Measuring the Effect of Working Capital Management on Financial Performance of Small and Medium Enterprises (SMEs) An Applied Study

Abstract

This study investigates the relationship between working capital management (WCM) and financial performance of Small and Medium sized enterprises (SMEs) in Egypt. The study uses a sample of 29 firms listed in the Nile index (NILEX) of Egypt for the period from 2008 to 2017. The aim of this study is to test the effect of WCM in the form of Cash Conversion Cycle (CCC) and its components on the profitability of SMEs using panel data methodology. The study uses Return on Assets (ROA) and Return on Sales (ROS) as proxy for the dependent variable, financial performance. CCC, Number of days of Inventory (INV), Number of days of Accounts Receivables (AR), and Number of days of Accounts Payable (AP) are used as independent variables. In addition, the study uses firm size, firm age, firm sales growth, financial leverage, and assets tangibility as control variables. The results of this study revealed that there is no statistically significant relationship between CCC measurements and profitability of firms measured by ROA. But, the results showed a significant negative relationship between CCC and ROS, number of days of inventories and ROS, and number of days of accounts receivable and ROS. The study found that there is no statistically significant relation between number of days of accounts payable and ROS. The results indicated that shortening the CCC improves an SME’s profitability.