The relative importance of working capital management and its components to SMEs' profitability

Purpose – This paper aims to report the results of an investigation of the relative importance of working capital management, measured by the cash conversion cycle (CCC), and its components (inventory, accounts receivable and accounts payable) to the profitability of SMEs. Design/methodology/approach – The paper employs panel data regression analysis and a questionnaire survey on a sample of 133 Alternative Investment Market (AIM) listed SMEs. The panel data analysis utilises financial data for the period 2005 to 2009. The questionnaire survey results are based on 19 SMEs that responded. Findings – Panel data analysis results show that the management of accounts payable (AP) and accounts receivable (AR) is important for SMEs profitability. However, AP management is relatively more important than AR management. Inventory (INV) and CCC management is not important for SMEs profitability. Questionnaire results suggest that management of CCC and all its components is perceived as important for SMEs profitability. In terms of relative importance, AR management is most important, followed by AP, INV and CCC respectively. Research limitations/implications – The sample is limited to AIM listed SMEs, and therefore the findings cannot be generalised to all companies. Practical implications – Overall the results imply that the SMEs need to concentrate their limited resources on managing AR and AP in order to be more profitable. Originality/value – The study is the first to investigate the relative importance of WCM and its components to SMEs profitability and use both regression analysis and questionnaire survey.