Trends in working capital management and its impact on firms’ performance – An analysis of SMEs

Abstract

This paper aims to explore the relationship between the performance of small and medium enterprises (SMEs) and working capital management. To make the research robust, accounting performance and measures of market related performance have been used to gauge the SMEs performance. This research utilizes secondary data obtained from the Alternative Investment Market concerning SMEs listed in the London Stock Exchange, to investigate the significance of working capital management towards the performance of SMEs. The working capital management components that were used in research are; account payable period APP, average collection period (ACP), return on assets (ROA) and inventory holding period (IHP). The analysis of data involved the use of regression analysis and extensive use of correlation analysis in order to establish the relationship between working capital management and SME performance. The study established that the use of WCM components such as cash conversion cycle, return on assets, cash conversion cycle and inventory holding period have a significant impact on the performance of SMEs. Further, it was established that when SMEs invested heavily in inventories and receivables, they amassed low profits while investment in current assets in relation to total assets lead to elevated profitability. Hence, it was concluded that there is a compelling relationship between WCM and SME performance.

Aggregate and Disaggregate Measures of Operating and Non-Operating Working Capital Influence on Firm Performance: Evidence From Malaysia

“…Bhatia and Srivastava (2016) conducted a study on 179 nonfinancial firms listed on the Bombay Stock Exchange and determined that by decreasing the cash conversion cycle days, average inventory days, and average receivable period, and by increasing the average payment period, firms can increase profitability. Zhang et al (2017) conducted a study on 140 SMEs listed on the London Stock Exchange between 2008 and 2016. Findings revealed that longer cash conversion cycle, longer average payment period, longer average receivable period, and longer average inventory days increased firm profitability.…”

Qualitative analysis into liquidity management by SMEs in the UAE

“…There are different types of problems faced by SMEs like unskilled employees, lack of experience, lack of appropriate educational background, lack of technology, limited number of employees, lack of managerial expertise and above all limited financial resources (Khalique et al, 2011). Cash Conversion Cycle return on assets and inventory holding period which together constitutes the Working Capital Management (WCM) has a significant impact on the performance of SMEs (Xiaoting Zhang et al, 2017). SME management is characterized by the last-minute scramble for liquidity which can be completely avoided through efficient management of the working capital cycle.…”

Corporate profitability-working capital management tie: empirical evidence from pharmaceutical sector of Pakistan

“…It is also considered to measure the efficiency of working capital (Mehmet and Eda, 2009). Cash conversion basically depicts the efficiency in a number of days to utilize the available cash in order to generate more cash by quickly selling inventory (Padachi, 2006). "Cash conversion cycle define the time in which current assets transmitted in the most liquid form".…”

“…Most of the time, majority scholars suggested the inverse relation between cash conversion cycle and return on assets. Performance and productivity can be increased by shortening the cash conversion cycle (Alavinasab and Davoudi, 2013;Anser and Malik, 2013;Bolek, 2013;Egbide et al, 2013;Makori and Jagongo, 2013;Manyo 2013;Ajao and Small, 2012;Ogundipe et al, 2012;Uremadu et al, 2012;Azam and Haider, 2011;Saghir et al (2011);Vijayakumar, 2011;Karaduman et al, 2010;Padachi, 2006)…”