Working Capital Management, Macroeconomic Impacts, and Firm Profitability: Evidence from Indian SMEs

Abstract

The present study investigates the relationship between working capital management and SME profitability. It also analyzes the impact of macroeconomic impulses on firm profitability through efficient management of working capital in the case of Indian small and medium scale enterprises over the time period spanning from 2010 to 2017 using Feasible Generalized Least Square (FGLS) regression models. The study concludes the negative relationship of account receivables together with a positive relationship of inventories and account payables with SME profitability. It implies the firm managers can maximize SME’s profitability by converting the credit sales to cash as early as possible, by increasing the days of accounts payable and following a conservative inventory management strategy. Changes in economic growth and commercial bank advances to small scale industries are the key macroeconomic determinants that are impacting SME profitability. The results from this paper may guide the firm managers to shape their working capital management strategies to maximize profitability. Policymakers may find the study interesting to identify the macroeconomic parameters that significantly influence Indian SMEs.

Working Capital Management Practices of Microenterprises in Lipa City as Predictors of Business Sustainability

“…These results were affirmed by the study of Aransiola (2021) who found that APMPs will achieve business profitability and sustainable growth. These results are similar to the findings of Panda et al (2021) that accounts payable had a significant impact on the performance of small and medium enterprises (SMEs). Accounts payable represent the company's obligation to pay for a certain period.…”

“…However, APMPs, an important component of WCMPs, were not included in the previous study. According to Panda et al (2021), APMPs were the second most important factor of WCMPs. Effective accounts payable management assured that enough measures were in place to prevent mistakes such as double payment, vendor fraud, and inefficient methods of late payments, all of which were detrimental to business growth and sustainability.…”

“…This means that CMPs which included conversion cycle, cash flow, and inventory management had a minimal positive effect on profitability. Panda et al (2021) investigated the relationship between WCMPs and SMEs' profitability using Feasible Generalized Least Square (FGLS) regression models and concluded a negative relationship between ARMPs to profitability. Furthermore, in India, IMPs and APMPs had a positive relationship with SMEs' profitability.…”

Working capital management impacts on small-scale coffee wet mills' financial performance in eastern Kenya

“…In this study, we used the average payment period (APP) and current ratio as the measure of WCM. According to Panda et al (2021), APP is the second most significant determinant of WCM after the average collection period and could significantly impact a firm's performance through improved operational efficiency and reduced transaction costs. However, we did not use the average collection period to measure WCM because the wet mills had no inventory and did not produce components for sales (Boisjoly et al, 2020).…”

Mediating Role of Risk Management and Profitability of Manufacturing Firms

“…Such contradictions leave management with mixed feeling about its application. However, other scholars propose risk management as key strategy to in uence pro tability of manufacturing rms (Panda et al, 2021, Syahirah, 2017, Rogers et al, 2016, Ellinger et al, 2015, Mwelu et al, 2014b, Salomo et al, 2007, Jüttner et al, 2003. With these direct strategies determining rms' pro tability performance, lays a ground to slot in interactive effect among these strategies to see if pro tability can be achieved through mediation since mediation studies pays vital role (Amoako- have forced these rms to explore multiple strategies to overcome pressures.…”