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INTERNATIONAL JOURNAL OF MULTIDISCIPLINARY: APPLIED
BUSINESS AND EDUCATION RESEARCH
2022, Vol. 3, No. 9, 1654 – 1663
http://dx.doi.org/10.11594/ijmaber.03.09.06
How to cite:
Bongalonta, M. B. & Bongalonta, M. M. (2022). The Liquidity Issues and the Profitability Index of Small-Scale Business
Entities in Sorsogon Province, Philippines. International Journal of Multidisciplinary: Applied Business and Education
Research. 3 (9), 1654 – 1663. doi: 10.11594/ijmaber.03.09.06
Research Article
The Liquidity Issues and the Profitability Index of Small-Scale Business
Entities in Sorsogon Province, Philippines
Michael B. Bongalonta*, Michelle M. Bongalonta
Business Management Education Department, Sorsogon State University Bulan Campus, 4706,
Philippines
Article history:
Submission September 2022
Revised September 2022
Accepted September 2022
ABSTRACT
This research was conducted to determine the liquidity issues
and profitability index of small-scale businesses operating in the
Second District of Sorsogon Province, Philippines as well as to es-
tablish the relationship of these two variables. This study used
mixed design. A total of 223 small-scale business owners engaged
in trading in the Second District of Sorsogon Province, Philippines
were the primary respondents of this research. Vertical analyses
and stepwise linear regression analyses were utilized.
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. Limited and unavail-
ability of capitalization, Absence of Credit Policy, High Finance cost
for debt financing, Inventory obsolescence, Shortage of re-
sources and Lack of markets of measure and scope are the identified
liquidity issues by small-scale business owners. To address the is-
sues, the Use equity financing than debt financing, Strengthen the
company’s policy of extending loan, Minimize the purchase of inven-
tory or stocks, financial suffering by staying well-informed of your
finances and Hiring Bookkeepers are highly recommended by the
respondents.
Keywords: Liquidity, Profitability Index, Small Scale Business Entities
*Corresponding author:
E-mail:
bongalontamichael@sorsu.edu.ph
Introduction
Profit is the lifeblood of every business or-
ganization. This principle manifests that the
sustainability of the business operations is
largely dependent from the level of income
earned by the entity. It is a common notion that
earning an income is deemed to be one of the
primary concerns of the business establish-
ments. Thus, most of the potential investors
and even the existing businesses intend to im-
plement some measures to regularly evaluate
the future and current performance of the
Bongalonta & Bongalonta, 2022 / The Liquidity Issues and the Profitability Index of Small-Scale Business Entities
IJMABER 1655 Volume 3 | Number 9 | September | 2022
business to determine its capacity to operate
on a going concern basis to serve the respective
consumers and consequently earn greater re-
turns. Internal controls such as monitoring of
financial statements on a timely basis are com-
monly adopted and implemented by many of
the business industries to protect its assets and
other properties from some malpractices.
These controls enable the business owners to
have direct access and Secondhand knowledge
and information with regards to the liquidity
and the profitability of the business operation.
Hence, it might avoid the possibility of a grad-
ual bankruptcy due to loss of ownership as well
as the income unknowingly. Similar to large
business establishments, almost all of the
small-scale business entities are also craving
for higher profits and better results for liquid-
ity test.
The liquidity and profitability index (finan-
cial performance) are imperative in sustaining
the operation of the business as well as in ven-
turing for new business opportunities and ex-
pansions. Accordingly, liquidity enhances the
financial position of the company with refer-
ence to its ability to manage its working capital
and pay for its short-term obligation while
profitability refers to the ability of the business
to earn a satisfactory rate of return on owner’s
or investor’s capital (Cruz-Manuel, 2016). It
was stated further that profitability serves as a
ticket to business growth and expansion. More-
over, it was expounded by Camposano (2010)
that liquidity ratios reflect the ability of the firm
to meet its financial commitments. He stated
that the inability to satisfy the demands of the
creditors is a sufficient reason to be wound up
irrespective of how it is profitable. Ballada
(2016) highlighted the importance of
profitability to the sustainability of the busi-
ness and he emphasized the concept of the re-
turn on investment which measures the man-
agement’s efficiency and using its assets to earn
profits. The stated literatures highlighted the
fact that firm’s liquidity and its financial perfor-
mance have vital role in the success of every
business entity.
Sorsogon is one of the Provinces in the Bicol
Region. This area has favorable accessibility to
other neighboring provinces such as Masbate
and Samar that are frequently and habitually
doing business, thus, bulks of business transac-
tions are recorded and contracted in this Prov-
ince. Apparently, amidst its civilization is the
rampant existence of Small-Scale Business En-
tities that have substantial contribution to the
income of the Sorsogon Province due to the le-
gal fees and taxes collected from these busi-
nesses. Thus, the success and the sustainability
of the business operations of the existing busi-
ness establishments in the area substantially
contributes to the realization of the vision and
goals of the Province. This notion has captured
the attention and willingness of the researchers
to conduct this study in order to determine and
evaluate the liquidity and financial perfor-
mance of the existing small-scale business enti-
ties in Sorsogon Province. In this study, liquid-
ity refers to the ability of the micro businesses
operating in the Second District of Sorsogon
Province to pay or settle its short-term matur-
ing obligation (debt with a term of not more
than one (1) year). However, the profitability
index, also known as financial performance, op-
erationally pertains to the level of income (rev-
enues less expenses) as manifested by the re-
turn on investment in general. Specifically, the
study aims to establish a business model or
framework showing the relationship between
the two variables, namely liquidity and profita-
bility index, as shown in Figure 1.
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 busi-
nesses which consequently affect the profita-
bility index, as manifested by return on sales
(margin), gross profit rate and the return on in-
vestment, of these particular business organi-
zations. 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.
The results of the study serve as bases in
the formulation some measures or designing
an operational manual to address the liquidity
issues of small-scale business entities in the
Second District of Sorsogon Province, thus, en-
hancing its profitability index.
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IJMABER 1656 Volume 3 | Number 9 | September | 2022
Figure 1. Framework of the Study
Objectives of the Study
This research generally aims to establish
the relationship between the liquidity level and
the profitability index of small-scale businesses
operating in the Second District of Sorsogon
Province, Philippines. Specifically, this was
conducted to realize the following objectives:
1. To assess and determine the liquidity level
of small-scale business entities in terms of
working capital, quick and current ratios
and inventory and receivable turnovers.
2. To evaluate and identify the profitability
index of small-scale business entities in
terms of return on sales, gross profit and
return on investment.
3. To know and establish the relationship of
the liquidity level of small-scale business
entities and its profitability index.
4. To explore the liquidity issues commonly
encountered by the owners of small-scale
business entities.
5. To explore some measures or formulate a
manual to address the liquidity issues and
thus further enhance the profitability in-
dex of the small-scale business entities.
Methods
This study used mixed design. This was uti-
lized to assess and determine the liquidity level
and profitability index of small-scale business
entities. This research design was deemed
relevant and instrumental in establishing the
relationship between the two variables used in
this study. Also, this was used to explore the un-
derlying issues affecting the entities’ liquidity
and the ways by which it could be improved.
Small-scale business owners engaged in
trading in the Second District of Sorsogon Prov-
ince, Philippines are the primary respondents
of this research. Second District of Sorsogon in-
cludes 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 un-
dertaking (C.I.=95%, M.E.=5%). The sample
was then proportionately distributed based on
the papulation size per municipality.
This employed two data gathering meth-
ods: documentary analysis and the interview
with key informants (KI). Documentary anal-
yses were used to quantitatively account and
determine the level of liquidity and the profita-
bility index of small-scale business entities
based on their reported financial statements.
Interview with KI, on the other hand, was con-
ducted using a structured survey question-
naire. This was done to explore the issues
Bongalonta & Bongalonta, 2022 / The Liquidity Issues and the Profitability Index of Small-Scale Business Entities
IJMABER 1657 Volume 3 | Number 9 | September | 2022
affecting the firms’ liquidity and the ways by
which it could be addressed.
The quantitative data obtained from the fi-
nancial statements of the small-scale business
owners were analyzed using common-size fi-
nancial statements (vertical) analyses and
step-wise regression analyses. Vertical anal-
yses 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. 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.
The applications and functions of these corre-
lation and regression analyses were made eas-
ier through the aid of the Statistical Packages
for the Social Science (SPSS).
The data gathered from the KIs were tran-
scribed and coded to determine the emergent
patterns or themes with regards to the issues
affecting firms’ liquidity and the ways by which
it could be addressed. The external validity of
the study results was deemed to be the main
delimitation of this paper. As a result, the find-
ings of this undertaking could not be general-
ized to other populations or businesses outside
the Sorsogon Province. As protection to the re-
spondents, all the data were used and kept by
the researchers with strict adherence to the
provisions of Privacy Act of the Philippines.
Results and Discussion
Liquidity Level
Liquidity refers to the ease with which an
asset, or security, can be converted into ready
cash without affecting its market price (Chen,
2020). In this paper, the liquidity level is repre-
sented by the working capital (WC), quick ratio
(QR), current ratio (CR), inventory turnover
(IT) and receivable turnover (RT) based on the
results of vertical analyses.
Table 1 presents the liquidity level of small-
scale business entities in terms of working cap-
ital, quick and current ratios and inventory and
receivable turnovers. Generally, the respond-
ents found to have very high liquidity level in
all indicators of business liquidity using docu-
mentary and vertical analyses based on their
submitted financial statements.
Working capital is defined as current assets
minus current liabilities. Current assets include
cash (which is not restricted for a long-term
purpose) plus the company's other resources
that will turn to cash, trading securities, inven-
tories or will be used up within one year (of the
date shown in the heading of the balance sheet)
(Averkamp, 2020).
Table 1. Liquidity Level – Vertical Analysis
Liquidity Measure
Computed Liquidity Value
Description
Working capital
125,641
Very Much Liquid
Quick ratio
86.89
Very Much Liquid
Current ratio
94.66
Very Much Liquid
Inventory turnover
7.76
Very Much Liquid
Receivable turnover
19.54
Slightly Liquid
Overall Liquidity Level: Very Much Liquid
The data in table 1 specifically revealed an
average working capital of P125,641which ap-
peared to be substantially higher than their
short-term debts. Such figure depicts the ability
of the small-scale business entities in the Prov-
ince of Sorsogon to settle their short-term ma-
turing obligations.
Moreover, with respect to quick and cur-
rent ratios, the respondents appeared to be
very much liquid with financial ratios of
86.89:1 and 94.66:1, respectively. It can be
gleaned from these results that the respond-
ents’ quick assets or those items which are
highly convertible into cash are almost nine (9)
times larger that its current liabilities which
consequently show the entities’ capabilities to
pay their financial obligations with terms of not
more than one (1) year. The computed quick or
acid test ratio also implies that the respondents
remain highly liquid even without relying from
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IJMABER 1658 Volume 3 | Number 9 | September | 2022
the sale of their inventories as well as from
other prepayments.
The computed current ratio, on the other
hand, reflects that the liquidity level of the re-
spondents increases the moment the invento-
ries, prepayments and other current assets
other than quick assets are taken into consider-
ation. Nonetheless, the results validate the no-
tion that test of liquidity using quick ratio re-
sults to more accurate liquidity level than that
of the current ratio. Folger (2020) mentioned
that computed quick ratio measures the liquid-
ity of a company by measuring how well its cur-
rent assets could cover its current liabilities.
However, the quick ratio is a more conserva-
tive measure of liquidity because it doesn't in-
clude all of the items used in the current ratio.
The quick ratio, often referred to as the acid-
test ratio, includes only assets that can be con-
verted to cash within 90 days or less. Folger
(2020) elaborated further that the quick ratio
offers a more conservative view of a company’s
liquidity or ability to meet its short-term liabil-
ities with its short-term assets because it
doesn't include inventory and other current as-
sets that are more difficult to liquidate (i.e.,
turn into cash). By excluding inventory, and
other less liquid assets, the quick ratio focuses
on the company’s more liquid assets.
Other tests of liquidity employed in this re-
search are the inventory and receivable turno-
vers with computed value of 7.76 days and
19.54 days, respectively. Inventory turnover is
a ratio showing how many times a company has
sold and replaced inventory during a given pe-
riod. A company can then divide the days in the
period by the inventory turnover formula to
calculate the days it takes to sell the inventory
on hand (Hargrave, 2020). Conversely, ac-
counts receivable is an accounting measure
used to quantify a company's effectiveness in
collecting its receivables or money owed by cli-
ents (Murphy, 2020).
The figures shown in the table mean that it
took almost eight (8) days for the respondents
before inventories can be sold to the outside
customers. The calculated inventory turnover,
therefore, can help the respondents make bet-
ter decisions on pricing, manufacturing, mar-
keting and purchasing new inventory. How-
ever, the computed receivable turnover re-
vealed that the respondents have to wait for al-
most twenty (20) days before cash collections
can be made from credit customers. The receiv-
able turnover manifests that small-scale busi-
nesses in the Province of Sorsogon are slightly
liquid in terms of their credit collections. Mur-
phy (2020) highlighted that receivable turno-
ver shows how well a company uses and man-
ages the credit it extends to customers and how
quickly that short-term debt is collected or is
paid. The receivables turnover ratio is also
called the accounts receivable turnover ratio.
Profitability index
Profitability is a measurement of efficiency
and ultimately its success or failure. A further
definition of profitability is a business's ability
to produce a return on an investment based on
its resources in comparison with an alternative
investment (Horton, 2020).
The profitability index as used in this con-
text is manifested by the computed return on
sales, gross profit and return on investment
based on the reported financial statements of
the small-scale business organizations in the
Province of Sorsogon based on the results of
vertical analyses. The data on the profitability
index of small-scale business entities in terms
of return on sales, gross profit and return on in-
vestment are presented in table 2.
Table 2. Profitability Index - Vertical Analysis
Liquidity Measure
Computed Liquidity Value
Description
Return on sales (ROS)
19 %
High Profitability
Gross profit (GP)
21 %
High Profitability
Return on investment (ROI)
36 %
High Profitability
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Overall Liquidity Level: High Profitability
The results of vertical analyses generally
revealed that the small-scall business owners
are highly profitable with their ventures based
on the computed return on sales (19%), Gross
profit (21%) and return on investment (36%).
The computed ROS is above the average
ideal minimum ROS of 10%. This indicates that
the respondents have a better profitability ra-
tio in terms of sales. This measure further pro-
vides insight into how much profit is being pro-
duced per peso of sales. Hayes (2020) ex-
pounded that an increasing ROS indicates that
a company is growing more efficiently, while a
decreasing ROS could signal impending finan-
cial troubles.
In addition, the respondents also showed a
favorable profitability index in terms of GP
(21%) which appeared to be above the 10%
threshold. Gross profit is the profit a company
makes after deducting the costs associated
with making and selling its products, or the
costs associated with providing its services.
Gross profit will appear on a company's income
statement and can be calculated by subtracting
the cost of goods sold (COGS) from revenue
(sales). The result suggests that the business
owners earn at least 20% markup per peso
sales. Hence, such trend is a sign of efficient op-
eration.
This is in line with the notion of Hayes
(2020) which says that gross profit can be used
to calculate another metric, the gross profit
margin. This metric is useful for comparing a
company's production efficiency over time.
Simply comparing gross profits from year to
year or quarter to quarter can be misleading,
since gross profits can rise while gross margins
fall, a worrying trend that could land a com-
pany in hot water.
Finally, the concept of ROI was also used to
represent the profitability index on the re-
spondents in terms of the income earned from
the utilization of company’s resources. Fer-
nando (2020) defines return on investment
(ROI) as a performance measure used to evalu-
ate the efficiency of an investment or compare
the efficiency of a number of different invest-
ments. ROI tries to directly measure the
amount of return on a particular investment,
relative to the investment’s cost.
The result found out that the respondents
are highly profitable in terms of ROI (36%)
which is substantially higher than the histori-
cally average ROI been of 10% per year (Fer-
nando, 2020). Within that, though, there can be
considerable variation depending on the indus-
try. This infers that business owners are very
much efficient and effective in the utilization of
their available financial resources.
Step-wise linear regression analyses
In these analyses, the computed values for
working capital (WC), quick ratio (QR), current
ratio (CR), inventory turnover (IT) and receiv-
able turnover (RT) based on the results of ver-
tical analyses were regressed separately
against the computed scores for return on sales
(ROS), gross profit (GP) and return on invest-
ment (ROI).
Hence, the variables representing the li-
quidity level are the independent variables and
the indicators of profitability index are the de-
pendent variables.
1. ROS in relation to independent varia-
bles
The data in table 3 shown that the inde-
pendent variables namely WC, QR, CR, IT and
RT have no significant impact on the profitabil-
ity index of the respondents in terms of ROS.
This implies that none of the independent
variables have relationship to the dependent
variables. Hence, the level of liquidity of the
business neither diminishes nor enhances the
company’s profitability index.
The collinearity statistics for each regres-
sion model exhibited a high acceptable levels of
tolerance values, except for QR and CR, which
are comfortably above the recommended min-
imum level of tolerance value of .20 (Menard,
1995) as well as acceptable levels of variance
inflation factors (VIF) which did not exceed the
recommended maximum VIF value of 5.
The tolerance and VIF values generally in-
dicate that there was no evidence of multicol-
linearity in the regression results. These fur-
ther shows that there were no overlapping in-
dependent variables in the regression analyses
which could adversely affect its results as also
evidenced by minimal standard errors.
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Table 3. Step-wise linear regression analyses - ROS
Independent Variables
Coefficients, ϐ
Sig.
Std. Error
Collinearity Statistics
Tolerance
VIF
Constant
9.314
.000
.022
WC
.031
.976
.000
.836
1.196
QR
-1.510
.132
.001
.017
59.770
CR
1.111
.268
.001
.016
60.662
IT
-.238
.812
.001
.995
1.005
RT
1.079
.282
.000
.933
1.072
F Value
2.686
R Square
.058
Adjusted R Square
.037
** Significant at the 0.5 level
2. GP in relation to independent variables
Table 4 presents the result of the regression
analysis between the independent variables
namely WC, QR, CR, IT and RT and the profita-
bility index of the respondents in terms of GP.
The results show that of the five (5) varia-
bles of liquidity level, only inventory turno-
ver (p=.006) and receivable turnover
(p=.027) were found to significantly affect the
profitability index in terms of gross profit. The
value and positive sign of the coefficient for in-
ventory turnover (ϐ=2.801) suggests that a
one-point increase in the degree of inventory
turnover will increase the profitability index by
2.801 points.
From this trend, a linear regression model
of {Y=.006IT + 2.801) was formulated where y
represents the Profitability Index in terms of
GP and IT represents the computed inventory
turnover. This model shows that increasing the
degree of IT would mean improving the com-
pany’s profitability.
The computed coefficient for receivable
turnover (ϐ=2.221) also implies that a one-
point increase in the degree of receivable turn-
over will increase the profitability index by
2.221 points in terms of GP. As a result,
Y=.027RT + 2.221 model was established.
Table 4. Step-wise linear regression analyses - GP
Independent Variables
Coefficients, ϐ
Sig.
Std. Error
Collinearity Statistics
Tolerance
VIF
Constant
11.678
.000
.017
WC
.934
.351
.000
.836
1.196
QR
-1.965
.051
.001
.017
59.770
CR
1.499
.135
.000
.016
60.662
IT
2.801
.006**
.001
.995
1.005
RT
2.221
.027**
.000
.933
1.072
F Value
6.840
R Square
.136
Adjusted R Square
.116
** Significant at the 0.05 level
In the said model, y represents the Profita-
bility Index in terms of GP and RT represents
the computed Receivable turnover. This mani-
fests that enhancing and increasing the velocity
of cash collections positively affect the entity’s
profitability index.
3. ROI in relation to independent varia-
bles
Table 5 depicts the result of the regression
analysis between the independent variables
namely WC, QR, CR, IT and RT and the profita-
bility index of the respondents in terms of ROI.
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Table 5. Step-wise linear regression analyses - ROI
Independent Variables
Coefficients, ϐ
Sig.
Std. Error
Collinearity Statistics
Tolerance
VIF
Constant
17.747
.000
.024
WC
-3.888
.000**
.000
.836
1.196
QR
-1.311
.191
.001
.017
59.770
CR
1.133
.258
.001
.016
60.662
IT
2.393
.018**
.001
.995
1.005
RT
-.996
.320
.000
.933
1.072
F Value
5.727
R Square
.117
Adjusted R Square
.096
Significant at .01 level
Among the five (5) independent variables
of liquidity level, only working capital (p=.000)
and inventory turnover (p=.018) were found to
significantly affect the profitability index in
terms of gross profit. The value and negative
coefficient for working capital (ϐ=-3.888) sug-
gests that 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.
However, the results show a direct and pos-
itive coefficient for inventory turnover (ϐ=-
2.393) which means that increasing the inven-
tory turnover indicates increase in the ROI with
a linear regression model Y=.018IT + 2.393.
This result validates the fact that increase in the
disposal or sale of the given inventories results
to a better ROI due to reduction in the non-
value-added costs.
Liquidity issues commonly encountered by
the owners of small-scale business entities
The following presents the discussions of
the results of the interviews conducted through
KIs. Interviews with KIs were conducted using
a structured survey questionnaire to explore
the emergent patterns and issues affecting the
firms’ liquidity and the ways by which it could
be addressed.
With the information supplied by the busi-
ness owners, this research identified six (6)
major liquidity issues encountered by the
small-scale business owners, to wit:
1. Limited and unavailability of capitaliza-
tion
During the interview, some of the KIs re-
peatedly mentioned that the very minimal and
sometimes the unavailability of funds to fi-
nance the day to day affects their liquidity.
They raised the fact that due to very limited
capitalization most of them shift to capitaliza-
tion by way of debt financing.
As a result, most of their currents assets be-
come collaterals to their liabilities which ad-
versely affect their ability to pay the principal
loan and the interest therewith.
2. Absence of Credit Policy
The discussions with the business owners
revealed that the absence of policies governing
their credit transactions is one of the major di-
lemmas which negatively affect their liquidity
level. They elaborated that the collections of re-
ceivables from their customers do require sub-
stantial period of time. This situation often re-
sults to lack or insufficient cash balances which
could be used for paying their short-term ma-
turing obligation.
According to the respondents, most of their
debtors are commonly not honoring their ac-
counts. Hence, this unfavorably lessen their ca-
pacity to meet the short-term obligations.
These ideas validate the quantitative result of
the study which provides that the age of the re-
ceivables outstanding is unfavorably longer
than the usual collection periods.
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3. High Finance cost for debt financing
The respondents averred that the high in-
terest rates imposed by financing institution
adversely affect their liquidity level. Substan-
tial majority of the respondents named exces-
sive interest expense imposed by their credi-
tors makes difficult for them to pay their loans
in due time, thus, compromising their liquidity
level.
4. Inventory obsolescence
Some of the respondents in the interview
considered inventory wastage, spoilage and
obsolescence as factors that hinder them to set-
tle their debts on time. They strongly believed
that inventory obsolescence increases their in-
ability to generate cash that could be used as
reserve for short-term maturing financial obli-
gations.
5. Shortage of resources
Key informants highlighted that the ab-
sence of funding, technology, experienced la-
bor, expertise in bookkeeping, and marketplace
statistics highly diminish the level of their li-
quidity.
6. Lack of markets of measure and scope
The respondents raised the fact that their
limited sales territory is another aspect that
disabled them to improve the volume of their
sales transactions thus resulting to very mini-
mal cash inflows.
Measures to address the liquidity issues be-
ing experienced by the business owners
During the conduct of interviews with the
KIs, the respondents provided five (5)
measures that may be taken into account in or-
der to address the identified liquidity issues, to
wit:
1. As much as practicable, use equity fi-
nancing than debt financing. The re-
spondents suggested that as much as pos-
sible it is better to use personal fund than
to resort to borrowings. This is to avoid
payments of excessive operational costs
including borrowing costs;
2. Strengthen the company’s policy of ex-
tending loan. According to the respond-
ents, by so doing, the entity can avoid the
possibility of bad debts which commonly
ruins the liquidity status of the business.
3. Minimize the purchase of inventory or
stocks. This will help the business avoid
unnecessary costs such as the ordering
and strigae costs.
4. Avoid financial suffering by staying
well-informed of your finances. The KIs
mentioned that being inexperienced or in
denial about the financial condition can
halt the industry.
5. Hiring Bookkeepers. The respondents
emphasized the importance of hiring
bookkeepers in order to make actual finan-
cial data accessible to the business owners.
With this, the owners could easily deter-
mine the status of their liquidity. They
added that expertise in bookkeeping is the
only way to keep your company afloat.
Output
This research provided to major outputs
namely the research itself which contributes to
the body of knowledge specifically the
measures provide for by this study to address
the liquidity issues encountered by small-scale
business owners as well as a liquidity manual
containing some quantitative techniques to
better assess the company’s liquidity issues.
Educators and researchers may similarly
utilize the results of the study as material for
academic instruction and as reference for fu-
ture studies on a similar or related topic. Most
importantly, output of which could also be used
as a basis of the College in extending technical
assistance to the business owners of small-
scale business entities.
Conclusion and Recommendations
This study concludes that small-scale busi-
ness entities in the Province of Sorsogon are
highly liquid and profitable depicting their abil-
ity to pay short-term maturing obligation. In-
ventory turnover positively affect the profita-
bility index both in terms of the ROI and gross
profit. However, receivable turnover directly af-
fects the gross profit while the amount of the
working capital has and inverse impact on the
profitability index in terms of the ROI. Y=.027RT
+ 2.221 and Y=.018IT + 2.393 are models
Bongalonta & Bongalonta, 2022 / The Liquidity Issues and the Profitability Index of Small-Scale Business Entities
IJMABER 1663 Volume 3 | Number 9 | September | 2022
established based on the relationship of liquidity
and profitability index. Limited and unavailabil-
ity of capitalization, Absence of Credit Policy,
High Finance cost for debt financing, Inventory
obsolescence, Shortage of resources and Lack
of markets of measure and scope are the iden-
tified liquidity issues by small-scale business
owners. To address the issues, the Use equity
financing than debt financing, Strengthen the
company’s policy of extending loan, Minimize
the purchase of inventory or stocks, financial
suffering by staying well-informed of your fi-
nances and Hiring Bookkeepers are highly rec-
ommended by the respondents.
This research highly recommends that the
following:
1. The recommended liquidity manual may
be adopted by the small-scale business
owners.
2. Use cash basis in dealing with sales trans-
actions with customers to avoid the possi-
bility of bad debts.
3. The linear regression models formulated
based on this paper may be used as a tool
for closely monitoring the liquidity level
and the profitability index of the small-
scale business entities.
4. The company owners may consider using
the inventory economic order quantity
concept in maintaining their inventories
so as to avoid the incurrence of non-value-
added cost such as storage and ordering
costs.
5. The business owners may switch from
short-term to long term debt financing in
order to fully maximize the cost of capital.
6. The small-scale proprietors may consider
disposing their useless assets and mini-
mize or control overhead expenses.
7. Future researches with a more in-depth
approach may be conducted to establish a
stronger relationship among these emer-
gent variables.
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