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Risks in Operating a Micro Enterprise in Davao City

von Adrian Tamayo (Autor) Janel Kaye Q. Pediangco (Autor)

Hausarbeit 2018 39 Seiten

BWL - Unternehmensführung, Management, Organisation

Leseprobe

Content

INTRODUCTION

METHOD

RESULTS

DISCUSSION

REFERENCES

Abstract

This study was conducted to identify the risk constructs and to determine the level of extracted risks in operating a micro enterprise in Davao City. A modified survey questionnaire was distributed to 104 respondents. The respondents of the study were the micro entrepreneurs who are in the business for the last three years operating within the area of Davao City. The study used quantitative exploratory research using exploratory factor analysis and Kaiser-meyer-olkin to determine the factors and the level of per extracted risks that were critical to the micro entrepreneurs in operating a micro enterprise. The results revealed that among the four risk factors perceived by micro entrepreneurs, only financial risk was considered the factor that greatly affect the operation of a micro enterprise. Furthermore, the study revealed that variables such as income, business type and type of business ownership were considered sensitive in operating a micro enterprise. The study is beneficial to the micro enterprise owners since it would give them a better understanding as to which factors are more significant to them. This would also enable them to prepare and protect their businesses from risks in order to survive the industry.

Keywords: exploratory factor analysis, micro enterprise, Davao City, Philippines

INTRODUCTION

Micro, small and medium enterprises (MSMEs) play vital role in Philippine economic development. However, firms, as much as micro enterprises face risks too which could be grouped as financial risks (Chandler and Hanks, 1998), human risks (Erven, 2009), risks of natural disasters (Sarasvathy, Simon and Lave, 1998), and personal risks (Ang, Lin and Tyler, 1995). It was quoted by Smit and Watkins (2012) that a high percentage of small enterprises fail in their first five years of operation due to unaddressed risks. Of all the risks, financial risks greatly hamper the development of micro enterprises in terms of access to finance. Meanwhile, fortuitous events or natural calamities like fire, typhoon and earthquake comprised the risks of natural disasters.

In reality, SMEs in Asia have poor access to finance (Shinozaki, 2012). Micro enterprises particularly the smaller ones and the start-ups are experiencing difficulty in accessing funds due to insufficient collateral, inadequate financial records, and high interest rates. Most micro enterprises experience financial difficulties and risks as they progress. Thus, some of these micro enterprise owners rely mostly on its own capital and casually borrow from family, relatives and friends for their start-up funds and working capital (Aldaba, 2012).

Generation of income and revenue is every business’ primary goal. Whether it is a small or large enterprise, hiring a human or sales force becomes essential in a business. Since they evidently contribute to the business’ success or failure (Erven, 2009), they Hhhave a great impact in every business activity. On the other hand, most micro enterprise owners or managers commonly execute a management style that is very much personalized and commonly informal (Matlay, 1999). Thus, the subordinates also follow patterns of characteristics and preferences associated to that of their superiors in dealing with their work and customers. Inevitably, those who have rendered longer service in the business follow a management style based on their own verdict. Factors such as these commonly result to theft and fraud which are seen as another source of risk the business (Dorminey, Fleming, Kranacher and Riley, 2010).

Patterson (1924) forebears business risks in its many manifolds as having legal implications. There are plenty of legal issues to consider in starting a business. Everything from the business name to business structure to its operation has legal implications. Firms must act accordingly with the government policies and requirements in order for it to operate smoothly. More often the risks inflate because of the embedded quality of business and personal risks (Ang et al., 1995). There is always a serious issue when lack of separation between business and personal risks arises (Greenbank, 2001). Most of the business owners handle their finances in a casual way. They tend to mix their business finances with their personal finances due to their belief that it will come back to them in the end anyway. Hence, protecting the business from risks is essential to ensure business continuity. It is hard to eliminate risk because it is normally present in all businesses whether big or small. It is best to identify and manage the risks involved in operating a micro enterprise in order to minimize its effect. Understanding and addressing such would contribute to realizing a stronger, longer and more sustainable future for every micro business (Reuvid, 2010).

This study primarily aims to help future Dabawenyo businessmen to become more successful in their business venture. There are no studies yet that focus on risks in operating a micro enterprise in Davao City. The four risks identified earlier by different authors were referring not only to micro enterprises but to all enterprises may it be small, medium or large corporations. Their articles basically discuss each risk broadly. Thus, it is significant to conduct this study because this will comprehensively determine the risks that Micro Enterprises in Davao City face and investigate as well the risk level of operating such.

Objectives

This study intended to determine the specific area of the level of risks in operating a Micro Enterprise in Davao City. This study addressed the following objectives:

1. To determine the risk constructs of micro enterprises through the exploratory factor analysis (EFA):
1.1 Financial Risk
1.2 Human Risk
1.3 Risk of Natural Disaster
1.4 Personal Risk
2. To determine the level of extracted risks that were determined by EFA; and
3. To determine statistically the influence of business risks in the operation of micro enterprises.

Review of Related Literature

This section provides different concepts, theories and other related materials that offer a clearer structure to this study. The following reviews are comprised of various principles and selected literatures about this subject.

Micro Enterprise

The Department of Trade and Industry (DTI) of the Philippines defined micro enterprise as a small business that has one to nine employees. It has an asset size of not more than three million pesos, exclusive of the land where the business entity’s office, plant, and equipment are located. Department of Trade and Industry also stressed out that Micro Enterprises contribute to the creation of wealth, employment opportunities, and income generation both in rural and urban areas. In fact, Third World governments recognize the contribution of these enterprises in terms of job creation, income generation, and alleviation of poverty (Ayanda and Laraba, 2011). Liedholm and Mead (2013) also added that micro enterprises including small enterprises in most developing countries are a major feature of the economic landscape nowadays.

Moreover, the article written by Luiz (2002) stated that there was a notable change in the 1990s on the role of small business development in the economy. Small-scale enterprises in most developing countries were perceived as solution for unskilled, surplus labor. It provided income-earning opportunities too for the informal sector. As such, it was still observed as a marginal sector and incorporating it into majority of economic activity was considered unimportant. On the contrary, Steel (1993) added that it has been proved that micro enterprises posed great importance. Strategies have been developed to expand worldwide and integrated this sector. He also pointed out that in some Asian countries like Taiwan, micro and small enterprises have benefited from subcontracting engagements with larger firms because of its well-developed urban industrial and financial systems. In addition, Nichter and Goldmark (2009) stated that micro and small firms in developing countries can gain easier access to finance and let them experience rapid and substantial growth.

In fact, there were a total of 774,664 establishments in the year 2010 listed on the NSO of the Philippines. Micro enterprises comprised majority or 91.6 percent of the total number of MSMEs. Majority of formal MSMEs in the Philippines are micro enterprises. On the other hand, the term “micro enterprise” indicated different bodies depending on the country where the business is situated. Micro enterprises in developed countries comprised the smallest end in terms of size, of the small business sector. Micro enterprises in developing countries comprised the vast majority of the small business sector (Ayyagari, Beck and Demirguc-Kunt, 2007).

Furthermore, micro-enterprises operating in developing countries are entrepreneurs primarily by necessity (Roy and Wheeler, 2006) and that for some reasons their basic needs determine their business activities and their behaviors. This is due to the relative lack of formal sector jobs available for the poor. Moreover, different barriers such as poor access to capital, poor training and general aversion to risk normally contribute to the success and failure of micro businesses. In the same manner, risks should be addressed accordingly for the business to survive the game.

Business Risk

Starting and operating a micro enterprise entails variety of risks and includes a possibility of success as well as failure. Moreover, failure of small enterprises could be due to lack of planning, improper financing, and poor management by the owners according to Longenecker, Moore, Petty, Palich and McKinney (2006). For instance, a simple management mistake is likely to lead to sure death of a small enterprise because risks are inherent properties of all business process. Certain techniques are needed in order to identify, represent and analyze these risks (Rosemann and zur Muehlen, 2005). These risks were then gathered as financial risk (Chandler and Hanks, 1998), human risks (Erven, 2009), risks of natural disasters (Sarasvathy, Simon and Lave, 1998) and personal risk (Ang et al., 1995).

Similarly, barriers and risks by some mean discourage the formation of new micro enterprise and its entry to a step higher in becoming a small, medium or large enterprise. This was supported by the fact that Philippine had several numbers of start-up procedures, costs to start a business and numbers of tax payments per year that make Philippine behind compared from other countries with respect in reducing these constraints. In fact, it was gathered from the literature of Smit and Watkins (2012) that a high percentage of small enterprises fail in their first five years of operation due to over trading and financial draining. Access to finance has therefore evidently highlighted in various studies as a constraint on the development of micro and small enterprise.

Moreover, most of the micro enterprises are commonly solely or family-owned in which the owner’s management style identifies how the business is being run. Owners of these micro enterprises are the ones regularly seen in the establishments. Therefore, absence of owners and mismanagement are few reasons why most businesses fail. Business owners who identified their businesses as more successful spend less sleep and employ temporary help during busy times in the business (Olson, Zuiker, Danes, Stafford, Heck, and Duncan, 2003). Primarily, the objective of every enterprise is to maximize shareholders’ wealth. Ignorance and negligence of risk will end up losing shareholders’ wealth (Kirytopoulos, Leopoulus, and Malandrakis, 2001). Thus, risk management becomes an integral part of managing a business. Firms must follow particular business systems in order to improve its operation and also to minimize the risks that a business might encounter. The better the risks are addressed and dealt with, the less of financial burden it will cause a business to bare. However, weighing and controlling business risks become perilous especially in emerging micro and small enterprises where risk assessment strategies or models no longer seem to exist (Haley, 2003).

Also, financing difficulties posed as one of the most serious problems for the growth of different firms and commercial banks based on the survey conducted by Aldaba (2011). The survey results revealed that SMEs show continued reliance on internal sources of financing not just during their start-up period but also in the ongoing operations of their business. Naturally, financial capital is needed to start and improve businesses. Also, micro entrepreneurs who intend to expand their businesses in the next years recognize that internal funds alone are not enough to support such expansion. As a result, financial risk was identified as the most serious constraint to the growth of micro enterprises (Bowen, Morara and Mureithi, 2009).

Correspondingly, financial risk is indeed a key factor in all economic activities. Small businesses typically complain that shortage of capital is their major problem and that this impacts their ability to invest in a particular asset, whether it is raw material, equipment, customer credit or finished products. Moreover, Rogerson (2001) and Skinner (2005) also stated that lack of credit is a major constrained experienced by emerging African SME entrepreneurs, who is depended on personal savings or loans from relatives and friends, as the source of their start-up capital.

Furthermore, financial risks involve the problem in access to finance, mainly from external sources like banks, which becomes significant as enterprises start expanding. This is made true by Cooper, Gascon and Woo (1994) who mentioned that financial capital is the most visible means that can make a defense against random shocks. In effect, government financial institutions and private banks should offer funds to micro enterprises. Nonetheless, micro enterprises experience difficulty in accessing these funds due to insufficient collateral, inadequate financial records, and high interest rates which drive most business owners to fund their expansion through loans. However, problem arises between the amount needed by micro enterprises and the real amount of funding made available by the banks.

In addition, Schmidt and Zeitinger (1997) also added that financial institutions must first be willing to play the role different from their conventional way if they really aspire to upkeep workable financial sector development for the micro and small enterprises. A commercial approach should be practiced in order to improve the entire financial sector of a particular developing country. Using commercial approach may include keeping costs as low as possible and those financial institutions should provide good financial services to micro enterprises. Otherwise, Chandler and Hanks (1998) added that insufficient financial resources can be a reason for the failure of an enterprise.

To sum it all up, a more relaxed access to finance from different financial institutions could offer sufficient financial resources to micro enterprises that would in return increase the income of the business. This will bring positive effect to the industry as well as to the country’s economy. In most developing countries, the vast majority of micro enterprises never expand beyond a few employees. However, some micro enterprises experience rapid and substantial growth. Thus, the government’s policy to promote and support these matters is really necessary and crucial to the overall economic growth and development.

Another source of risk in business is the staffs since they have great impact in the business operation (Erven, 2009). Just like larger businesses, people contribute to the business’ success or failure. As such, smaller businesses like micro enterprises do not escape the impact of human resource. In this case, human risks in business involve shortage of employees, employees doing disordered work, those who refuse additional work responsibilities, etc. Evidently, they greatly affect the business effectiveness and efficiency. For this reason, proper human resource management should be done in order to address boundaries and fill employees’ gaps in a business.

In the same way, human risk is another example of operational risk. It is also one of the hardest risk types to quantify and manage at any organization since it is not inherent in financial and systematic field. It is usually identified after breaking down internal procedures and systems. Human risk can raise all sorts of financial and reputation-related issues in an organization in the long run. These issues can then cause serious and significant damage. Employee theft and fraud are just few examples of human risk. Furthermore, employees see a chance to commit fraud without being detected due to poor internal controls, poor training and weak ethical culture. But if this is address proactively, a business “can drive sustainable and positive business results”. Thus, businesses with lower human interaction are likely to have lower human risk (Dorminey et al., 2010).

Comparatively, the preliminary study results of Matlay (1999) exemplify that micro businesses have a tendency to show greatly personalized and informal management styles. Their employee relations strategies follow tactics that of their owner/managers’ characteristics, personalities and preferences. Basically, the performance of employees toward its customers and work depends on what they see and learn from their superiors. It was also concluded that a lack of technical and managerial skills (Brink, Cant, and Ligthelm, 2003; Rogerson, 2008) impedes on business development. Research conducted on SME failures in South Africa revealed that failure was primarily caused by a lack of management skill and training. This finding was confirmed by 90% of a sample of 1000 entrepreneurs who believe that SME failure is due to a lack of managerial skills. However, taking the importance of training and skill into account, it is cautioned by Rogerson (2008) that skills are not the only or even primary answer to the challenges facing SME development. Thus, factors like finance, skills, business training and less rigid regulations are the key elements to promote entrepreneurship, to enhance the enterprise environment, to improve competitiveness and capacity of micro enterprises (Rogerson, 2008).

Another common business risks are the risk of natural disasters. These include events like accidents, fires, floods, tornadoes, earthquakes and other natural calamities. Man-made, as well as natural hazards can damage a business operation. In the worst cases, natural disasters can run an enterprise out of business. Proper planning and preparation is a must to help a small business recover full operations. Survey results of Runyan (2006) showed include lack of planning by small business; vulnerability to cash flow interruption; lack of access to capital for recovery; problems caused by federal assistance; and serious infrastructure problems impeding recovery.

It would be of great help if micro enterprise has proper preparation before disaster strikes by making a business continuity plan and a disaster recovery plan. Adapting to the changes of the environment is the key to a business’ survival.

Ang et al., (1995) pointed to the fact that most small businesses have little separation between their business and personal risks. Micro business owners tend to confuse their personal matter with their business finances. Stewart, Watson, Carland and Carland (1999) confirmed that these small business owners concentrate on providing household income and view the business as an extension of their personalities. Thus, micro enterprise owners have a tendency to mismanage business funds and eventually result to business failure.

In the same way, micro enterprise owners also leave the management of the business in the supervision of their managers in times of emergency. This may lead to the business success or failure. It is seen that owners who spend most of their time in their business result to success. Thus, planning in micro and small enterprise seems to boost business performance. Business owners should treat the enterprise as a separate entity to improve business operation and survive in the industry.

So, the barriers to micro enterprise success are various and diverse. It includes obstructions such as poor managerial skills and training, poor market access, poor preparation for natural calamities and personal related matters. Owners are mostly responsible for the management of their enterprises’ operations. There are studies that confirmed the ignorance of the owners about the risks their businesses encounter from internal to external causes. Therefore, it is best to address all these risks as early as possible to make the business effective.

Theoretical Framework

This study used a risk analysis method which is defined as “set of triplets’ idea” by Kaplan and Garrick (1981). By using this method, it predicts how the future will turn out if certain course of action will be carried out. Risk analysis is answerable to questions like what can happen; how likely it will happen; and if it does happen, what could be the consequences. This idea was accentuated by the viewpoint of Kaplan and Norton’s (1995) balanced scorecard that offers effective measure in the management process. Balanced scorecard is a management system that can motivate breakthrough improvements in critical areas such as product, process, customer, and market development.

In the study of Rider, Milkovich, Stool, Wiseman, Doran and Chen (2010) regarding risks, they defined Quantitative Risk Analysis (QRA) which is a variant of risk analysis, as a scientific methodology that quantitatively exhibit the potential risk linked with several given consumer products. According to them, QRA is based on the Risk Equation which is Risk= Hazard x Exposure. Using QRA, they come up with a result that allowed them to identify the critical factors influencing the risks posed by consumer products in the market.

2014). Thus, human risk is inevitable since every business needs hHhuman force in order to make the business run. They contribute great effect in every business activity for they are responsible for to the business’ success and failure. Meanwhile, fortuitous events or natural calamities like fire, typhoon and earthquake comprised the risks of natural disasters. Another indicator is the personal risks. Among all micro enterprise, lack of separation between business and personal risks has always become a serious issue. Most micro enterprise owners face obstacles such as poor managerial skills, training and education (Smit and Watkins, 2012) which result to handling their business and finances in a casual way. They tend to mix their business finances with their personal finances due to their belief that it will come back to them in the end anyway.

All of these risks posed a great threat for every micro enterprise. It is best to identify and manage the risks involved in operating a micro enterprise in order to minimize its effect. These risks observed by micro enterprises are the factors that contributed to the level of risks faced by micro enterprises which is the output of the study. The profiles like income, nature of business, number of employee, capital and asset size contribute to the result of the study as well.

Significance of the Study

Recognizing the different risks associated in operating a micro enterprise would be much beneficial to following persons or organizations. First, the result of this study will provide information to the micro enterprise owners about the different risks associated in operating a micro enterprise. This study will support business owners in making better decisions in any of their business activities. It would also lead to improvement on overcoming risks.

Next, for business start-ups, this study will provide great opportunity particularly for minorities and low-and-moderate income individuals who want to start their own micro businesses. Entrepreneurs will now be aware of the different risks they might encounter upon starting the business. They will be able to study the risks before starting their business and learn how to handle such risks.

Lastly, the result of this study will encourage business students that they can also start their own micro businesses. Aside from the small capital needed to operate a micro enterprise, it will be a great opportunity too to promote employment and create local ownership which can lead to individual wealth.

Definition of Terms

The following terms are defined operationally in this study:

Micro Enterprise is defined as a business that is composed of 1 to 9 employees and has an asset size of not more than 3 million pesos, exclusive of the land where the business entity’s plant, office and equipment are located.

Risks are inherent in every business operation. One of the risks is financial risk which is associated with financing like financial transactions and loans. Next is human risk which includes employee theft and fraud. Lastly, personal risk that includes personal finance that owner tends to mix with his company’s finances.

METHOD

Presented in this section are the research design, research locale, population and sample, research instruments, data collection and statistical tools of the study.

Research Design

The method used in this study was quantitative exploratory research. Quantitative research according to Garwood (2006) is “research involving the collection of data in numerical form from either controlled environments or from samples of the general population.” This is to determine the relationship between an independent variable and dependent or outcome variable in a given population (Hopkins, 2008). This research method could be of help in assessing the risks associated with operating a micro enterprise.

Population and Sample

The respondents of this study were one hundred four (104) micro enterprise owners who are in the business for the last three years and which operate in different locations around Davao City. The respondents include owners of “sari-sari store”, beauty parlors, rice retailers, ready-to-wear apparels, eatery and auto repair shop. They were chosen on a suitable basis, which is a purposive or non-probability sampling (Tongco, 2007). Purposive sampling includes people of interest and excludes those who do not suit the purpose.

The tables on the following pages illustrated the results on the socio-economic profile of the respondents and the profile of the micro-enterprise. Out of the 104 entrepreneurs who responded to the survey, it revealed that most of them were in their 30’s to 40’s and mostly were females with income between P20,000 to 40,000 a month. The type of micro businesses vary from sari-sari store (29%), service-oriented businesses like accounting, barbershop (17%) to operating an Inn (2%) and producing furniture (1%). Generally, the sector most represented in the survey result is the retail industry.

The results of the survey also indicated that most of entrepreneurs were into business for roughly four years, and had one to three workers. Businesses that employ 0 to 9 workers are classified as micro enterprise and had total assets of less than P3,000,000.00 excluding the land where the business was situated. By the type of business entity, survey shows 88% were solely owned. These micro enterprise owners were largely interested in producing a living to support themselves and their families.

Socio-economic profile of respondents

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Profile of the micro-enterprise

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Research Instrument

The study used survey questionnaires to gather information from different respondents. It is a research-based type of a questionnaire. Questions involved 80 items that came up to 49 items. It used a five-point Likert scale for measuring the level of extracted risks. A five-point Likert scale allows the respondents to express how likely they agree or disagree with a particular statement. Questionnaires were administered through face-to-face interview and online survey. The researcher chose to conduct a face-to-face interview so that the respondents can clearly understand the questions being asked. The responses were then used for statistical analysis.

Data Collection

These were the procedures in gathering the data for this research. First, permission was asked to conduct the study which included an approval from the panel before the study was conducted. Then, the final questionnaires were distributed to all respondents after the pre-testing of survey questionnaires. Next, the

accomplished questionnaires were retrieved from the respondents within one (1) week. Each questionnaire was checked for incomplete or missing required information to be filled out and as to the completeness that all questions had been answered by the respondents. Results of the survey questionnaire were then collected and tabulated using Microsoft excel collate. Lastly, the tabulated data were analyzed and interpreted using applicable statistics.

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Statistical Tools

Exploratory Factor Analysis (EFA) was used to determine the number and nature of those factors, and the pattern of influences on the surface attributes. Factor analysis is a data reduction technique. It can be used to identify the underlying components that explain the correlations among a set of variables (Gerber & Finn, 2005). The risks that are to be determined are associated with the operation of the business.

Kaiser-Meyer-Olkin (KMO) measure of sampling adequacy provides an index (between 0 and 1) of the proportion of variance among the variables that might be common variance (i.e., that might be indicative of underlying or latent common factors). This suggests that a KMO near 1.0 supports a factor analysis and that anything less than 0.5 is probably not amenable to useful factor analysis.

RESULTS

This chapter discussed and interpreted the results of the survey conducted. It described the latent construct of risks and the level per extracted risks based on the survey result of 104 micro entrepreneurs in Davao City. Correspondingly, the influence of socio-economic and business profile on the level of risks of micro entrepreneurs were also presented and discussed based on the stated research objectives.

Latent construct of risks of micro-entrepreneurship

Table 1 shows the latent construct of risks in operating a micro enterprise with the help of Exploratory Factor Analysis (EFA). It identified 8 factors that are then widely grouped into 4 relevant components. These components are financial risk, power outages risk, human resource risk and disaster risk.

Financial risk identified five indicators such as “not setting aside a personal savings”, “inability to meet financial obligations”, “low capital budget for improvements”, “not saving for emergency fund”, and “inability to achieve good financial standing”. Power outages risk, human resource risk and disaster risk have one indicator each.

The factor analysis in Table 2 reveals an acceptable measurement value for adequacy of samples, KMO of 0.58. The value of Kaiser-Meyer-Olkin Measure of Sampling Adequacy must be above 0.50 (KMO>0.50) in order to be considered acceptable for factor analysis (Williams, Brown and Onsman, 2012). The Bartlett’s

Table 1

Micro-entrepreneurs Risk Perceptions

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Table 2

Test of Adequacy and Sphericity

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Test of Sphericity shows a significant chi-square value of 2568 Abbildung in dieser Leseprobe nicht enthalten signifying the extracted latent risks were statistically reliable. The p-value for this analysis hinted us to reject the null hypothesis and concluded that there were correlations in the data set that were suitable for factor analysis.

Also, Table 3 presents the data with 74% ability to explain the variance which suggests that the loadings and constructs could explain the extracted components.

Table 3

Total Variance Explained

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Moreover, with the aid of Exploratory Factor Analysis, the number of major influences underlying a domain of variables can be concluded. EFA measures the level to which each variable was associated with the factors and gained information about their nature from observing which factors contribute to performance on which variables. Each component has factor loadings that explain the identified components of risks of micro enterprise.

Level of risk per extracted constructs

Presented in Table 4 are the responses on the level of financial risk which registered an overall mean score of 2.67 or moderate level indicating that the respondents are neutral with this factor.

The moderate descriptive level was seen in the questions regarding inability to set aside personal savings (2.84), low capital for improvements (3.07), and lack of emergency fund (3.32). The survey results revealed that these are the common problems faced by micro entrepreneurs in managing their micro businesses.

Davao micro entrepreneurs are having the trouble of dissociating themselves from the business as they are hounded by the concerns of the future when an emergency occur and that the business has no provision for it which will lead to necessary conversion of personal savings for business use. Owners have the inclination of mixing their business and personal finances thinking that whatever profits earned will eventually return to them.

On the other hand, two indicators of financial risk posed low descriptive level namely, inability to meet financial obligation (2.00) and inability to achieve good financial standin g (2.13). This revealed that the entrepreneurs are not finding much the risk of being overtaken by dues and other financial obligations and the trouble of not maintaining a good financial standing. Thus, it seems like the micro enterprises owners are able to roll their revenue to meet their obligations which improves their standing in the market.

Table 4

Financial risks faced by Micro entrepreneurs

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Presented in Table 5 is the response on the level of power outages which registered a mean score of 4.00 or high level indicating that this factor is deemed important to the respondents. Micro enterprises are hugely beset by the troubles of power outages and brownouts which reduce their productivity and ultimately their ability to sustain operation.

Table 5

Power outages risks

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Another level of extracted risk is presented in Table 6 regarding human resource with a mean score of 2.18 or low level indicating that this item is not that important to the respondents. Most of the respondents have the trouble of choosing carefully their workers. Perhaps, because the enterprise is low, and usually their ability to pay for a worker is comparably lower than the small and large enterprises, good workers leapfrogs their offer of compensation. This will leave micro businesses with workers who have low productivity as a result of low education.

Table 6

Human resource risks

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Finally, Table 7 shows the level of disaster risk which registered a mean score of 2.18 or low level indicating that this factor is not that important to the respondents. Moreover, the micro-entrepreneurs are also looking at the adverse effects of the disasters on their operation and consequently on their sales.

Table 7

Disaster risk

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In order to determine the influence of socio-economic and business profile on the level of risks of micro entrepreneurs, an artificial neural network was employed as shown in Figure 4 to construct architecture of relationship of the variables. The network information revealed that there are eight factors that served as input layers. They are the entrepreneurs’ age, gender, income, status, nature of business, year started, number of employees, and type of business. Each of the distinct parameters under the profile variables functioned as units, summing up the thirty-five parameters which were tested for their influence on the level of risks in operating a micro enterprise. The level of risks is then called the independent variable.

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Figure 1. Diagrammatic Representation of the Neural Network and the Synaptic Weights

Moreover, the network information on the previous page reveals the impact of the variables on the risks through the hidden layer. In particular, it should be noted that a grey line positively affects the level of risks through the hidden layer; the blue line negatively impact the risks. The lighter colored network implied positive synapses which suggested positive impact on the level of risks. The darker colored lines signified negative synaptic weights which also implied negative effect on the level of risks of micro entrepreneurs. Using a simulated variable importance, income of the entrepreneur happened to be the most important variable in consideration followed by the nature of business, and then least is the civil status of the micro entrepreneur.

Illustrated in Table 8 is the model summary which also impressed that the architecture, design of training and testing are deemed acceptable. The sum of squares of the error are small in the training, the relative error is barely above 1 as well. The testing also offers the same figures indicating acceptable values.

Table 8

Model summary of the network

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The variable importance is also extracted as shown in Table 9 and Figure 5, and it was found that of the variables identified, the most important is the income of the entrepreneur. This is strongly suggestive of the liquidity ability of the business as a result of the huge capital base of the owner resulting from income, perhaps from other ventures other than the business.

Second most important is nature of business. A good business is a business that directly involves the consuming public. Given that the business is operating at a micro-level, a relatively successful business would surely be those that have high activity rate (selling and buying) relative to the purchases of the consumers in the immediate environment.

Ownership of business also came out as an important factor in the risk perception. The result of the survey says that most enterprise owners are solely owned. Socio-economic profiles are some of the least important factors in the micro-enterprise operation. These variables are civil status with 6 percent importance, gender with 29 percent importance.

Table 9

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Figure 2. Graphical presentation of variables importance (Normalized Importance)

Chapter 4

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DISCUSSION

This chapter presents the summary of the key findings of the study which includes the discussion of the data gathered and collated on latent construct of risks and the level of per extracted risks in the operation of micro enterprise in Davao City. Furthermore, results on the influence of socio-economic and business profile on the level of risks are discussed comprehensively.

Latent construct of risks of micro-entrepreneurship

As seen in the statistical results in the previous chapter, four components of risks namely, financial risk, power outages risk, human resource risk and disaster risk were identified using exploratory factor analysis (EFA). Of all the stated risks, financial risk has the biggest factor among all perceived risks and it is what the respondents in Davao City are most concerned of. Financial risk is indeed identified as the most serious constraint to the growth of micro enterprises (Bowen, Morara and Mureithi, 2009).

Moreover, with the aid of Exploratory Factor Analysis, the number of major influences underlying a domain of variables can be concluded. Exploratory Factor Analysis measures the level to which each variable was associated with the factors and gained information about their nature from observing which factors contribute to performance on which variables (Cudeck, 2000). These factors are discussed further on the following sections.

Level of risk per extracted constructs

With the help of exploratory factor analysis (EFA), the overall level of financial risk in operating a micro enterprise is identified as moderate. The indicators that greatly contributed to the overall mean of financial risk are the financial perceptions on not setting aside a personal savings, having low capital budget for improvements and not saving for emergency fund. Most of them prefer to put their money in the business rather than setting it aside for personal savings. They are troubled when unexpected events or emergency occur and the business could not provide for it. This will lead to conversion of personal savings for business use in order to cope up or recover. They also believe that adding it to their working capital would also increase their profit. Davao business owners are also seen to mix their business and personal finances thinking that whatever profits earned will eventually return to them (Ang et al, 1995). Furthermore, emergency fund has no universal definition, but according to some financial planners it is an amount set aside for protection against undesired events. They recommend a range from three months to six months of living or business expenses (Chang and Huston, 1995). This is to protect the business from events like disasters or calamities until such time that the business can manage again. Nonetheless, lack of access to credit does impede a micro business from growing. If only financing become more readily accessible, micro enterprises not just in Davao City but all over Philippines could be accelerated (Aryeetey, 1994).

In addition, the results also show that inability to meet financial obligations and inability to achieve good financial standing are described as low level or are not that important to the respondents. The micro entrepreneurs are not concerned of the financial obligations. They are able to meet their dues and maintain a good financial standing which keep most of them in the industry for more than four years .

On the other hand, another factor such as power outages revealed a high level which is pointing out that micro entrepreneurs are greatly affected by this. Most of the businesses especially those that belong to the industry which offer services like internet café and massage spa are the ones who greatly suffer. Thus, electric power crisis may result to lower sales growth, slightly higher bad debts and inability to expand. One cause of power outages is the weather condition such as high winds, and storms can cause electricity service interruptions. It can greatly affect a business operations like lost orders, damage perishable goods, lost production, etc. (Campbell, 2012).

The low level obtained from human resource risk implied that the respondents are not giving much attention and importance to their staffs. However, according to Hornsby and Kuratko (1990), human resource issue is still inevitable in every small business with two or three employees where sophisticated personnel systems did not exist. Meanwhile, the low level result on the disaster risk indicates that micro entrepreneurs are not very much bothered by the effects of natural calamities. This could be for a reason that they have not experienced it yet. However, disaster risk should be given equal attention. Micro enterprises could face significant losses of wealth if not addressed well. It is always believed that calamities have an overall negative economic effect to any business (Guimaraes, Hefner and Woodward, 1993).

Influence of socio-economic and business profile on

the level of risks of micro entrepreneurs

The network information revealed that there were eight factors, entrepreneurs’ age, gender, income, status, nature of business, year started, number of employees, and type of business were tested for their influence on the level of risks in operating a micro enterprise. It was revealed that income of the entrepreneur served as the most important variable which suggested the liquidity ability of the business as a result of vast capital of the owner. Second most important variable is the nature of business.

A business that involves the consuming public is a good business for it includes a high activity rate of selling and buying. Next, ownership of business came out as another important factor of risk. The survey result showed that most of the micro entrepreneurs owned their businesses solely. Moreover, factors such as year started, owner’s age, number of employees, gender and civil status served as least important factors of micro entrepreneurs.

An artificial neural network (ANN) was originated from the functions of a human brain where hundreds of billions of interconnected neurons process information (Wang, 2003). The basic idea behind an artificial neural network was to make computers work just like brains. The neural networks were commonly software simulations which behave as if they were built from billions of highly interconnected brain cells working in parallel.

Artificial neural network has hundreds to thousands, or even millions of artificial neurons calledunits, which are arranged in a sequence of layers, each of which connects to the layers on either side. Some of them are known as input units. Input units are intended to collect numerous forms of information from the outside world that the network will recognize or process. The other unit, output units are located on the opposite side of the network which responds to the information gathered. In between the input units and output units are one or more layers ofhidden units which form the majority of the artificial brain. The connections between one unit and another are represented by a number called aweight. It can either be positive or negative. The higher the weight, the more influence one unit has on another.

Conclusion

The data gathered and analyzed from the results of this study have a contribution to the business industry as to understanding and managing financial risk. The statistics revealed that financial risk is what most Davao micro entrepreneurs are concerned of. This is an implication that the identified factors are very essential in helping micro entrepreneurs survive the industry. “Not saving for emergency funds” was the most common problem faced by micro business owners. Most micro entrepreneurs were having a hard time separating themselves from their businesses. As a result, personal and business matters or finances tend to mix therefore leaving emergency funds unimportant.

Recommendation

Now that risks are identified, protecting the business from these risks becomes essential in order ensure business continuity. It is hard to eliminate these risks because it is normally present in all micro enterprises, therefore it is best to manage these risks in order to minimize its effect and have a more sustainable future for every micro business.

The result of this study suggests that since financial risk is what preventing a micro enterprise from growing and realizing its goals, there must be a strong stand for effective implementation for a structured approach to micro enterprise risk management. The potential benefits could be cost reductions, reducing the over-management of risks and organizational alignment towards the micro enterprises’ mission and objectives. Government should educate the micro enterprise owners through conducting seminars which will primarily tackle about proper handling of cash. Government could introduce technological innovation (e.g., customized software system) to properly record and monitor the operation or status of the business. In this way, the micro entrepreneurs will be able to minimize the trouble of mixing their business and personal finances.

A further study on how to address and minimize these risks could also be a great continuing topic. There are still a lot to be learned about these risks in operating a micro enterprise. Since the level of risk is moderate, government should seriously enhance some laws and policies to protect the owners from risks. This will eventually boost the MSMEs industry and the country’s economy as well.

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Details

Seiten
39
Jahr
2018
ISBN (Buch)
9783668717466
Dateigröße
779 KB
Sprache
Englisch
Katalognummer
v426911
Institution / Hochschule
University of Mindanao – Research Center
Note
Schlagworte
risks operating micro enterprise davao city

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Titel: Risks in Operating a Micro Enterprise in Davao City