Working Capital Level Influence on SME Profitability

Abstract

This paper aims to report the results of an investigation of the relationship between working capital level, measured by the cash conversion cycle and profitability of Small and Medium Enterprises (SMEs). The paper employs panel data regression analysis on a sample of 160Alternative Investment Market (AIM) listed SMEs for the period from 2005 to 2010. The empirical results show that there is a concave relationship between working capital level and firm profitability and that there is an optimal working capital level at which firms' profitability is maximised. Furthermore, an examination as to whether or not deviations from the optimal working capital level reduce firm profitability indicate that deviations above or below the optimum decrease profitability. The sample is limited to AIM listed SMEs, and therefore the findings cannot be generalised to all firms. Overall, the evidence suggests that firms should strive and attain the optimal working capital level in order to maximise their profitability. The results are of importance to both SMEs and policy makers providing insight into the nature of cash conversion cycle and its relationship to SMEs profitability.

Cash Conversion Cycle and Firm Liquidity Analysis for Consumer Product Sectors in Malaysia

“…However, this will lead to lower profitability as they would use all their profits to expand more. This can be supported by previous studies (Eljelly, 2004;Afrifa & Padachi, 2016;Raheman & Nasr, 2007;Shin & Soenen, 1998) which found that the smaller the firm, the higher the liquidity; thus, the lower the profitability is. In conclusion, firm size natural logarithm of total asset does affect both relationship and influence towards liquidity.…”

Working Capital Management and Firm Performance: An Empirical Study for Malaysian Public Listed Companies in Property Industry

“…The empirical researches have supported the postulation stating that firms ought striving for an optimal level of working capital components which are receivables, inventory, payables and cash, with the postulation to maximise the shareholders' wealth (Afrifa & Padachi, 2016;Nazir & Afza, 2009;Deloof, 2003). The efficiency of working capital management links with releasing cash tied up from inventories and accounts receivable whereas pertaining to the antecedent of accelerating the collection of receivables in the shortest duration as possible on top of delaying disbursements to suppliers in the feasible yet lengthiest period (Nobanee, Abdullatif, & AlHajjar, 2011).…”

Manajemen Modal Kerja, Kendala Keuangan, Dan Profitabilitas Pada Perusahaan Manufaktur Indonesia

“…Melihat peran pentingnya manajemen modal kerja, suatu perusahaan bisa saja memilih kebijakan manajemen modal kerja secara konservatif ataukah secara agresif (Baños-Caballero et al, 2012;Afrifa dan Padachi, 2016;Afrifa, 2016;Altaf dan Shah, 2018). Kebijakan konservatif mengarahkan kepada investasi tinggi dari modal kerja yang berkonsekwensi pada risiko rendah dan return rendah.…”

“…Hasil-hasil penelitian ini menyarankan bahwa peningkatan modal kerja akan meningkatkan profitabilitas ketika tingkat modal kerja adalah rendah, namun profitabilitas akan menurun dengan peningkatan modal kerja ketika tingkat modal kerja adalah tinggi. Temuan ini menyediakan satu dukungan empiris bagi studi-studi terdahulu (Baños-Caballero et al, 2012;Afrifa dan Padachi, 2016;Altaf dan Shah, 2018). Tambahan lagi, faktor kendala keuangan mempunyai pengaruh pada hubungan antara modal kerja dan profitabilitas perusahaan.…”