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.

Supply chain finance, financial constraints and corporate performance: An explorative network analysis and future research agenda

“…Beyond that, we gather financial data regarding a focal company's up-and downstream supply chain partners. Methodologically, we build on past WCM research and apply a quadratic model to estimate our parameters (Baños-Caballero et al, 2014;Afrifa, 2016;Afrifa and Padachi, 2016). However, due to the dynamic nature of supply chain networks, we do not employ a panel data regression, but rather a cross-sectional regression analysis.…”

Financial Performance and Audit Quality: Comparative Study of Investor Reaction

“…Adopting the research of Maqbool & Bakr [19], Prasaad et al, [20], Majanga [21], Yu et al, [22], Ganvir & Dwivendi [23], Bhat & Bhattacharya [24], Oyewobi et al, [25], Hall [26], Anwar [2], Afrifa & Padachi [27], financial performance in this study was measured using ROCE (Return on Capital Employed).…”

Net trade credit: what are the determinants?

“…Investment in trade credit or conservative trade credit policy may help stimulate the sales of a firm (García-Teruel and Martínez-Solano 2010a; Tauringana and Afrifa 2013; Afrifa and Padachi 2016). Companies may also use trade credit to entice customers to purchase more than is required (Deloof 2003;Afrifa et al 2016).…”

“…Companies may also use trade credit to entice customers to purchase more than is required (Deloof 2003;Afrifa et al 2016). Trade credit may also serve as a quality guarantee to customers (Ng et al 1999;Wilner 2000), may help sustain a long-term relationship with customers (Ng et al 1999;Wilner 2000).…”