Proceedings of the 16th International Academic Conference, Amsterdam

THE SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT AND ITS COMPONENTS ON SMES PERFORMANCE - EVIDENCE FROM INDIA

SATISH KUMAR

Abstract:

Purpose-The main aim of present study is to empirically examine the importance of working capital management and its components on the profitability of Small and Medium Enterprises (SMEs) in India. Design/methodology/approach - We employ panel data regression method on a sample of 433 Small and Medium Enterprises (SMEs) from India for the period spanning from 2007 to 2012. Following Deloof (2003); Garcia-Teruel and Martinez-Solano (2007) and Tauringana & Afrifa (2013), we use Cash Conversion Cycle (CCC) as measure of working capital management and its components (inventory, accounts receivable and accounts payable) and Return on Assets (ROA) as the proxy for SMEs profitability. Findings -Using panel data analysis, we find that the number of days of inventory (DI), number of days of accounts receivables (DAR), the number of days of accounts payables (DAP) and cash conversion cycle (CCC) are negatively correlated with profitability of SMEs in India. Results further show that the management of inventory (DI) and accounts receivables (AR) are important for SMEs profitability in India, albiet the latter is relatively less important than inventory management. Overall, our findings are consistent with the earlier work on SMEs by Garcia-Teruel and Martinez-Solano (2007) and Tauringana & Afrifa (2013). Research limitations/implications - Our sample is limited to 433 SMEs, and therefore the findings cannot be generalized to all the SMEs in India. Practical implications -Results of the present study imply that the SMEs in India need to focus their resources on managing inventory and accounts receivables in order to be more profitable. Originality/value-To best of author’s knowledge, the present study is the first to examine the relationship between WCM and its components to SMEs portability in India. The main contribution of this paper is the finding of relative importance of components of working capital management and their differential influence on profitability of SMEs in the Indian context.

Keywords: Working capital management, Cash Conversion Cycle, India, Return on assets, Small to medium-sized enterprises, number of days of inventory.

DOI: 10.20472/IAC.2015.016.040

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