Effects of Working Capital Management on Small and Medium Enterprise Profitability

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IJMF 3,2

Effects of working capital management on SME profitability
´ ´ Pedro Juan Garcıa-Teruel and Pedro Martınez-Solano
Deptartment of Management and Finance, Faculty of Economy and Business, University of Murcia, Murcia, Spain
Abstract
Purpose – The 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/approach – The 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. Findings – The 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/value – This 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. Keywords Working capital, Profit, Small to medium-sized enterprises Paper type Research paper

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International Journal of Managerial Finance Vol. 3 No. 2, 2007 pp. 164-177 q Emerald Group Publishing Limited 1743-9132 DOI 10.1108/17439130710738718

1. Introduction The corporate finance literature has traditionally focused on the study of long-term financial decisions. Researchers have particularly offered studies analyzing

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