Working capital management, financial performance and growth of firms: empirical evidence from India

Abstract

Purpose This paper aims to investigate how firms growing at a high average rate over a period differ in their working capital management (WCM) efficiency from those growing at a low rate during the same period. It also examines how WCM efficiency impacts firms’ financial performance and how firms’ growth influences this relationship. Design/methodology/approach The authors have analyzed the difference in WCM efficiency of a sample of 431 nonfinancial firms during 2012 to 2019 by segregating them into above median growth (AMG) and below median growth (BMG) firms. The authors have used fixed effect regression to investigate the impact of cash conversion cycle, inventory days, accounts receivable days and accounts payable days on the financial performance and the effect of growth on this relationship. Findings This study finds that AMG firms manage their working capital significantly more efficiently than BMG firms. It also reports that the WCM efficiency impacts the profitability and valuation of firms positively; however, this relationship is more intense for firms growing at a high rate than for those growing at a low rate. Originality/value This research should contribute to the less researched area of WCM by finding the effect of growth on the relationship between WCM efficiency and performance. The evidence found in this study may be of interest for industry practitioners and managers in identifying WCM efficiency as an important driver for the financial performance of their firms.

The impact of working capital management on the profitability of listed halal food and beverage companies

“…The study revealed that CCC improved shareholder wealth. Utilizing a sample of 431 Indian non-financial firms over eight years (2012)(2013)(2014)(2015)(2016)(2017)(2018)(2019), Sawarni et al (2022) documented that WC efficiency improved firm profitability and value, particularly those that grow at a higher rate.…”

“…WCM is one of the crucial functions discharged by a financial manager (Ukaegbu, 2014). It is vital in improving firm profitability and liquidity (Nyamao et al ., 2012; Njoroge and Opuodho, 2022; Sawarni et al ., 2022; Urhoghide and Korolo, 2022). In fact, a firm's financial health may be determined by looking at its WCM since the items funded through working capital mostly constitute a significant proportion of their total assets (Le et al ., 2018; Njoroge and Opuodho, 2022; Shurie and Cheluget, 2022).…”

“…Based on the aforementioned significance of firm WCM, establishing the association between WCM and financial performance has become an essential research theme (Sawarni et al ., 2022). Accordingly, many empirical studies around the globe investigated how WCM influences firm financial performance, which mostly uses non-financial firms, such as manufacturing, food and beverage, construction, consumer and industrial goods, automobile and trading firms.…”

Performance of Shariah vs Non-Shariah Firms: A Study of Manufacturing Sector in Malaysia

“…In addition, Sawarni et al (2022) measured the efficiency of a sample of 431 nonfinancial firms from 2012 to 2019. The findings indicated that a firm's working capital management significantly impacts its profitability and that working capital management may help businesses increase their profitability.…”

“…The findings are consistent with the agency theory because high working capital will increase shareholder and management conflict, raising agency costs. Managers will utilize their limited resources more profitably to lower agency costs (Alarussi & Alhaderi, 2018;Tareq et al, 2021;Sawarni et al, 2022).…”