business owners realize the importance of effective cash management activities to run businesses
successfully; however, many business owners lack the knowledge or time to conduct cash management
activities (Mungal & Garbharran, 2014; Prasad, 2017) or the ability to develop formal processes to
manage cash (Belle Isle & Freudenberg, 2015). As a result, these business owners are at risk of
experiencing liquidity and performance problems, including bankruptcy (Jamil, Al Ani, & Al Shubiri,
2015).

Moreover, a large number of businesses fail due to the absence of cash rather than the absence of
profits (Patel 2010). Patel (2010) also indicated that cash management practices are vitally important for
the business because it would assist in profitability, future planning and sustainability. The practice of
basic concepts of cash management will assist businesses plan for the unforeseen eventualities that
almost all businesses encounter.

Foster (2012) indicated that, since the year 2008, business failures have risen by 30% in the past three
years. Businesses with less than five employees were hit the hardest. 57% of those small businesses
failed in a year. Businesses that had employed six to nineteen employees faced a 40% increase in
bankruptcy.

This study will investigate the impact of cash management practices on the profitability and
sustainability of small retail businesses. It will look at the underlying reasons why small businesses are
not managing their cash inflow and outflow. A possible resolution would be to provide cash
management assistance to these small retail businesses. This would be done to enhance their cash
management knowledge of their small business owners so that these businesses could be more efficient
in managing their cash and decision making which will enhance their profitability and sustainability.
Statement of the problem

The problem or question is the axis around which the whole research effort revolves (Leedy and Ormrod
2010: 43). It is the difference between the way things should be and the way they are. Small businesses
cannot be the platform for growth and development if they are not profitable and sustainable. One
possible reason for this prevalence is that small business owners are not equipped to identify the
problem areas within their businesses, due to the lack of necessary skills and tools to increase
profitability and sustainability.

Likewise, many businesses owners do not perform many cash management practices simply because
they feel they are not necessary and are very time consuming (Debt 2005).

Cash management is the lifeline of every small business. Cheatham, Dunn and Carole (1989:1-2)
indicated that one of the most dangerous misconceptions is the common belief among entrepreneurs
that adequate profits will automatically result in an adequate cash flow. The lack of cash management
knowledge and skills prevent small business owners to adequately manage their cash flow.

A study by Bradley Univ from the University of Tennessee Research, as indicated in Unvi (2014), revealed
that just 47% of the small retail businesses still operated after four years.

Unvi (2014) also investigated the major causes for their failure. 46% indicated that the major cause was
business owner incompetence. The specific pitfalls were poor collection and control of debtors’
payments, no knowledge of pricing, lack of planning and budgeting, no knowledge of financing and no
experience in record keeping.

The gap identified was that some business owners are not performing the basic cash management
practices in their businesses. This practice is omitted in business largely due a lack of knowledge and
skills to perform the task.

Therefore, the purpose of the study is to investigate which cash management practices are being
performed by food retail businesses, and which practices are challenging for the owners to perform.
Moreover, the study investigates if the failure to implement cash management practices impacts on the
business profitability and sustainability. Hence, there is a need to answer the following questions:

1. What is the respondents’ profile?

Limitations of the study

The research is limited to the food retail businesses in the urban municipalities of Nueva
Vizcaya which includes Bayombong, Solano and Bambang. The qualifying inclusion
criterion for this study is specifically food retail businesses which has been operating for
more than 5 years.

This study addresses cash management practices used to tackle profitability problems.
Furthermore, it surveys the owners or suitable representatives of each business in the
sample. Therefore, the accuracy of information given in the questionnaire is limited to their
knowledge of the cash management practices used in their business. Since this is a
quantitative study, the ideal choice was to have the data instrument as a questionnaire.

This study is restricted to determining whether or not business managers/ representatives

The literature is also restricted to cash management practices in food retail businesses and
the impact these practices has on the profitability and sustainability. This study is also
limited to investigating the impact that cash management practices have on profitability and
sustainability.

The term “cash management” in the title refers to cash management practices. The types of
cash management practices this study will be limited to are cash flow, budgets, debtor
management, inventory management, purchase management and business financing.
Sustainability, in this study, refers to the longevity of the business and factors related to
business failure. The benchmark for sustainability is the business being in operation for at
least six years.

The study will not investigate economic development and other business-related aspects.
Therefore, the findings of this study cannot be generalised to all types of small businesses in Nueva
Vizcaya

Rationale of the study

The purpose of the study is to investigate the impact of cash management practices on profitability
and sustainability of food retail businesses in the urban municipalities of Nueva Vizcaya. Part of the
study will also ascertain whether certain cash management practices are being performed in the
businesses and, what are the challenges faced? Many small businesses face liquidity problems and
eventually fail due to the lack of cash management knowledge and implementation. It is vital to
have viable businesses in developing communities as these businesses provide the basic necessities
of the community. Therefore, this study will directly benefit these communities. This study will
equip business owners with sound management practices which will ensure the profitability and
sustainability of their businesses.

Variables
The variables used in this research study are presented below.

Independent variable:
 Cash management practices
 Urban municipalities

Dependent variable:
 Profitability and sustainability of food retailers
 Term of business operations

Hypotheses

The hypotheses that will be tested in this study are as follows:

Null hypothesis (Ho): The implementation of cash management practices do not have an
impact on profitability and sustainability of food retailers in urban municipalities of Nueva
Vizcaya.

Alternate hypothesis (Ha): The implementation of cash management practices do have an

The hypotheses were formed from the problem statement relating to relevant studies
which emphasized the impact of the lack of implementation of cash management
practices of small businesses on profitability and sustainability.
Aim of the study
The aim of the study is to identify the current cash management practices used by food retailers in
urban municipalities of Nueva Vizcaya and identify the impact of such practices on their profitability
and sustainability.
Objectives of the study
In order to achieve the above aim, the following objectives will be addressed:
- To identify the current cash management practices of small businesses;
- To determine why certain cash management practices are not being performed; and
- To identify if failure to implement cash management practices impacts on profitability and
sustainability of businesses.

Method of the research

A descriptive study was chosen to undertake this research to discover and understand the cash
management practices implemented by the small retail businesses, which are classified as businesses
with less than five employees.

The quantitative research paradigm was used in this study. A cross sectional study was carried out in
which information was collected just once, over a period of two weeks in order to answer the research
questions. Non-probability, convenience sampling was chosen for this study where the researcher
randomly selected businesses based on their availability and willingness to participate in the study. The
population of small retail businesses in the Tongaat area comprised of 83 small businesses. The sample
size was 69 businesses.

A survey research was conducted. A questionnaire was used to measure cash management practices
and their impact on profitability and sustainability of small businesses with statistical precision. The
questionnaire was designed with open and closed-ended and Likert type questioning which were
answered by the small business owners or suitable representatives of the business owners.

A pilot study was carried out to ensure that the final questionnaire is error free and amendments, if any,
are made before the data can be collected for the study.

The recruitment process was conducted by the researcher who personally approached the business
owners and explained the researcher’s intentions for conducting the study. The DUT consent letter for
the respondent’s willingness to participate was completed once the candidate’s responsibility was fully
explained. On completion of the consent letter, the respondent was handed a questionnaire to
complete. All the businesses in the sample were aware that all information released would remain
confidential and all names would remain anonymous and would not be used for any other purpose
other than this research study. No business names were mentioned in the write up of the dissertation.

The retrieval of the completed questionnaire from the businesses was confidential. The researcher
provided a self- addressed and prepaid envelope to the respondent to return the completed
questionnaires to the researcher. Statistical analysis was performed on the data extracted from
respondents using SPSS version 21.0 statistical software.

1.11 Outline of the study

The study consists of the following five chapters:

1.11.1 Chapter 1 – Nature, scope and organisation of study

This chapter has introduced background information of the cash management practices and their impact
on profitability and sustainability of small businesses. The chapter also introduced the rest of the
dissertation.

1.11.2 Chapter 2 – Literature Review: Cash Management Practices

This chapter will discuss the definition and the importance of cash management practices. It will also
present components relevant for effective cash management practices in small businesses.

1.11.3 Chapter 3 – Literature Review: Impact of cash management practices on profitability and
sustainability

This chapter will look at the definition of profitability and sustainability. It will also review existing
research on the factors that affect the lack of cash management practices and the cash management
challenges faced by small businesses, which lead to poor profitability and sustainability in small
businesses. This chapter will also identify impact that cash management practices have on profitability
and sustainability of small businesses.
1.11.4 Chapter 4 – Research methodology

This chapter will present the methodology used in this research. It will describe the questionnaire used
to identify the cash management practices that are currently being used, those that are omitted and
those that are challenging for small business owners. This chapter will also describe the methods used
for the analysis of the questionnaire data.

1.11.5 Chapter 5 – Presentation, interpretation and discussion of findings

This chapter will present the factors identified by the data analysis as being significant with regard to
cash management practices in small businesses and the impact of these practices on profitability and
sustainability. The chapter will also discuss the empirical findings of the research in comparison with the
existing literature.

1.11.6 Chapter 6 – Conclusions and Recommendations

This chapter will make appropriate conclusions and recommendations relating to the impact of cash
management practices on the profitability and sustainability in small businesses. The research will be
summarised in terms of what it has achieved in improving cash management practices in small
businesses. It will also present the limitations of this study.

1.12 Conclusion

In this chapter, the problem statement and the purpose were explained. The limitations of the study
were presented. The rationale for the research and the variables were also described. The aim,
objectives as well as the method of research

were also outlined. The method of research and significance of the study were described. The outline of
the study was also explained.

In chapter two, the literature review will be presented in the form of theories relevant for effective cash
management and their impact on profitability and sustainability in small retail businesses. It will also
review existing research on the factors that affect poor cash management in small businesses and the
factors that are lacking in small businesses.