EFFECTS OF WORKING CAPITAL MANAGEMENT ON SME PROFITABILITY*

Pedro Juan García-Teruel Dept. Organización de Empresas y Finanzas Facultad de Economía y Empresa Universidad de Murcia Campus Espinardo, s/n 30100 - Murcia (SPAIN) Tel: +34 968367828 Fax: +34 968367537 E-mail: pjteruel@um.es

Pedro Martínez-Solano Dept. Organización de Empresas y Finanzas Facultad de Economía y Empresa Universidad de Murcia Campus Espinardo, s/n 30100 - Murcia (SPAIN) Tel: +34 968363747 Fax: +34 968367537 E-mail: pmsolano@um.es

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Financial support from Fundación CajaMurcia is gratefully acknowledged.

EFFECTS OF WORKING CAPITAL MANAGEMENT ON SME PROFITABILITY

ABSTRACT The objective of the research presented here is to provide empirical evidence about the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. With this in mind, we collected a panel of 8,872 SMEs covering the period 1996-2002. The results, which are robust to the presence of endogeneity, demonstrate that managers can create value by reducing their firm’s number of days accounts receivable and inventories. Equally, shortening the cash conversion cycle also improves the firm’s profitability.

Keywords: Working capital, profitability, SMEs. JEL codes: G3, G32.

EFFECTS OF WORKING CAPITAL MANAGEMENT ON SME PROFITABILITY

1.- Introduction The corporate finance literature has traditionally focused on the study of longterm financial decisions. Researchers have particularly offered studies analyzing investments, capital structure, dividends or company valuation, among other topics. But the investment that firms make in short-term assets, and the resources used with maturities of under one year, represent the main share of items on a firm’s balance sheet. In fact, in our sample the current assets of small and medium-sized Spanish firms represent 69.48