EFFECT OF DEBT ON PROFITABILITY OF MSME OF MERCHANDISING INDUSTRY

IN THE MUNICIPALITY OF DAET

A Thesis
Presented to
the faculty of the Graduate School
Camarines Norte State College
Daet, Camarines Norte

In partial fulfillment
of the Requirements for the Degree
Master in Business Administration

by

RYAN EDISON G. SECRETARIO

2020
 Chapter I

THE PROBLEM AND ITS SETTING

Introduction

In today’s competitive and dynamic business world, financial decision plays

a fundamental role in the firm’s day to day performance and operations. Firm’s

financial decision affects almost all activities within the company.

Every developing nation’s development depends on the private sector of

the country. According to the Local Government Unit’s 2017 list of registered

businesses here in Daet, Camarines Norte, 2237 out of 2251 have been classified

to be belonging to Micro, Small, and Medium Enterprises (MSMEs) and it account

for 99.37% of the total establishments, of which 88.29% were micro enterprises,

8.63% were small enterprises, and 3.08% was medium enterprises. Large

enterprises made up the remaining 0.63%.Micro, Small, and Medium Enterprises

serves as facilitators for broad-based growth in competition, entrepreneurship and

offer economy-wide benefits such as innovation and aggregate productivity

growth. It also contributes immensely to the development of the nation in terms

of taxes to the state, provision of quality goods and services to the larger

public at a comparatively reduced prices as well as its contributions to poverty

alleviation. And for the matter, the merchandising industries under the said

category occupy the largest proportion of the type of business being operated in

the country.
 The small and medium scale enterprises face many challenges, but the

most significant among them is that of financing decision of their operations, of

which is a determinant of the flow of the business and the profit it makes to the

owners. Different government programs in the Philippines have tried at different

times to assist these enterprises in addition to assistance given by other

development partners and foreign donors, yet the challenges have remained

unresolved.

This renders the merchandise owners with no option but to run to financial

institutions for assistance, therefore incurring debt. Going to those financial

institutions also brings new phenomena for these MSMEs. Among them are the

excessive interest rates, management of debt, and the effects of debt in relation to

its profitability. This issue put MSMEs in a dilemma whether to depend on their

own savings, family savings, friends‘ assistance, government and donor support

or financial institutions to finance their operations.

The relationship between debt and profitability of firms has been a

center of attention for many researchers over decades, however, there is

difference of opinion between different researchers about the role of debt,

some researchers found negative (Abor, 2005), some found positive

(Margrates et. Al., 2010), while some found mixed results of debt on profitability

(Weill, 2008). This difference of opinion is due to many reasons including different

types of variables, sample size such as countries, municipalities, industries or

sectors, firms and periods, also taking to account are methodologies.

 This study tries to investigate the effect of debt practices and financing

decisions of MSMEs engaged in merchandising access to funds and their financing

decision. In doing so, the study takes a look at the extent to which debt practices,

interest rate, and the difference in capital structure and financing activities affect

Micro, Small and Medium Enterprises’ financing decision in with regards to its

profitability.

Mostly, the reported studies have taken a majority of merchandising firm

belonging to MSMEs over a period of time, however; there are a handful studies

that had focused on financial or non-financial sector as a whole. This study

while using different set of variables investigates the role of debt in profitability

of firms belonging to general merchandising since it could provide more reliable

figures in registered business here in Daet, Camarines Norte, with empirical

evidence from the non-financial sector of Philippines. This study will provide

a comprehensive view to finance managers about the relationship between

debt and profitability in merchandising entities. This study will be employed by

acquiring useful literature comprising of surveys, studies, projects and journals.

The analysis from these documents will generate this research.

Statement of the Problem

Generally, this study is designed to determine the effect of debt on profitability

of MSME on merchandising industry in municipality of Daet.

Specifically, this study will provide answers to the following questions:

1. What is the status of the enterprise in terms of:

1.1 total manpower;

1.2 age of firm;

1.3 source of funds;

1.4 types of credit providers;

1.5 number of loans;

1.6 forms of credit providers;

1.7 level of interest rate; and

1.8 repayment capabilities?

2. What is the enterprises’ debt status in terms of:

2.1 debt financing purposes; and

2.2 debt range?

3. What is the level of management risk of debt financing along:

3.1 liquidity; and

3.2 solvency?

4. Is there a significant difference on the effect of debt on profitability in micro, small

and medium enterprises?

5. What are the suggested strategies to practice debt financing effectively to enhance

profitability of MSME on merchandising industry?

Hypothesis

There is no significant difference on the effect of debt on profitability on

merchandising industry in micro, small and medium enterprise.

Significance of the Study

The researchers believed that this study would be of great help to the following:

Entrepreneurs. The aim is to assist the management of MSMEs to gain a better

understanding for how the profitability of their firm is related to the usage of debt

capital.

Prospective Entrepreneur. The study will also help those who want to start a new

business. If they have knowledge in the importance and the relationship of the debt

and profitability, this will help them in deciding whether to finance its new business

by incurring more debt than their own money to put up such business they want to

engage in.

Government Agencies. The government with the help of the concerned agencies

can create programs that will aid MSMEs with their capital needs or can also make

amendments in the current law with regards to borrowing rates.

Researchers. This study will provide the researcher with an in-depth

understanding of the subject under study.

Future Researchers. It will benefit the future researchers because this study will

serve as related studies with the same undertaking. Likewise, to those who would

wish to replicate this study for improvement purposes.

Scope and Delimitation

The study entitled “Effect of Debt on Profitability of MSME on Merchandising

Industry” was conducted in Daet, Camarines Norte. Micro, Small and Medium

Enterprises is the centerpiece of this study; hence large corporations have been

disregarded. Only the proprietors of registered business and those qualified under

the Philippine operational definition of MSMEs were chosen as respondents for

this study.

The focus of the study are the General Merchandising stores. The time

horizon used for the study was set to two years (2016 to 2017), which should be

sufficient in order to determine the effect of debt on profitability.

Definition of Terms

For clearer understanding of the terms used in this study, below are their

meanings that were conceptually and operationally defined.

Debt is a borrowing for funding businesses. The study considers short-term debt

(payable within one year from the statement of financial position) and long term

debt (payable over more than one year).

Profitability is the ability of a business to earn a profit. A profit is what is left of the

revenue a business generates after it pays all expenses directly related to the

generation of the revenue, such as producing a product, and other expenses

related to the conduct of the business activities.

Micro, Small and Medium Enterprise (MSME) has two operational classifications

in the Philippines. It is based on the enterprise assets size and number of

employees. It is classified as; micro enterprise if it has assets of ₱3 million or less

and 1 to 9 employees; small enterprise if it has assets of ₱3 to 15 million and 10

to 99 employees; medium enterprise if it has assets of ₱15 to 100 million and

100 to 199 employees.

Merchandising Industries. This includes industries having variety of products

available for sale and the display of those products in such a way that it stimulates

interest and entices customers to make a purchase.

General Merchandise stores are those retail stores which sell a number of

products which are used by the general public but exclude certain items like food

and grocery.

Liquidity is the availability of cash in the near future to cover currently maturing

obligations.

Solvency is the availability of cash over a long term to meet financial commitments

when they fall due.

Capital structure is how a firm finances its overall operations by using either by

debt or equity. The current study focused only on debt financing.

Net profit margin is the percentage of revenue left after all expenses have been

deducted from sales.