Working Capital Management and Performance of SME Sector

Abstract

The study investigates the influence of working capital management (WCM) on performance of small medium enterprises (SME’s) in Pakistan. The duration of the study is seven years from 2006 to 2012. The data used in this study was taken from different sources i.e. SMEDA, Karachi Stock Exchange, tax offices, company itself and Bloom burgee business week. Data of SME’s acquired from these sources forms the foundation of our calculation and then interpretation. As the data was gathered for a period of seven years i.e. 2006-2012, the reason for choosing this period was because of the availability of the latest data. The dependent variable of the study is Return on assets which is used as a proxy for profitability.  Independent variables were number of days account receivable, number of day’s inventory, cash conversion cycle (CCC) and number of days account payable. In addition to these variables some other variables were used which includes firm size, leverage and growth. Panal data technique is used to study the influence of WCM on profitability of SME’s. Results suggest that number of day’s accounts payable has positive association with profitability whereas average collection period, inventory turnover and CCC have inverse relation with performance. On the other hand the variable size and growth in sales has positive influence on profitability. In contrast debt ratio has negative impact on profitability.

Keywords: Cash Conversion Cycle, Working Capital Management, SME’s