PurposeThe object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium‐sized Spanish firms.Design/methodology/approachThe authors have collected a panel of 8,872 small to medium‐sized enterprises (SMEs) covering the period 1996‐2002. The authors tested the effects of working capital management on SME profitability using the panel data methodology.FindingsThe results, which are robust to the presence of endogeneity, demonstrate that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves the firm's profitability.Originality/valueThis work contributes to the literature in two ways. First, no previous such evidence exists for the case of SMEs. Second, unlike previous studies, in the current work robust test have been conducted for the possible presence of endogeneity problems. The aim is to ensure that the relationships found in the analysis carried out are due to the effects of the cash conversion cycle on corporate profitability and not vice versa.

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This paper analyses the determinants of Cash Conversion Cycle (CCC) for small- and medium-sized firms. It has been found that these firms have a target CCC length to which they attempt to converge, and that they try to adjust to their target quickly. The results also show that it is longer for older firms and companies with greater cash flows. In contrast, firms with more growth opportunities, and firms with higher leverage, investment in fixed assets and return on assets have a more aggressive working capital policy. Copyright (c) 2009 The Authors. Accounting and Finance (c) 2009 AFAANZ.

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This article presents the analysis of the determinants of the trade credit granted and received by a panel of 47,197 SMEs in Europe over the period 1996—2002. Our results show a strong homogeneity in the factors determining trade credit in European countries. On the one hand, firms with greater capacity to obtain resources from the capital markets, and more cheaply, grant more trade credit to their customers. Moreover, the results appear to support the price discrimination theory. We also found that firms react by increasing the credit they grant in an attempt to stem falling sales. On the other hand, larger firms, with greater growth opportunities and greater investment in current assets, receive more finance from their suppliers. Where firms have alternative sources of finance they are less likely to resort to vendor financing (substitution effect).