Effect of Working Capital Management on SME’s Performance in Pakistan

Abstract

Working Capital Management has an intervening effect on a firm’s performance. However, it is expected that an efficient management of working capital might have a profound effect on performance of small enterprises than on the performance of larger companies since a substantial proportion of the total assets of small and medium firms is constituted of the Current Assets and a sizeable fraction of their total liabilities is consisted of the Current Liabilities. This study, therefore, aims to investigation whether working capital management (WCM) is associated with performance of a sample of 54 SME’s listed on Karachi stock exchange for a period of five years 2006-2010. Performance was measured both in accounting and market valuation perspectives. The approach adapt to measure the performance was random effect regression model on panel data. The findings of the panel data regression analysis show that SMEs with shorter inventory holding period, shorter accounts receivable period and shorter accounts payable period are more profitable and create value. However, no evidence was found that cash conversion cycle and net trading cycle has any effect on profitability and market valuation of SME. Under the control variable financial leverage has strong significant positive impact on performance of SME, but liquidity has insignificant positive impact on the performance. Also size of firm and sales growth has positive impact on the performance. Findings from the analyses suggested that indicators of working capital management had a perceptible effect on performance of firms under study.

Keywords: Working Capital Management, SME’s, Net operating profitability, Return on Assets, Tobin’s Q, Random Effect.