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5. Significance of the Study

Numerous
researches have been conducted in the field of real estate. However, only few
researches about the real estate industry’s working capital are available.
Several factors contribute to this limitation such as company confidentiality
policies. Some of the real estate contractors are focused on cash conversion
and some are more focused on long term profitability. However, the researchers
believe that having more researches and available sources about the real estate
industry’s working capital would be helpful to several stakeholders.

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5.1.
Real Estate Industry                                                                                                

This
research paper would like to help the real estate industry, specifically the
real estate contractors, by providing information on proper working capital
management. This research paper would also like to show the different
relationships of the current assets and current liabilities to the company’s
profitability. The knowledge about the effects of the working capital to
profitability will allow the companies in the real estate industry to monitor
and manage better their working capital.

5.2.
Students

This
research paper will be of help in the studies and can serve as a supplementary
reference to students who are studying Bachelor of Science in Real Estate
Management since information about working capital management and profitability
will be presented in this pap information about short term financing will not
just be applicable in the real estate industry but also in other industries.
Also, this research paper can be of help in enticing the students to enter in
the real estate industry or other related businesses by providing them internal
and financial information.

5.3.
Sureties and Banks

The
research paper will help a company’s creditor to assess better the capacity of
the firm to meet the interest and principal payments when they come due, based
on what has been reflected in their financial statements. With better
assessment of the capacity of the firm to meet payments, they can create
regulations and protocols in lending that are more efficient and effective.
With better regulations and protocols in lending, there will be more qualified
real estate contractors in the industry.

5.4.
Business Sector

This
research paper can be of help as a reference to other industries in the
business sector since the findings about working capital management and
profitability can be applicable to other businesses as well. Also, this
research paper emphasizes the importance of proper working capital management
and monitoring of the current assets and current liabilities in securing the
survival ability of a business.

5.5.
Government and Economy

The
real estate industry is considered to be a “Booming” business in the
Philippines. It used to be just evident in Metro Manila but throughout the
years, the industry is now tapping former rural areas in the country. By
providing more information to the real estate industry about working capital
management, they will be able to reassess their strategies, consider and apply
the theories provided in the paper and ultimately, run their businesses better.
The real estate industry is one of the biggest contributors to the Philippines’
growing Gross Domestic Product. Economically speaking, if GDP is rising, the
economy is in good shape and the nation is moving forward.

5.6.
Future Researchers

Future
researchers may be able to continue this paper using their own resources and
ideas. They can conduct a version of this paper but i er. Other students who
are taking other programs as well can still benefit from this research paper
since nstead of focusing on selected real estate contractors in Metro Manila,
they can focus on selected real estate contractors in other areas in the
Philippines like Cebu City and Davao City. This research paper can still serve
as source material for the future researchers in improving their studies.

 

 

7. Scope and Limitation

The
scope and limitation of this paper set parameters for both the firm and their
working capital. This paper studies real estate firms that are publicly listed
who are categorised under the property sector. This is so since the firms
listed in Philippine Stock Exchange (PSE) fall under six (6) categories wherein
only those belonging to the property sector are included in this paper.
Furthermore, among the thirty-seven (37) firms who are engaged in land and
building development, only thirty-one (31) will be assessed by this study since
the six (6) other firms were publicly listed in the years succeeding year 2012.

These
firms are those whose normal operating cycle mainly involves the cash outflow
upon the acquisition of raw materials or engaging in credit terms with a
construction firm or hardware supply. These raw materials are used in building
their projects and eventually earning sales revenue through the disposal of the
finished units. The funds acquired for a project may be raised through bank
loans, pre-selling down payments, investments, and revenue from other projects.
This therefore involves those who build real estate properties such as but not
limited to townhouses, commercial spaces, and condominiums. This study excludes
those engaged in merely buying and selling of real estate properties. This
further excludes entrepreneurs who are only developers but not contractors
wherein they still have to enter into an agreement with a third party who will
serve as the contractor to build a certain project. Such limitation will not
apply in instances where the developer also happens to be the contractor of a
certain project.

The
focus of this paper mainly revolves around working capital which is assessed
through both the balance sheet and the operating cycle perspective. The balance
sheet perspective includes the analysis of the gross working capital and the
net working capital. For the operating cycle perspective, this paper focuses
more on the permanent or fixed working capital which includes regular and
reserve working capital rather than the temporary or variable working capital.
The accounts to be studied by this research only involve the most common
accounts that are present in the financial statements of all the respondents.
Thus, the current assets portion of the working capital will only be limited to
Cash, Accounts Receivable (A/R), Investments and Inventory. The current
liability portion on the other hand shall only comprise of Accounts Payable
(A/P) and current portion of Notes Payable (N/P).

8. Hypotheses

 

H1:
Firms efficiently managing their working capital would have a higher
profitability.

 

 

H2:  Firms implementing a working capital policy
would expect to have a higher level of profitability at higher levels of
working capital but would decrease upon reaching a threshold.

 

 

H3:
As the liquidity of the firm increases, the profitability decreases.

H5:
As the cash conversion cycle shortens, the profitability of firm increases.

9. Assumptions

The
researchers assumed that the working capital, which includes current asset and
current liabilities, affects profitability of the real estate contractors. The
said effect can be either beneficial or harmful to the contractors. The
researchers further assumed that the financial statements for the past 5 years
and information gathered from the 31 firms are sufficient to come up with
reliable findings. The concept of working capital used by the real estate
contractors is assumed to be the Net Working Capital concept because aside from
current assets, current liabilities were also considered by all the selected
contractors.

10. Definition of Terms

Working capital is calculated as the current assets minus the
current liabilities, is the capital of a business that is used in its
day-to-day trading operations.Permanent working capital refers to the minimum amount of all current
assets that is required at all times to ensure a minimum level of uninterrupted
business operations.Temporary working capital refers to the excess working capital needed
to support the changing production requirements and sales activities.Net working capital is the aggregate amount of all current
assets and current liabilities.Current assets are liquid assets that can be readily
converted to cash. It includes cash and cash equivalents, accounts receivable,
inventory, marketable securities and prepaid expenses.Current liabilities are debts or obligations that are due within
one year. It includes short term debt, accounts payable, accrued liabilities
and other debts. Essentially, these are amounts due to creditors and suppliers
within a short period of time.Contractors are independent entities that agree to furnish certain
number or quantity of goods, material, equipment, personnel, and/or services
that meet or exceed stated requirements or specifications, at a mutually agreed
upon price and within a specified timeframe to another independent entity
called contractee, principal, or project owner.Normal operating cycle is the average period of time required for a
business to make an initial outlay of cash to produce goods, sell the goods,
and receive cash from customers in exchange for the goods.Going concern principle is the assumption that an entity will remain
in business for the foreseeable future.Cash conversion cycle (CCC) is a metric that expresses the length of
time, in days, that it takes for a company to convert resource inputs into cash
flows. It attempts to measure the amount of time each net input amount is tied
up in the production and sales process before it is converted into cash through
sales to customers. This metric looks at the amount of time needed to sell
inventory, the amount of time needed to collect receivables and the length of
time the company is afforded to pay its bills without incurring penalties. The
CCC is also referred to as the “cash cycle”.Fluidity is the quality of being likely to change repeatedly and
unexpectedly.Liquidity is the extent to which a firm has cash to meet immediate
and short-term obligations, or assets that can be quickly converted to cash.Cash
management is the process of collecting and
managing cash, as well as using it for (short-term) investing.Accounts
receivable management refers to the set of policies,
procedures, and practices employed by a company with respect to managing sales
offered on credit.Inventory management is the practice of overseeing and
controlling of the ordering, storage and use of components that a company uses
in the production of the items it sells.Accounts
payable management refers to the set of policies,
procedures, and practices employed by a company with respect to managing its
trade credit purchases.

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