Trends in working capital management and its impact on firms’ performance – An analysis of SMEs

Abstract

This paper aims to explore the relationship between the performance of small and medium enterprises (SMEs) and working capital management. To make the research robust, accounting performance and measures of market related performance have been used to gauge the SMEs performance. This research utilizes secondary data obtained from the Alternative Investment Market concerning SMEs listed in the London Stock Exchange, to investigate the significance of working capital management towards the performance of SMEs. The working capital management components that were used in research are; account payable period APP, average collection period (ACP), return on assets (ROA) and inventory holding period (IHP). The analysis of data involved the use of regression analysis and extensive use of correlation analysis in order to establish the relationship between working capital management and SME performance. The study established that the use of WCM components such as cash conversion cycle, return on assets, cash conversion cycle and inventory holding period have a significant impact on the performance of SMEs. Further, it was established that when SMEs invested heavily in inventories and receivables, they amassed low profits while investment in current assets in relation to total assets lead to elevated profitability. Hence, it was concluded that there is a compelling relationship between WCM and SME performance.