Effects of Working Capital Management on Small and Medium Enterprise Profitability

6576 Words Mar 4th, 2011 27 Pages
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IJMF 3,2

Effects of working capital management on SME profitability
´ ´ Pedro Juan Garcıa-Teruel and Pedro Martınez-Solano
Deptartment of Management and Finance, Faculty of Economy and Business, University of Murcia, Murcia, Spain
Abstract
Purpose – The object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. Design/methodology/approach – The authors have collected a panel of 8,872 small to medium-sized enterprises (SMEs) covering the period 1996-2002. The authors tested the effects of working
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Most of these companies’ assets are in the form of current assets. Also, current liabilities are one of their main sources of external finance because they encounter difficulties in obtaining funding in the long-term capital markets (Petersen and Rajan, 1997) and the financing constraints that they face (Whited, 1992; Fazzari and Petersen, 1993). In this respect, Elliehausen and Wolken (1993), Petersen and Rajan (1997) and Danielson and Scott (2000) show that small and medium-sized US firms use vendor financing when they have run out of debt. Thus, efficient working capital management is particularly important for smaller companies (Peel and Wilson, 1996). In this context, the objective of the current work is to provide empirical evidence about the effects of working capital management on profitability for a panel made up of 8,872 small to medium-sized enterprises (SMEs) during the period 1996 to 2002. This work contributes to the literature in two ways. First, no such evidence exists for the case of SMEs in earlier studies. A sample of Spanish SMEs was studied that operate within the so-called continental model, which is characterized by its less developed capital markets (La Porta et al., 1997), and by the fact that most resources are channeled through financial intermediaries ´ (Pampillon, 2000). All this suggests that Spanish SMEs have fewer alternative sources of external finance available,
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