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Research Agenda: Assessing business trends and issues

Title

THE EFFECT OF FINANCIAL LITERACY ON FINANCIAL PERFORMANCE OF

REGISTERED MICRO, SMALL AND MEDIUM ENTERPRISES

OWNED BY MUSLIMS IN BUTUAN CITY

Theoretical/ Conceptual Framework

The first dimension of the study covers the dependent variable which

pertains to the financial performance of the micro, small and medium enterprises.

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.

“Financial performance is scientific evaluation of profitability and financial

strength of any business concern” according to Kennedy and Macmillan financial

statement analysis attempt to unveil the meaning and significance of the items

composed in profit and loss account and balance sheet. The assists are the

management in the formation of sound operating and financial policies.

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According to Tripathi, “Measurement is the assignment of numerals to

characteristics of objects persons, states or events, accounting to rules. What is

measured is not the object, person, state or event itself but some characteristics

of it. When objects are counted for example we do not measure the objects itself

but also its characteristic of being present. We never measure people only by

their age, height, weight or some other characteristics.”

While measuring the performance of the company the first requirements is

the thought and goals of human being are mostly realized thought the

establishments of diverse kinds or relevant association.

Profit is the main goals for establishing business concern. Profit is the

primary motivating force for economic activity. Profit has to be earned and they

have got to be earned on a regular basis. Business concerns that are unable to

generate efficient profit from their operation cannot remunerate the providers of

their capital and this makes it difficult for them to maintain the continuity of their

existence. Profits are needed not only to remunerate capital but also to finance

growth and expansion.

Insure the survival of a firm in a growing economy. If the firm is to survive

in competitive and expanding environment, it has to go on expanding the scale of

its operations on a regular and continuing basis. “Profits are the record card of

the past, the inventive lode star for the future. If an enterprise fails to make profit,

capital invested is eroded and in this situation prolongs the enterprise ultimately

ceases to exist.” Thus profit is the soul of the business concern without which it
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becomes weak and lifeless. Profit can rise when the price paid by the customers

for the product of the business firm exceeds the cost that has been incurred from

it. Accountants, economists, and others have defined profit in a number of ways

as per its use and purpose. There have been many theoretical discussion of the

concept of profit, but there is no consensus on the precise definition of this

theoretical construct. There are main two concepts one is accounting concept

and other is economics concept.

2.12.1 ACCOUNTING PROFIT: “The excess of revenue over related costs

applicable to a transaction, a group of transaction of an operating profit is profit”

In accounting profit is generally known as the excess of total revenue over total

costs associated with these revenues for the period. As such the residue of

income after meeting all the “explicit”, items of expenditure is termed as profit”

Explicit items of expenditure generally, includes, raw material consumed, direct

expenses, salaries, & wages, administrative expenses, selling and distribution

expenses, depreciation and interest on capital of business firm. “The different

between the sales and the costs of producing and selling that product is its

profit.”

2.12.2 ECONOMIC PROFIT: Back in 1939 the famous economist

J.R.Hicks defined a man‟s income as “the maximum value, which he can

consume during a weak, and still expect to be as well of at end of the weak as he

was at the beginning” Economics profit is the residual of income meeting all the

„explit‟ and „implicit‟ items of expenditure for a given period. The term explit item

of expenditure has the same meaning that have discussed in “accounting profit”
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but the implicit item of expenditure includes the amount of those factors of

production, which are owned by owner. For examples the rent of own land and

building, the interest of own capital and salary of owner are termed as “implicit

costs” or “opportunity costs”. However, the term economic profit in the form of

equation can be represented as under:

Economic profit = accounting profit- implicit costs OR

Economic profit=total revenue- (Explicit costs +implicit costs)

In economic the accounting profit known as gross profit while the profit

remaining after subtracting the implicit cost of owner’s times and capital invested

is known as “pure profit‟

2.12.3 BUSINESS PROFIT OR INCOME: Businessmen and accountants

usually look upon the entire return to stakeholders‟ profit or income, and do not

regard any part of return as a cost. Thus business profit plus the normal return on

investment, which is also the different between end-of – period wealth and initial

investment.

2.12.5 ACCOUNTING PROFIT AND ECONOMIC PROFIT: The concept

of accounting profit and economic profit differ from each other from the view point

of opportunity cost of capital invested and cost of owner‟s time .for calculation of

economic profit, opportunity cost capital and owner‟s time is considered while

calculating accounting profit it is ignored by accountants. In accounting “the profit

is deemed to be the joint result of various factors of production while in

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economics, it is termed as the rent liability, wages of owner and the reward of risk

bearing.

CONCEPT OF PROFITABILITY: The word “Profitability” is modulation of

two words “profit‟ and “ability”. In another words it referred to “Earning power” of

“operating efficiency” of the concerned investment concept of profitability may be

defined as “The ability of a given investment to earn a return from its use”

Measurement of profitability is the overall measure of performance profits known,

as bottom lines are also important for financial institutions. Analyzing and

interpreting various types of profitability ratios can obtain creditor performance of

portability.

2.13 CONCEPT OF LIQUIDITY: The concept of liquidity within a business

is important to understand the financial management, as it is the basic criteria to

test the sort term liquidity position of the enterprise. Liquidity may be defined as

the ability to realize value in money the real liquid asset. It has two dimensions

[A] The time required to convert the assets money and [B] The certainty of the

realizable price. Generally the term „liquidity‟ means conversion of assets in to

„cash‟ during the normal course of business and to have regular uninterrupted

flow of cash to meet outside current Liability as and when due and payable and

also the ensure money for day to day business operations. Hence the flow of

current assets should circulate with such a rapid speed that they are converted

into cash within a year so that timely payment may be made to outsiders for

interest, dividends, etc. If a major part of current assets is blocked in inventories

and credit cells, not only ready cash will not be available to pay current debt but
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there is a risk shrinkage in the total current assets available because of possible

fall in the value of inventories or possible losses an account of bad debts. The

quality of current assets is therefore very important for analyzing liquidity. 

SIGNIFICANCE OF THE LIQUIDITY ANALYSIS: The importance of adequate

liquidity in the sense of the ability of a firm to meet current/short-term obligations

when they become due for payment cash hardly is overstressed. In fact liquidity

is a pre-requisite for the very survival of a firm. The short-term creditors of the

firm are interested in the sort-term solvency or liquidity of a firm. But liquidity

implies, from the viewpoint of utilization of funds of the firm that funds are idle or

they earn very little. A proper balance between the two contemporary

requirements i.e. liquidity and profitability is required for efficient financial

management. The liquidity ratio measures the ability of a firm to meet its short

term obligation and reflects the short-term financial strength/solvency of a firm.

The second dimension of the study covers the independent variable,

which is financial literacy. This study pertains to the concept of AnnamariaLusardi

(2014) which states that financial literacy impacts financial decision-making,

failure to plan for retirement, lack of participation in the stock market, and poor

borrowing behavior can all be linked to ignorance of basic financial concepts,

while financial education programs can result in improved saving behavior and

financial decision-making.

One of the essential components of financial literacy is knowledge which

involves the ability to understand and control cash in its diverse structures, uses,
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and functions and ability to deal with everyday financial matters and settle on the

right decisions to meet one’s personal and business needs.

The study on the concept of Organization for Economic Co-operation and

Development (2006) stated that financial literacy is a combination of awareness,

knowledge, skill, attitude and behavior towards financial concepts to manage

resources effectively, make sound financial decision and ultimately achieve

individual financing well-being. Business owners will not be able to choose the

right financial considerations for their business, and may be at risk of fraud, if

they are not financially literate. Thus, financial literacy of business owners’ plays

an important role in measuring the financial performance of the business.

FINANCIAL
LITERACY FINANCIAL
PERFORMANCE
 Sources of
BASIS OF
Finance  Profitability
ENHANCEMENT
 Budgeting  Liquidity
 Saving
 Record
Keeping

PROFILE

 Sex
 Civil Status
 Educational
Attainment
 Previous
Occupation
Figure 1 Schematic Diagram
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Statement of the Problem

This study will aim to determine the financial literacy of the Muslim owners

of registered micro, small and medium enterprises in Butuan City based on

sources of finance, budgeting, saving, and record keeping and its effect to

financial performance measured based on profitability and liquidity.

Specifically, it will answer the following questions.

1. What is the profile of the members in terms of:

1.1 Sex;

1.2 Civil Status; and

1.3 Educational Attainment

1.4 Previous Occupation?

2. What is the level of manifestation of financial literacy among Muslim

owners of registered micro, small and medium enterprises in

Butuan City in terms of:

2.1 Sources of Finance;

2.2 Budgeting;

2.3 Saving; and

2.4 Record Keeping?

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3. What is the extent of the financial performance of registered micro,

small and medium enterprises in Butuan City owned by Muslims in

terms of:

3.1 Profitability; and

3.2 Liquidity?

4. Is there a significant relationship between the level of manifestation of

financial literacy and financial performance among Muslim owners of

registered micro, small and medium enterprises in Butuan City?

5. On the basis of the findings, what enhancement program can be

proposed to improved financial literacy and financial performance

among Muslim owners of registered micro, small and medium

enterprises in Butuan City?

Hypothesis

The study will be guided by the null hypothesis tested at 0.05 level of

significance.

Ho: There is no significant relationship between the level of manifestation

of financial literacy and financial performance among Muslim owners of

registered micro, small and medium enterprises in Butuan City.

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Chapter 2

METHODOLOGY

This chapter presents the research design, research locale, population

and sample, sampling techniques, research instruments, data gathering

procedure, and statistical treatment that will be used in the study.

Research Design

The study will use the descriptive-correlation method. It is descriptive

because it will aim to determine the financial literacy and the financial

performance of the micro, small and medium enterprises owned by Muslims in

Butuan City. It is correlational for it will aim to test the significant relationship of

the independent and dependent variables.

Respondents

The researcher will conduct the study in the micro, small and medium

enterprises owned by Muslims in Butuan City.

The researcher will choose ten (10) respondents among the Department

of Trade and Industry (DTI) registered Muslim owners of micro, small and

medium enterprises. The said respondents will be interviewed and will take the

testing of the validity and reliability of the questionnaire that will be designed by

the researcher.
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Ethical Considerations

The researcher will carefully explain to the respondents as to the research

process. The respondents’ welfare will be carefully protected that respect for the

dignity of research participants will be considered, full consent will be obtained

prior to the study, protection of the privacy of the respondents and ensuring

adequate level of confidentiality of the research data that will be gathered by the

researcher.

In order to address ethical considerations, the researcher will be able to

affect the following: voluntary participation of respondents in the study, avoidance

of the use of offensive, discriminatory or other unacceptable language, the

importance of privacy and anonymity of the respondents.

Sampling Technique

The researcher will utilize the purposive sampling technique in gathering

the data. Purposive sampling technique will be chosen because the participants

are the DTI registered Muslim owners of micro, small and medium enterprises in

Butuan City. There will be ten (10) respondents and she will schedule an

interview with the respondents by going to their business establishments for the

participation of the survey research. A letter will be sent to each respondent

explaining the purpose of the research.

Research Instrument
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The study will utilize a researcher-made questionnaire as the instrument in

gathering the necessary data and information. It will have two (2) major parts.

Part 1 will consists of information on the profile of the Muslim owners of micro,

small and medium enterprises in terms of sex, civil status, and educational

attainment. Part 2 will consists of items on the financial literacy and Part 3 on

financial performance. It will be checked by the adviser for reliability and content

validity.

Data Gathering Procedure

The researcher will submit a letter to the adviser for approval to conduct a

study in micro, small and medium enterprises owned by Muslims in Butuan City.

After getting the approved letter, she will prepare letter for the Department of

Trade and Industry (DTI) Butuan City Office to ask for the list of DTI registered

Muslim owners of micro, small and medium enterprises in Butuan City. After

receiving the reply from the DTI Butuan City Office she will conduct a personal

visit to the micro, small and medium enterprises owned by Muslims in Butuan

City and will ask permission from the owners for the conduct of the study. Upon

its approval, the questionnaires will be distributed to the first batch of

respondents for pretesting. The final gathering of data will be made after the

result in pretesting will be identified. The researcher will retrieve the answered

questionnaires from the respondents right after they have answered the

questionnaires. After the research instruments were retrieved, the data gathered

will be tallied, collated, analyzed and interpreted using the appropriate statistical

treatment.
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Statistical Treatment

The statistical tools that will be utilized in the study are the following:

Frequency and Percentage. This will be used to represent the personal

information variables.

Mean. This statistical tool will be used to determine the level of financial

literacy and financial performance.

Pearson rho Correlation. This non-parametric statistics tool will be used to

measure the association between two variables measured in nominal level of

measurements.