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Journal cover: International Journal of Managerial Finance

International Journal of Managerial Finance

ISSN: 1743-9132

Online from: 2005

Subject Area: Accounting and Finance

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Effects of working capital management on SME profitability


Document Information:
Title:Effects of working capital management on SME profitability
Author(s):Pedro Juan García-Teruel, (Deptartment of Management and Finance, Faculty of Economy and Business, University of Murcia, Murcia, Spain), Pedro Martínez-Solano, (Deptartment of Management and Finance, Faculty of Economy and Business, University of Murcia, Murcia, Spain)
Citation:Pedro Juan García-Teruel, Pedro Martínez-Solano, (2007) "Effects of working capital management on SME profitability", International Journal of Managerial Finance, Vol. 3 Iss: 2, pp.164 - 177
Keywords:Profit, Small to medium-sized enterprises, Working capital
Article type:Research paper
DOI:10.1108/17439130710738718 (Permanent URL)
Publisher:Emerald Group Publishing Limited
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.



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